Star Paper Mills Ltd. Upgraded to Sell on Improved Valuation Metrics

Valuation Upgrade Spurs Rating Improvement

The most significant catalyst behind the upgrade is the company's valuation grade, which has improved from 'Attractive' to 'Very Attractive'. Star Paper Mills currently trades at a price-to-earnings (PE) ratio of 6.00, substantially lower than many of its peers such as T N Newsprint (32.83) and Pudumjee Paper (8.33). The price-to-book value stands at a modest 0.33, signalling undervaluation relative to its net asset base. Enterprise value multiples also reflect this trend, with EV to EBITDA at -0.53 and EV to EBIT at -0.67, indicating the market is pricing the company conservatively, possibly due to its recent financial performance.

Dividend yield remains a moderate 2.36%, while the PEG ratio is at 0.00, suggesting limited growth expectations priced in by the market. These valuation metrics collectively underpin the upgrade in the company's mojo grade from Strong Sell to Sell, as the stock now appears more attractively priced for value-oriented investors.

Quality Parameters Remain Weak

Despite the valuation improvement, the quality of Star Paper Mills remains a concern. The company’s Return on Equity (ROE) is low at 5.50%, reflecting limited profitability generated from shareholders’ funds. This is consistent with the longer-term average ROE of 8.58%, which is below industry standards and indicates poor management efficiency. Return on Capital Employed (ROCE) is negative, further highlighting operational inefficiencies and capital utilisation challenges.

Moreover, the company’s promoter shareholding structure adds to the risk profile, with 47.21% of promoter shares pledged. This high level of pledged shares can exert downward pressure on the stock price during market downturns, raising concerns about potential liquidity risks and governance issues.

Financial Trend Shows Continued Weakness

Star Paper Mills’ recent financial performance remains disappointing. The company reported negative results in Q2 FY25-26, with operating cash flow for the year at a low ₹14.84 crores. Profit before tax excluding other income fell sharply by 28.84% to ₹5.28 crores, while profit after tax for the nine months declined by 27.93% to ₹30.84 crores. These figures underscore a deteriorating earnings trend that has persisted over recent quarters.

Long-term growth metrics also paint a subdued picture. Net sales have grown at an annualised rate of just 10.03% over the past five years, while operating profit growth has lagged at 7.54%. This sluggish expansion contrasts with the broader sector and market benchmarks, where peers have generally demonstrated stronger top-line and bottom-line growth.

Returns over various periods further highlight underperformance. The stock has delivered a negative return of 22.03% over the last year, significantly underperforming the Sensex, which gained 7.07% over the same period. Over three years, Star Paper Mills’ returns are down 15.70%, compared to a robust 38.13% gain in the Sensex. Even the five-year return of 35.36% trails the Sensex’s 64.75% appreciation, signalling persistent challenges in generating shareholder value.

Technical Indicators and Market Sentiment

From a technical perspective, the stock’s mojo score stands at 31.0, categorised as a Sell, though this is an improvement from the previous Strong Sell rating. The market cap grade is 4, reflecting its micro-cap status and relatively limited liquidity. The stock price closed at ₹148.15 on 9 February 2026, down 0.87% from the previous close of ₹149.45. The 52-week trading range is ₹138.20 to ₹192.90, indicating the stock is trading closer to its lower band, which may attract value investors but also reflects caution among market participants.

While the technicals have improved slightly, the overall market sentiment remains cautious due to the company’s weak financials and governance concerns. The low debt-to-equity ratio, averaging zero, is a positive factor, suggesting limited financial leverage risk. However, this has not translated into improved profitability or growth, limiting the stock’s appeal from a technical momentum standpoint.

Comparative Industry Context

Within the Paper, Forest & Jute Products sector, Star Paper Mills’ valuation stands out as very attractive compared to peers. For instance, Kuantum Papers and Satia Industries also enjoy very attractive valuations but trade at higher PE ratios of 12.08 and 9.83 respectively. Other competitors such as Emami Paper and N R Agarwal Industries are rated as attractive but command significantly higher multiples, reflecting better growth prospects or financial health.

However, the company’s financial and operational metrics lag behind these peers, with negative capital employed and declining profitability. This dichotomy between valuation and quality metrics explains the cautious upgrade to Sell rather than a more positive rating. Investors are advised to weigh the low valuation against the risks posed by weak earnings, high promoter pledge, and poor management efficiency.

Outlook and Investor Considerations

Star Paper Mills Ltd.’s recent rating upgrade to Sell from Strong Sell reflects a nuanced view that values the stock’s improved valuation attractiveness while acknowledging persistent fundamental weaknesses. The company’s low PE and price-to-book ratios suggest potential upside if operational and financial trends improve. However, the negative ROCE, declining profits, and high promoter pledge ratio remain significant headwinds.

Investors should approach the stock with caution, considering the broader market context and sector dynamics. The stock’s underperformance relative to the Sensex and BSE500 indices over multiple time frames highlights the challenges in realising sustainable returns. Until there is clear evidence of turnaround in financial performance and management efficiency, the Sell rating remains appropriate.

For those seeking exposure to the Paper, Forest & Jute Products sector, alternative stocks with stronger financials and growth prospects may offer better risk-adjusted returns.

Unlock special upgrade rates for a limited period. Start Saving Now →