The paper industry has seen a recent surge of investment interest. A part of this can be a natural consequence of investments in the packaging industry, which is doing mannered. Investors expect the paper cycle to also remain strong because of this.
Alternatively, unlike in the packaging sector, the financial position is less lucid in the paper industry. About 20-25 per cent of the revenues of the paper industry are generated by listed companies, with the rest coming from smaller mills.
In Q4, 2020-21, a pattern of 21 listed companies saw their revenues up 16 per cent year-on-year at Rs 5,244 crore as opposed to Rs 4,520 crore in Q4, 2019-20. Operating Profits were up 19 per cent YoY at Rs 949 crore vs Rs 797 crore a year ago. Profits after tax were down 5 per cent at Rs 427 crore as opposed to Rs 450 crore. Tax paid used to be up 241 per cent at Rs 156 crore as opposed to Rs 46 crore. Financing and interest costs were down 29 per cent at Rs 115 crore.
The higher revenues are a good signal but this hasn’t translated into profits. The industry had to deal with demand destruction in some segments because of schools and colleges being shut down. It also had to live on provide chain issues except coping with production all over lockdowns, so this is in reality a decent performance.
In the final fiscal, provide of waste paper for recycling dried up because of lack of transport facilities with the shipping industry hit by global lockdowns. China also became a big buyer of waste paper and jelly, pre-empting provide to Indian mills.
India depends on waste paper jelly imports for near to 65 per cent of all uncooked fabric provide. This is particularly important for the packaging industry. This is because of the truth that the USA/ Europe have per capita paper consumptions of approximately 55-60 Kg/ year as opposed to India’s per capita consumption of 15 Kgs.
One reason for long-term optimism is that per capita consumption is expected to grow in India from this extremely low base. The industry is hoping for better demand as educational institutions re-open. Bans on plastics may be a driver since paper is a natural replacement in many cases. As such, long-term growth in paper consumption is around 6-7 per cent CAGR in India, whereas demand for paper is flat in the First World.
The industry is expected to begin consolidating. Larger, financially stronger players are likely to take over capacity as under-capitalised smaller mills cannot find the resources to upgrade technology. The top three listed players in India account for approximately 10 per cent market share whereas they hold 20 per cent in China and around 65 per cent in the USA. So, a trend of consolidation is likely.
Economies of scale are appreciable in the industry since it’s a commodity. It’s a capital-intensive industry with high constant assets and working capital requirements. The industry could also face competition from big international players who might explore the potential for opening production facilities inside India. There may then again, be scope to increase efficiencies all along the value chain.
Final week, most paper company shares surged towards new 52-week highs. The gainers included Pudumjee Paper Products, Star Paper Mills, Orient Paper, Seshasayee, JK Paper, Tamil Nadu Newsprint, and West Coast Paper. It’s a highly cyclical industry but the cycle could be beneficial, particularly for listed companies whether the consolidation trend takes hold.
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