Education cess has paper units on a roll

The 2 per cent education cess introduced by the government has resulted in paper companies planning capacity expansion.

Intrigued? It's elementary, say industry players: the cess money would be used to educate the unread. Meaning, demand for note books and text books is going to increase, and by default, the demand for paper.

"The education cess and the increasing GDP growth have led to a jump in demand for both low-end and high end paper. There will be a demand-supply gap in the next few years in the paper industry. In another six months as the cess gets collected there is expected to be an increase in demand for making copy books and text books," said a senior BILT official.

BILT, the largest manufacturer and exporter of paper in the country, has plans to increase its capacity by another 50,000-60,000 tonne in the next two years which is being funded mostly through internal accruals. Other paper manufacturers "" Andhra Paper, Sirpur Paper Mills, Tamil Nadu Newsprint and JK Paper "" also have capacity expansions on the anvil.

Andhra Paper is expanding capacity from 1.5 lakh tonne to 1.95 lakh tonne. "We have worked out financing from International Finance Corporation, Washington, DEG of Germany and Indian institutions to the tune of Rs 550 crore for our capacity expansion. There is a large increase in demand expected with the new education cess, increasing literacy rates and rising per capita consumption," said Sudhir Bansali, CFO, Andhra Paper.

Tamil Nadu Newsprint, which has a capacity of 1.8 lakh tonne, is in the process of tying up a Rs 400 crore loan towards expansion. JK Paper, with a capacity of 1.5 lakh tonne has worked out a loan syndication of Rs 280 crore in order to step up its capacity by 20 per cent and Sirpur Paper Mills has a Rs 250-300 crore expansion on mind.

Finance minister P Chidambaram had, in his Budget for 2004-05, proposed to levy a cess of 2 per cent on all central taxes towards education.

The levy is expected to generate Rs 4,000-Rs 5,000 crore during the financial year and the money is earmarked for education and for providing mid-day meals. The stock prices of these companies have been moving up for over a month and a half.

The BILT share moved up 16.7 per cent from the beginning of August to Rs 75.30, while the Andhra Paper scrip rose 16.7 per cent to Rs 100.40 in the same period.

The share price of Tamil Nadu Newsprint moved up 23.5 per cent to Rs 64.15 and that of Sirpur Paper Mills rose 10.2 per cent to Rs 82.10 over the same period.

The demand of paper over the past few years has grown at a compounded annual growth rate of about 5.8 per cent and is expected to increase to 6.3 per cent, say experts.

The Indian per capita consumption of paper is extremely low at a mere 5 kg of paper in contrast with China which has a per capita consumption of as much as 28 kg. Even a marginal increase in per-capita consumption is expected to result in a significant increase in demand.