Paper sector may see a turnaround

Huge capex and low input cost to increase profitability

India’s paper sector is likely to see a turnround this quarter following estimates of increasing profitability on capital expenditure made over the last several years and incremental demand to absorb surplus output.

In five years, the sector has invested Rs 20,000 crore towards capacity enhancement, technology upgradation and various acquisitions. As a result, it has added manufacturing capacity of a compounded annual growth rate (CAGR) of 11 per cent. The sector has added 1 million tonnes (mt) of capacity in the current financial year.

“Since most of these investments made were towards capital expenditure, we believe the benefits shall start kicking in from this year in terms of increased throughput or reduced cost, especially on the investments made over last two-three years,” said Yogesh Agarwal, chief executive officer (CEO), Avantha Group Company, Ballarpur Industries, and president of the Indian Paper Manufacturers’ Association (IPMA).

Weaker rupee, which prevailed for some time in 2013, has helped, as a tariff barrier against imports. However, the sector has been impacted in the case of wood imports.

“For the current financial year, the sector maintains a stance of cautious optimism. If after the general elections, a stable government is formed, the economy would improve, which has a direct correlation with the consumption of paper,” Agarwal said. A study by Emkay Global Financial Services said the balance-sheet leverage continued to remain elevated as a result of increase in capex over the last several years.

  “To ensure sustainable competitiveness, government support is required at the policy level. First is to ensure the supply of wood. At the sectoral level, 2.5-million hectares is required to be covered under pulpwood plantations.”

Paper makers are seeking import protection for key raw materials even as the duty-free paper import regime from ASEAN has become operational from January 1. The sector also wants zero import duty on wood logs/wood chips.

“The sector is poised to actualise the potential of investments made in the past few years, which could further be boosted by positive policy interventions from the government,” Agarwal added.

Given the annual growth rate of five-six per cent, the incremental demand each year is estimated at 0.5-0.6 mt. Since the capex intensity is expected to slow, with no new large capex being announced, the demand-supply mismatch would gradually reduce, as incremental demand absorbs excess supply.

“On the input cost front, we expect some moderation to kick in, as availability of raw materials improves. JK Paper, West Coast Paper, TNPL, and AP Paper have planted 50,920 hectares with saplings (an increase of 17 per cent in FY13) in continuation of the earlier initiatives undertaken,” said Rohan Gupta, an analyst with Emkay.