The domestic paper sector is likely to see marginal improvement in demand in FY17 from education and corporate sectors, aided by expected higher GDP growth of the country, says a research report.
India Ratings and Research (Ind-Ra) has maintained a 'negative-to-stable' outlook on the paper industry for FY17 on the expectations of a limited improvement in the demand-supply environment and import risks.
However, cost side pressures related to wood are likely to subside further, it said.
"We expect major sector companies to report a marginal improvement in revenue growth in FY17 to 7-8 per cent driven primarily by volume growth. This will be on the back of increasing demand from the education and corporate sectors, aided by higher GDP growth estimated at 7.4 per cent in FY16.
"The domestic surplus created by past capacity additions in the writing & printing paper (WPP) is likely to be absorbed by FY16, as reflected in the stabilisation of aggregate inventory levels of sector companies over FY14-1HFY16. Thus, pricing in the WPP segment could improve in FY17," India Ratings Associated Director Chandan Sharma said.
Import pressures are likely to continue in FY17 and would depend upon the extent of the devaluation of competing currencies, mainly Chinese Renminbi, Thai Baht in relation to the rupee.
An increase in import pressures could result in continued pricing pressures in both coated paper and uncoated paper segments. Imports grew significantly in the uncoated segment in rupee value terms at 44.5 per cent and 30.4 per cent in FY14 and FY15, respectively, the report said.
The coated segment has also continued to see around 15 per cent y-o-y growth in imports. Continuation of anti-dumping duties in the US market for Asian countries could also increase import pressures, which may delay price recovery in the domestic market.
Cost pressures might subside for paper sector companies in FY17 with softening of wood prices. Paper mills' continuous efforts on farm forestry as well as higher wood prices have led to increased availability of wood in nearby areas, thereby reducing average wood procurement costs for mills.
Ind-Ra said any significant rise in domestic wood prices or global pulp and coal prices could lead to the sector outlook being revised to 'negative'.
