Andhra Paper Ltd Management Discussions

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Outlook

As per the industry reports, the revenue-generating ability of the industry is expected to rebound by 6-9% in FY 2025, highlighting the probable growth in the industry ¹⁷. The domestic paper consumption is poised to grow significantly. As per the statistics, the domestic consumption of paper and paper products are expected to grow by 23.5 million TPA and the production of the industry is anticipated to touch 22.0million TPA by FY 2025¹⁸. This expansion is anticipated to be supported by the growth in industrial activities, spending on office stationery and advertisements. Several factors such as increased enrolment of students in academic institutions and New Education Policies (NEP) are expected to support the growth of the paper industry in India. In addition to this, the increased focus on innovation is further expected to drive sustainable growth in the industry in the coming years.

Risks and Mitigation Measures

Human Resources

The Company recognises the value of an efficient workforce. Andhra Paper Limited invests in hiring and retaining individuals that can effectively contribute to the growth of the Company. It undertakes effective talent management strategies, leadership succession, planning initiatives and organisational assessments to maintain the skill and competency of its human capital.

The Company follows the 3C rule-Character, Capability and Catalyst. This rule is integrated into the process and tools for employee development, ensuring the employees are aligned with the Company goals. The Company also uses career planning and training and skill development initiatives to strengthen its human capital and build a strong organisation.

Andhra Paper Limited prioritises the safety of its employees. The Company fosters a positive work environment that does not discriminate on any grounds. It also ensures no sexual harassment at work.

4835

Total number of employees as of March 31, 2024.

Operational Highlights

The Company is present in all segments of paper ranging from writing, printing, industrial and copier papers. The Companys share in the export was approximately 8% in FY 2024. It remained focused on producing value-added products with higher Net Sales Realisations to increase profitability including cup stock, pharma print and Hi BF Virgin Kraft.

The Company consistently makes efforts to improve its existing products to stay aligned with the industry trends. Feedbacks are gathered from the customers and channel partners to provide with personalised and market-relevant products. Through its ‘Think Customer, the Company focuses on offering its customers with ‘right products for the right applications that meet the customer requirements. Initiatives including the commissioning of a state-of-the-art Precipitated Calcium Carbonate (PCC) Plant, the relocation of outside conversion facilities within the mill, installation of a new Marushi Wrapmatic machine have further helped the organisation meet market demand in a timely manner.

In the reported year, Andhra Paper Limited received a 96% OTIF delivery rate (on-time-in-full) and improved complaint closure by 90%, making it top-tier in the Indian paper industry. The strong distribution network of the Company within the domestic market has helped it to cater to the domestic demand. In the reported year, despite the long annual outage of 41 days, the total sales made by the Company was 2,33,480 metric tones.

The Company completed projects including pulp mill upgradation of 100 tones per day (TPD) and surface sizing a large paper machine and is anticipating to leverage on these projects and enhance its productivity and efficiency in delivering to the customers in the coming years. These will additionally help in increasing value in terms of profitability and shareholder returns of the Company.

Installation of Tissue Paper Machine

The Company received consent from the State Pollution Board for installation of a tissue paper machine with capital outlay of INR 270 crores. The Company has signed an agreement with a globally reputed vendor for the supply and commissioning of the tissue paper machine with 129 TPD capacity. This is expected to be operational in next year. This is anticipated to add to the existing capacity by 35,000 metric tones per annum and help diversify into the speciality paper segment where the growth is in double digits with opportunities in the domestic market.

Upgrading and rebuilding of pulp mill

The approved planned capex by the Board was utilised to rebuilt and upgrade the manufacturing facilities at Rajahmundry and Kadiam in phases starting from 2023 and most of the work was undertaken during the long annual outage. The rebuilt and upgrade is expected to get completed by 2024-25. The investment in rebuilt and upgrade aligned with new technological advancements is expected to yield significant benefits on long term basis by increase in operational efficiency, reduction in breakdowns and increase in machine reliability, productivity and competitiveness.

Installation of PCC Plant

The Company undertook various sustainability initiatives, such as installation of PCC plant for efficient carbon capture and reuse. This reduces carbon emission for the Companys existing lime kiln stacks by 54 metric tones per day i.e. 19,000 tones per annum (TPA ). This process also lowers production costs and improves paper capacity, bulk and brightness.

Financial Highlights

In FY 2023-24, revenue from operations stood at INR 1801 crore compared to H2098 crore in the previous year, reflecting a decline of 14% over FY 2023-24. EBITDA stood at H526 crore compared to H787 crore in FY 2023-24. Profit after tax dropped to H340 crore compared to H522 crore in the previous year.

The profitability declined on account of an extended period of planned maintenance shutdown for 41 days. The long maintenance period was utilised to integrate the Board approved capital expenditure to rebuild and upgrade the plant and machinery at certain units within the manufacturing facilities to increase the efficiency and reliability of manufacturing operations.

The annual outage along with the increase in the cost of raw materials such as pulp, wood, coal, chemicals and volatility in import materials coupled with low volume output and lower realisations had negatively impacted the overall profitability of the Company.

For FY 2023-24, the CARE ratings reaffirmed the ratings of CARE AA; stable for long-term facilities and CARE AA; Stable/ CARE A1+ for short-term facilities. The ratings took into consideration the Companys balanced capital structure and strong liquidity profile with the availability of surplus liquid investments amidst low debt levels and cushion in the fund-based working capital limits utilisation.

The India Rating assigned IND AA (Stable ratings for long-term facilities) and IND AA/Stable/IND A1+ for Andhra Paper Limited. The affirmation reflects the continued strong consolidated business profile led by a robust market position, moderately diversified portfolio within the paper industry, healthy operating performance with robust margins and a strong financial position with a net cash position.

Although there are lot of challenges in the coming years owing to geopolitical friction, increasing supply chain disruptions and rising input costs, the Companys proven capability of swinging between the domestic market and exports to balance supply and demand situations and the noteworthy flexibility of each machine to manufacture an array of products will help mitigate such challenges. The management is confident that the capital investment in manufacturing facilities coupled with other initiatives taken during the year will yield positive results in the coming years.

Ratios

For further information and detailed explanations on ratios, please refer Note No. 51 of the Financial Statements.

Internal control systems and their adequacy

Andhra Papers management is in charge of implementing and maintaining effective internal control over financial reporting. Internal control over financial reporting is designed under the supervision of the Chairman & Managing Director, Joint Managing Director and Chief Financial Officer and implemented by the Board of Directors, Audit Committee, Management and other personnel to provide reasonable assurance about the reliability of financial reporting and the preparation of financial statements for external purposes.

All internal control systems have inherent limitations, including the possibility of control circumvention and override and so can only provide reasonable certainty of meeting the control objectives. The Companys internal control system is based on written rules and procedures, includes self-monitoring measures and is audited by outside auditors. Management takes appropriate corrective actions as problems are detected. The Company has a procedure in place to continuously monitor the processes, identify gaps and implement new and/or better controls where the impact of such gaps would be material to the Companys operations. The Company fully supports Internal Auditors, an external and independent audit firm, in this ongoing process.

The Company evaluated and assessed the sufficiency and effectiveness of its internal financial controls as of March 31, 2024. Based on this assessment, Management believes that the Companys internal controls over financial reporting were effective as of March 31, 2024 and our Statutory Auditors have expressed an unmodified opinion on the adequacy and operational effectiveness of the Companys internal financial controls over financial reporting, as stated in their report.

The internal control environment includes a corporate-wide attitude of integrity and control consciousness, which creates a positive tone at the top. This is demonstrated by our ethics programme, which contains long-standing principles and policies on ethical business behaviour that demand employees to uphold the highest ethical and legal standards in the conduct of Andhra Paper Company and has been provided to all employees.

The internal control system also includes careful selection and training of supervisory and management personnel, appropriate delegation of authority and division of responsibility, widespread dissemination of accounting and business policies and an extensive programme of internal audits with management oversight. The Board of Directors, with the assistance of the Audit Committee, oversees the integrity of the Companys financial statements and financial reporting systems, as well as the performance of the Companys internal audit function and independent auditors, as specified in its charter. The Committee, which is made up of the majority of Independent Directors, meets on a regular basis with management representatives, independent auditors and internal auditors to examine their actions, both with and without management representatives present.

The Committee reviewed and discussed the financial accounts for the fiscal year ended March 31, 2024, with Management and the independent auditors, including internal control systems, major accounting policies and significant Management judgements.