Emami Paper Mills Ltd Management Discussions.

A. INDUSTRY STRUCTURE & DEVELOPMENTS

GLOBAL PAPER INDUSTRY

Global Paper & Paperboard market accounted for $175.00 billion in 2017 and is expected to reach $266.88 billion by 2026 growing at a CAGR of 4.8 per cent during the forecast period. Growing consumer awareness for sustainable packaging, rising demand from various end users and increasing environmental concerns are some of the factors favouring the market growth. Moreover, growing disposable incomes of people especially in the developing countries is one of the major opportunities during the forecast period.

Globally over 400 million tonnes of paper and paper products are consumed. The worlds three largest paper producing countries are China, the United States, and Japan (these countries account for approximately half of the worlds total paper production), while India accounts for a small but growing share of the global market. The global paper and pulp industry has contracted slightly over the past !ve years, primarily due to the shift to digital media and paperless communication across most developed economies. However, demand in emerging markets has partially o"set the decline by driving increased demand for paper used in packaging materials.

Emerging markets like India and China will drive the market for the paper packaging segment, with applications across industries like healthcare, personal care, homecare, retail and others. With the focus now shifting towards eco-friendly and sustainability, paper packaging is expected to gain traction with many countries pushing for paper packaging products over plastic packaging, which poses a signi!cant threat to the environment.

Higher recycling demand will further push the use of paper as a packaging material, with consumers and businesses looking for solutions that help in cost reduction as well as keeping the environment safe while keeping government regulations intact.

INDIAN PAPER INDUSTRY

The Indian paper industry accounts for about 3.7% of the worlds production of paper. The estimated turnover of the industry is INR 60,000 crores (USD 8.5 billion approximately) and its contribution to the exchequer is around INR 4,500 crores. The industry provides employment to more than 0.5 million people directly and 1.5 million people indirectly.

Paper Industry in India is moving up with a strong demand push and in expansion mode to meet the projected demand of 20 million tonnes by 2020. Thus paper industry in India is on the growth trajectory and is expected to touch 8.5% GDP in the coming years. Therefore, the growth of industry will exceed the present rate of 6.5%.

Inspite of the sustained growth witnessed by the industry, the per capita paper consumption in India stands at a little over 13 kg which is well below the global average of 57 kg and signi!cantly below 200 kg in North America.

The demand drivers include 1) rising income levels, 2) growing per capita expenditure, 3) a likely pick-up from the education sector, 4) requirement of better quality packaging of FMCG products marketed through organised retail, and 5) increasing preference for ready-to-eat foods.

On the other hand, challenges include 1) access to quality and cost competitive raw material whose prices have started increasing recently, 2) competition from imports and 3) technology obsolescence.

Industry Segmentation: Packaging paper & board segment demand is growing at a faster pace as compared to Printing & Writing and the Newsprint segments.

For the Indian paper industry, strong economic growth has been accompanied by equally robust demand for paper. The demand drivers and growth triggers have come from a combination of factors such as rising income levels, growing per capita expenditure, rapid urbanization and a larger proportion of earning population which is expected to lead consumption and there is enormous potential for the paper industry in the country. The individual segments are expected to grow as follows:

• Printing and Writing segment : demand is expected to grow at a CAGR of 4.2% and reach 5.3 million tonnes in 2019. The demand is expected to grow on account of an anticipated pickup from the education sector with improving literacy rates and growing enrolment as well as increasing number of schools and colleges.

• Consumer Packaging Board Sector:

Paperboard packaging is used to provide packaging solutions, largely to the consumer products. Paperboard packaging solutions have extensive applications across several industrial verticals from healthcare to food and beverages industry and personal care to home care. Furthermore, paper and paperboards are also used to make packaging labels, boxes, cartons and cardboard boxes.

In last 5 – 6 years, domestic demand for consumer packaging board has increased at 8-9% CAGR to touch 3.7 million ton in 2018; and it is expected to grow to 4.7 million ton by 2021-22 harnessing the same growth rate driven by steady economic growth, increased industrial growth and consumers preference to branded products.

Consumer packaging board comprises of two subsegments (i) virgin grade Value Added Product (VAP) (ii) recycle grade paperboard. The anticipated robust growth in this segment will be led by the VAP grade paperboard, which presently witnessing about 12%-13% CAGR and expected to continue as such to reach 1.3 million ton in 2021-22 from the present demand level of 1.0 million ton. Annual demand of recycle grade consumer packaging is 2.7 million ton in 2017-18, which is expected to reach 3.4 million ton in 2021-22.

Even though virgin grade paperboard has more promising future over recycled grade in consumer packaging segment; couple of years are set for grand success of the recycle based paperboard also as a result of change in industrial scenario globally.

• Newsprint sector: Improving literacy rates, rising circulation and an increasing number of newspapers and magazine is expected to support growth in newsprint demand, which is expected to reach 2.7 million tonnes in 2019. Competition from growing imports from developed countries is a major challenge to the industry.

EMAMIS INDUSTRY PRESENCE

Your Company has paper mills located at Balasore (Odisha) and Dakshineswar (W.B.,Kolkata), are most environment friendly paper mills in Eastern India. The company is largest newsprint manufacturer of India with 1,50,000 tpa capacity and produces best quality newsprint at par with the quality of imported ones. The other line of business of the company is 2,00,000 tpa capacity consumer packaging board of recycle grade as well as that of virgin grade. Companys diversi!cation into paperboard segment is now most discussed success story in the paper industry because of the tremendous performance of its board machine, appreciated market acceptance of the companys paperboard. Our paperboard has also a good reputation in export market and about 10%-15% of its recycle grade paperboard is exported to overseas market.

B. OPPORTUNITIES AND THREATS

OPPORTUNITIES

• Strategic location – proximity to raw materials and nearness to the market.

• Large and growing domestic paper market and increasing export market for its products

• Pan India presence

• Partnership with best logistic companies, which enables the company to deliver it products at any corner of India within 3-4 days at very competitive freight charges

• Close proximity to Mahanadi Coal (MCL) !elds for Balasore plant and Raniganj-Asansol (ECL) belt for Kolkata unit for procurement of coal and also proximity to Haldia port for import of pulp, waste paper, chemicals, spares & machineries.

• Strong team having sound technical knowledge and visionary managerial capabilities to ensure production of world class quality products and best business operation.

• Companys focus on continuous sustainable growth, especially diversi!cation into paperboard segment, which is growing very fast and protected from increasing use of digitization and internet.

• Economy of scale – about 3.35 lac tpa capacity at single location

• Strong customer base and dealers/distributors network.

• Governments thrust for education and literacy coupled with increasing disposable income and overall economic growth of the nation.

• Sufficient infrastructure available with the Company for future expansion.

• Availability of sufficient good quality ground water with the required permissions from Central Groundwater Authority as well as from Orissa State level authorities.

• River water pipeline project from Budhabalanga river is in progress.

• Well established Research and Development (R&D) facilities/activities encouraging innovation, product development and cost saving.

• Steady increase in preference to branded products by consumers, booming e-commerce and healthy growth in organized sector are the driving force for robust demand for paper and paperboard.

• Lowest cost manufacturer with advanced technology for manufacturing of newsprint and multilayer paperboard with self-sufficient captive power plants.

• Levy of IGST on imported newsprint as compared to duty free import in pre-GST regime

• Private Railway siding through M/s NOCCI Balasore Infrastructure Company Ltd. is at the !nal stage.

THREATS

Increasing coal cost

Numerous Regional Trade scheme (RTs)/Free Trade Agreement (FTAs) without adequate safeguard to the domestic industries.

Increasing competition from electronic media and digitalization (for newsprint).

Fragment nature of industry having small and unorganized industry players

Capital-intensive industry.

C. PERFORMANCE & OUTLOOK

The details have already been covered in the Directors Report.

D. RISK AND CONCERNS

Your Company identi!ed various risks and implemented its Mitigation Plans. Risk Policy and monitored frame work has been approved by the Audit Committee and the Board of Directors of the Company. Risk reporting and monitoring is being conducted regularly by Governance Risk and Compliance Committee (GRCC) at all the operation levels and reporting directly to the Audit Committee and the Board on half-yearly basis.

E. INTERNAL CONTROL SYSTEM

Your Company has an adequate and effective Internal Control Mechanism in place to ensure e#cient conduct of its operations, security of assets, prevention and detection of frauds/errors, accuracy and completeness of accounting records and the timely preparation of reliable financial information as per its Management Information System (MIS). These controls have been designed to provide a reasonable assurance with regard to maintaining of proper accounting controls for ensuring reliability of financial reporting, monitoring of operations and protecting assets from unauthorized use or losses, compliances with regulations. The Company has continued its e"orts to align all its processes and controls with global best practices.

Apart from strong internal control, your Company has also appointed external and independent Audit Firms as its Internal Auditor for periodical checking and monitoring the Internal Control Measures for both its plants at Balasore and Kolkata.

Internal Auditors are present at the Audit Committee Meetings where Internal Audit Reports are discussed alongside of management comments and the !ndings and observation of the Internal Auditors. The Terms of Reference of the Audit Committee inter alia includes reviewing the adequacy of the internal control environment, monitoring implementation of the action plans emerging out of Internal Audit !ndings including those relating to strengthening Companys Risk Management Systems and discharge of statutory mandates.

Your Company has a Comprehensive Budgetary Control System in operation and its Key Performance Indicators (KPI) are set for all important operational parameters. These are monitored and reviewed regularly by the management in Management Committee Meetings, which is chaired by the Executive Director of the Company and participated by all departmental heads and necessary corrective and preventive actions are being initiated.

F. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

Financial Performance has been detailed in the Directors Report.

G. HUMAN RESOURCES AND INDUSTRIAL RELATIONS

Highly capable and skilled human resources with strong motivation and dedication is the backbone of your companys success and growth. From its foundation, companys employment philosophy and practices have been based on the recognition that its people are the primary source of its competitiveness.

Your Company consistently abides by human resources policy that is found on a set of following principles: equality of opportunity, continuing personal development, fairness, mutual trust and teamwork. The company takes several measures for suitable appointment, skill development and retention of human resources including but not limited to effective appointment system, employee training (on duty as well as structured trainings), goal setting, performance based appraisal, retention by creation of a nice work place, employee engagement activities and leadership development.

Your Companys employees have collectively envisioned the future with commitment to realise your Companys vision of creating enduring value for the company as well as for the society at large.

Number of people employed : 1441

H. DETAILS OF SIGNIFICANT CHANGES (I.E. CHANGE OF 25% OR MORE) AS COMPARED TO THE IMMEDIATELY PREVIOUS FINANCIAL YEAR.

Particulars

Key Financial Ratios

Changes between Current F.Y. and Previous F.Y. Explanation

2018-19

2017-18
i) Debtors Turnover 7.10 7.37 (0.27)
ii) Inventory Turnover 5.93 6.43 (0.50)
iii) Interest Coverage Ratio 2.68 2.53 0.15
iv) Current Ratio 0.74 0.87 (0.13)
v) Debt Equity Ratio 1.53 1.70 (0.17)
vi) Operating Pro!t Margin (%) 20.18% 15.46% 4.72% Due to increased sales realization and reduction in per ton costing.
vii) Net Pro!t Margin (%) 2.88% 1.20% 1.68% -do-

I. DETAILS OF ANY CHANGE IN RETURN ON NET WORTH AS COMPARED TO THE IMMEDIATELY PREVIOUS FINANCIAL YEAR ALONG WITH A DETAILED EXPLANATION THEREOF:

Particulars

Key Financial Ratios

Changes between

2018-19

2017-18 Current F.Y. and Previous F.Y. Explanation
i) Return on net worth 8.88% 3.39% 5.49% Due to improved operational results.

J. CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations or predictions may be forward-looking statements within the meaning of applicable securities, laws and regulations. Actual results could di"er materially from those expressed or implied. The important factors that could make a di"erence to the Companys operations include global and Indian demand and supply conditions, !nished goods prices, raw material availability and prices, cyclical demand, changes in government regulations, environmental laws, tax regimes, economic developments within India and the world, as well as other factors such as litigation and industrial relations.