Kay Power & Paper Ltd Management Discussions.

INDUSTRY STRUCTURE AND DEVELOPMENT

Based on packaging form, the corrugated segment is projected to dominate the Kraft Paper market, in terms of value and volume, from 2019 to 2025. Corrugated boxes not only offer protection to shipped goods from damages but also offer easy handling features. The reusable and recyclable nature of corrugated boxes reduces packaging waste. This has resulted in an increased demand for corrugated boxes in various industries such as food & beverages, building & construction, clothing, freight forwarding, logistics, cosmetics & personal care, and pharmaceuticals.

The demand for quality has risen. Today, the market is transforming from being cost-conscious to being quality-driven. The quality of Kraft paper of the company is among the best in the region.

The Indian Paper Industry accounts for about 2.6% of the worlds production of paper and Paperboard. The Paper and Paperboard in India are expected to grow at CAGR of 5.3% during the forecast period of 2021-2026. This market is growing rapidly owing to the higher growth of food and beverages, cosmetics, and other industries in India.

The paper industry in India has become more promising as domestic demand is on the rise. Increasing population and literacy rate, growth in GDP, improvement in manufacturing sector and lifestyle of individuals are expected to account for the growth in the paper industry of India. Many of the existing players are increasing their capacity to meet the growing demand. The focus of paper industry is now shifting towards more Eco-friendly products and technology. Government of India has established rules and regulations to control the population and degradation of forest. These measures taken by the government has brought the significant changes in the paper industry of India.

Paper Industry plays a vital role in the economic growth of a country through revenue generation, foreign exchange earnings, and employment generation. Paper fi nds its usage in recording, storage and dissemination of information. In addition to these, paper is a widely used medium for wrapping and packaging of several products. Despite the technological revolution leading to increased computerization of operations, paper still holds on to its existence and has become an essential commodity

There are various reasons which have made the paper industry of India more promising and attractive than ever before. The population of India has been growing at a significant pace which has led to the increase in the paper consumption as each individual utilizes paper and other related products on daily basis. The growth in the GDP of India has helped the paper industry significantly. Growth in economy has led to the increase in the manufacturing activities which has further led to the increase in the demand for paper products especially paperboard as the paperboard is extensively utilized by the manufacturing sector for a wide range of activities ranging from packing to storage and transportation. The growth in the GDP has also led to the improvement in the purchasing power of the individuals.

The paper industry can be classified into 4 categories namely, paperboard and industrial packaging paper, writing and printing papers, newsprint, and specialty papers. Kay Power and Paper Ltd is a paper mill which is strategically located at Satara and is manufacturing Kraft paper using Indian and imported waste paper. Kraft paper has the largest consumption (52.5%) in the paperboard and industrial packaging market in India.

The reasons for growth of paper industry in country are continuous demand for education and literacy, increasing organised retail, growth in eCommerce, FMCG, pharma/ healthcare sector, demand of quality packaging, ban on plastic (especially polythene bags) and increment in demand of eco-friendly paper bags, continuously increasing demand of ready-to-eat food and printed stationary.

Under the baseline scenario, by 2024-25, domestic consumption is projected to rise to 23.5-million TPA and production to 22.0-million TPA. About one million TPA of integrated pulp, paper and paperboard capacity is required to be created in India on an annual basis over the current capacity to meet the growing demand.

The investments would create a multiplier effect on the economy through gross capital formation of Rs 8,500-crore every year, direct employment to 15,000 people every year and further giving additional livelihoods of 72-million men days per year (for people involved in Agro/ farm forestry).

While the industry has already made significant capital investments to ramp-up capacities, the gestation period is long and the economic viability of the investments has been impacted significantly by raw material shortage and rising imports.

Over the years company has focused on stringent quality measures, which help to meet all our customers needs. Our focus on quality has helped us in building strong relationship with customers and eliminated supplementary cost.

OPPORTUNITIES AND THREATS:

Indias paper industry is expected to grow at 8 to 9 percent year over year, with the packaging industry poised to grow at 22 to 25 percent annually. Advances in education, a fast-growing middle class, strong growth in sectors like fast-moving consumer goods (FMCG)—pharmaceuticals, liquor, cosmetics, and organized retailing are the main drivers of demand for paper and packaging products.

Per capita consumption of paper in India remains woefully low at 22 lbs. compared to 770 lbs. in the United States and 363 lbs. in the European Union in 2010. India has 15 percent of the worlds population but consumes less than 2 percent of the worlds paper. But Per capita consumption of paper has almost doubled in the last decade.

The company has adequate infrastructure facilities such as land, water & power. Apart from this company has the fl flexibility of various grades of paper, which gives the company a distinct competitive advantage.

The availability of raw material has always been a matter of concern for the industry. In India about 850,000-1,000,000 tons of waste paper is being currently recovered annually. The recovery rate works out to about 20% which is much lower in comparison with 65% recovery achieved by many global players. Low recovery is on account of alternate use of paper in wrapping, packing, etc. The utilization rate of recovered fi ber is only 47%. Paper mills are heavily dependent on imported waste paper which commands exorbitant price due to inadequate availability. India needs a well-defi ned and aggressive system for collection, sorting, grading and utilization of recyclable waste paper to contain imports.

At the same time, it may face competition due to proliferation of capacities in the country.

COVID – 19

In view of the preventive measure and announcement of nation-wide lock down by the Government to contain the spread of COVID 19 pandemic, most of the industrial establishments had closed their operations from 24th March, 2020 onwards. The some industrial establishments are reopened after the ease of restrictions of lock down. Our companys operations had also closed from 24th March, 2020 and restarted partially from 8th June, 2020. The Govt. of India eased total restriction of lock down from the end of September, 2020 which were imposed on 24th March, 2020. But before company could stabilize from first wave of COVID 19, second wave of COVID-19 started from March 2021 and once again operations of the company got derailed. The company hopes to achieve regular production from August 2021.

Under this scenario, the revenue of the financial year 2021-22 of the company will also be affected adversely. The company is also facing the shortage of raw material and workforce. The company is continuously working on plans to overcome from this current situation and to minimize the impact on the revenue of the company for FY 2020-21.

Whilst it is difficult to estimate precise future impact of Covid-19 on Companys operations in view of the prevailing uncertainty about the duration of Covid-19 in the country, it is believed that the Companys operations would be in line with overall developments and revival of economy.

Current Business Scenario

The Indian paper industry is going through one of its toughest phases in history with the novel coronavirus (Covid-19) pandemic affecting supply, compounded by non-availability of shipping containers and China importing huge quantities of Kraft paper from India.

Three factors are primarily behind the problems the paper industry is facing. The Covid-19 situation has resulted in waste paper supply shortage. The issue has been aggravated by non-availability of shipping containers. While India is starved of waste paper supply due to these factors, export of recycled pulp (made from waste paper and paper cuttings) to China is adding to the industrys woes.

The problems due to these three ‘C factors- Covid-19, container shortage and China- in the paper industry is currently such that the waste paper, paper mills, including Kraft paper makers, and corrugated or packing box manufacturing sectors have been affected badly.

In particular, export of recycled pulp to China is now turning out to be a major worry, as it is resulting in the domestic industry, particularly packing box makers, facing shortage.

This has resulted in a demand for ban of export of Kraft paper from India so that the domestic industries will not be starved of the key raw material, particularly to make packing boxes that are used in a range of industries, starting from white goods to electronics to fast-moving consumer goods and all e-commerce products.

The paper industry is facing a huge crisis, mainly since supply of its primary raw material — waste paper — has been affected due to the Covid-19 pandemic, particularly in the US and Europe. We get maximum raw materials from these destinations.

SWOT analysis – Indian paper industry Competitive strengths

1. Large and growing domestic paper market

2. Up to date research institute (CPPRI)

3. High Employability

4. Recyclability of Waste Paper

5. Know how in non-wood pulping and applications

6. Well-developed printing industry

7. Local market knowledge

Competitive weaknesses

1. Fiber shortage, especially virgin wood Fiber

2. Small and fragmented industry structure, many non-competitive mills/machines.

3. Highly skilled and job specic manpower is not available

4. Low Capacity Utilization

5. Quality and availability of some of the domestic pigments and chemicals

6. Scarcity of water according to demand

7. Highly pollute

8. Environmental problems of most of the small pulp mills and also some big mills

9. Low standard of converting industry 10. Industrial sickness 11. Infrastructure, transportation

12. High cost of raw material including wood, non-wood and waste paper

13. High energy costs 14. High cost of nancing 15. Impact of high local taxes 16. Low input into mill level R&D

Competitive opportunities

1. Domestic market growth potential

2. Modern, world scale paper machine would be cost competitive in most grades

3. Forest plantation potential

4. Output recyclability

5. Integration of combined wood and agro based paper making.

6. Government literacy program – increasing demand for printing/writing papers

7. Low labor costs (allow eg. cost effective sorting of imported mixed waste)

8. Export potential

Competitive threats

1. Unprepared mills for international competition (WTO entry) both on price and quality

2. Decline in capacity due to environmental pressures

3. Decline in capacity as some of the segments/group of mills are unable to compete at national and international levels with respect to quality and cost of products.

4. Delayed forest plantations, decit of wood ber

5. Technological obsolescence

6. Entry of substitutes like e-paper, plastic and other products

7. Weakening competitiveness of domestic industry due to shortage and cost of basic input

SEGMENT-WISE OR PRODUCT WISE PERFORMANCE

The company has paper division only. The company has a well-established network of dealers all over western and southern India for sale of its paper products and continually working to strengthen the network and to get the new orders for Karft paper. The Company could sell its entire output without any diffi culty. The Company produces wide range of Kraft paper from 80 gsm to 180 gsm, to meet the requirements of all the market segments.

REVIEW OF PERFORMANCE

During the year, Companys Sales and other operating income were Rs. 22.73 Crores. The management of the Company is engaged in to improve the performance further.

STRATEGY

The company is continuously increasing its quality of paper as per the requirement in the market and to compete with the other market players. Further the company has been adopting the latest technology for production of various grades of paper in the plant. During the year company has supplied the highest quality of Kraft paper to the customers and our customer base is increasing day by day.

OUTLOOK, RISK AND CONCERN MANAGEMENT PERCEIVES

The Paper Industry is understood to be cyclical in nature and its performance depends on global pulp and paper demand supply situation. However, given the growth potential, outlook of the paper industry is promising. Considering the positive outlook company is ready to face new challenges.

The company is deriving its revenue from paper/paperboard manufacturing. The availability of raw material and rates of raw material due to competition among the related paper mills are matters of concern.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

The company has adequate system of internal control to safeguard and protect for loss, unauthorized use or disposition of its assets. All the transaction is properly authorized, recorded and reported to the management, the company is following all the applicable accounting standard for properly maintaining the books of accounts and reporting financial statement. The company has appointed an independent firm of Chartered Accountants for conducting internal audit. The Audit Reports are reviewed by the Management and the Audit committee of the Board from time to time

HUMAN RESOURCE DEVELOPMENT/ INDUSTRIAL RELATIONS

The Company follows fair ‘human resource practices providing equal opportunity to all its employees. The policy includes on the job training, progressive and performance driven remuneration, talent retention and some work-life balance programs. The Company believes in offering full opportunity for growth to employees demonstrating positive attitude and initiative to accept challenge and responsibility.

The company has drawn a specific program to improve the skill of the workers to rationalize the manpower. Further it is providing necessary training to the manpower. There is continuous interaction between the management and employees. The numbers of people employed during the year were 60.

FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE.

Financial performance with respect to operational performance is explained in detail in the beginning of the Directors Report. The management is taking continuous efforts to improve upon its financial and operational performance.

There were significant changes in following ratios (i.e. change of 25% or more as compared to the immediately previous financial year) during the financial year 2020-21 compared to immediately previous financial year.

Sr. No. Ratio 31st March, 2021 31st March, 2020 Percentage of change (+) Increased and (-) decreased Reasons for change
1 Debtors Turnover 11.16 10.31 0.85 Mainly decrease in sales as compared to the last year
2 Inventory Turnover 22.35 14.44 7.91 Mainly decrease in sales as compared to the last year
3 Interest Coverage Ratio 134.38 5.28 129.10 Decrease in borrowing which results decrease in interest cost.
4 Current Ratio 2.35 2.47 -0.12 As explained in point (ii) above and increased in liabilities, the current ratio is decreased as compared to the previous year
5 Debt Equity Ratio 0.30 0.44 -0.14 As explained in point (ii) and (iv) debt equity ratio of the company has decreased during the year.
6 Operating Profit Margin 0.30 0.67 -0.37 Mainly due to increase in cost of production of the company.
7 Net Profit Margin 0.27 0.02 0.25 Mainly due to decrease in interest cost of the company.
8 Return on Net Worth 0.13 0.13 0.00 No change in return on net worth

CAUTIONARY STATEMENT

The management discussion and analysis report contain forward looking statements based upon the data available with the company, assumptions with regards to economic conditions, the government policies etc. The company cannot guarantee the accuracy of assumptions and perceived performance of the company in the future, therefore, it is cautioned that the actual result may materially differ from those expressed or implied in the report.

For and on behalf of the Board

Niraj Chandra Chairman and Managing Director

DIN: - 00452637

Place: - Satara

Date: - 12th August, 2021