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 costconscious 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 1.6% of the worlds production of paper and Paperboard. Paperin Indiais expected to see an average growth of 7 per cent duringthe next year according to prediction by the Indian Pulp and Paper Technical Association.

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 finds 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.

Indias share in world production of paper is about 3.7%, with estimated production of over 15-million TPA.The paper industry has the market size of more than 17-million tonnes of paper and growing at around 7% per annum.

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-millionmen days per year (for people involved in Agro/ farm forestry).

If the investments are not made, the growing demand will be met through imports, which will result in a substantial foreign exchange outflow. The compounding effects of this over a 10-year period are truly staggering.

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.

Market Drivers

China Regulation: Ban on waste paper in China is, currently one of the major market drivers for India making supply more than demand and decrease in recovered paper prices globally

Exports: Increasing demand from exports; which have increased from last year and is mainly exported to China, SriLanka, Middle East and is expected to increase further End-Use Industries: Strong demands from end-use industries such as E-Commerce, FMCG, Consumer Durables, Agriculture, Electronics, etc.

Income & Expenditure: Rising disposable income levels, growing per capita expenditure and a larger segment of earning population is expected to increase demand

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 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 fiber is only 47%. Paper mills are heavily dependent on imported waste paper which commands exorbitant price due to inadequate availability. India needs a well- defined 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. Some industrial establishments have reopened after the ease of restrictions of lock down but some establishment are still closed. Our companys operations were also closed from 24th March, 2020 and restarted partially from 8th June, 2020. The Govt. of India have still not eased all the restrictions which were imposed on 24th March, 2020. Under this scenario, the revenue of the financial year 2020-21 of the company will be affected adversely as well the company is 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 linewith overall developments and revival of economy and business sentiments prevailing in the ‘unlockdown phases.

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 specific 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 millsand 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 financing

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, deficit of wood fiber

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 difficulty. 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. 3047.54 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 CONCERNS 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-lifebalance programs. The Company believes in offering full opportunity for growth to employees demonstrating positiveattitude 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 53.

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 2019-20 compared to immediately previous financial year.

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