Kuantum Papers Ltd Management Discussions.

1. An overview of the Economy and Business Environment

As per the World Bank, COVID-19 has triggered the deepest global recession in decades which has delivered an enormous global shock, leading to steep recessions in the worlds most developed countries like USA, Britain and Germany. While the ultimate outcome is still uncertain, the pandemic will result in contractions across the vast majority of emerging market and developing economies. The baseline forecast envisions a 5.2 percent contraction in global GDP in 2020—the deepest global recession in decades. Per capita incomes in most emerging and developing economies will shrink. The pandemic highlights the urgent need for policy action to cushion its consequences and protect vulnerable populations. Once the crisis abates, it will be necessary to reaffirm a credible commitment to sustainable policies and undertake the reforms necessary to support longterm prospects. According to an assessment by the World Economic Forum (WEF), supporting SMEs and larger businesses is crucial for maintaining employment and financial stability.

India too has been affected not only because of its pre-pandemic domestic slowdown but also because of international recession. According to the World Bank, the current pandemic has "magnified pre-existing risks to Indias economic outlook". What started as one day Janta Curfew on 22.03.2020 and lockdowns by some of the state governments, the entire country was declared to be under lockdown from the midnight of 24.03.2020, and the same continues to be so till now albeit with relaxations.

The Government of India announced a variety of measures to tackle the situation, from food security and extra funds for healthcare and for the states, to sector related incentives and tax deadline extensions. A number of economic relief measures for the poor were announced. The Reserve Bank of India also announced a number of measures making funds available to the countrys financial system. The World Bank and Asian Development Bank approved support to India to tackle the coronavirus pandemic.

The Government announced an overall economic package worth 20 lakh crore (10% of Indias GDP) with emphasis on India as a self-reliant nation. The Govt also announced details of the “Atmanirbhar Bharat Abhiyan” package, to provide relief to Medium, Small and Micro Enterprises (MSMEs) in the form of an increase in credit guarantees.

The Five pillars of Atmanirbhar Bharat Abhiyan focus on:

• Economy

• Infrastructure

• System

• Vibrant Demography and

• Demand

India has faced the COVID-19 situation with fortitude and spirit of self-reliance. The clarion call given by the Govt. to use these trying times to become Atmanirbhar (self-reliant) has been very well received to enable the resurgence of the Indian economy.

The Govt also urged the citizens to go vocal for local and use the current crisis to make India self-reliant. Local would not only mean products made by Indian companies, but would also include those manufactured in India by multinational companies.

Further, even as economic activity resumes gradually, the situation will take time to normalize, as consumer behaviors change as a result of continued social distancing and uncertainty about how the pandemic will evolve.

2. Industry Structure and Development

In the calendar year 2020, demand for paper and board (writing and printing, paperboard and newsprint) is expected to be subdued on account of the Covid-19 pandemic-led disruptions across the globe. In China, which had almost one-third of paper demand, it is expected to fall too due to strict shutdown coupled with lower export opportunities. The US and the EU, which together account for almost 40% of global demand, are also expected to witness demand contraction due to the pandemic-driven lockdown. In 2020, CRISIL expects paper and board to de-grow due to moderation of global growth leading to lower demand from end-user industries. In 2021, CRISIL expect demand to rebound 5-6% on-year driven by strong growth in the paperboard segment.

CRISIL Research expects paper and paperboard capacity to increase to about 22-23 million tonne by fiscal 2025, an increase of 1% CAGR from fiscal 2020. Key players are expected to add an aggregate of 0.5-1.5 million tonne of capacities over the next 5-year period in the paper and paperboard segment. However, on account of a sudden plunge in the demand environment, CRISIL expect players to defer capacity additions until demand improves.

The Indian paper industry accounts for about 4% of the worlds production of paper. The estimated turnover of the industry is INR 70,000 crore (domestic market size of INR 80,000 crores) and its contribution to the exchequer is around INR 5,000 crore. The industry provides direct employment to 500,000 persons, and indirectly to around 1.5 million.

Most of the paper mills are in existence for a long time and hence present technologies fall in a wide spectrum ranging from oldest to the most modern. The mills use a variety of raw material viz. wood, bamboo, recycled fibre, bagasse, wheat straw, and agri residues. In terms of share in total production, approximately 25% are based on wood, 58% on recycled fibre and 17% on agro-residues. The geographical spread of the industry as well as market is mainly responsible for regional balance of production and consumption.

CRISIL Research expects paper & board demand to nosedive in FY21. This is on account of demand destruction caused due to shut down across India due to Covid-19. In contrast, specialty paper is expected to grow driven by increased tissue demand. In fiscal 2020, due to moderation in industrial activity as well as exports, CRISIL expect paper demand to increase just 1-3%. Nevertheless, over next the five fiscals CRISIL expect paper demand to grow at a moderate pace of 3.5-4.5% to touch 22 million tonne by fiscal 2025.

Indias share in global paper demand, though small is growing as demand in the western nations contracts, while domestic demand in India grows at a steady pace. 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 three 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 mills industry has contracted slightly, primarily due to the shift to digital media and paperless communication across most developed economies. However, demand in emerging markets has partially offset the decline by driving increased demand for paper used in packaging materials.

Domestic Demand for Paper is expected to continue growing at a robust pace with Packaging Paper & Board and Specialty segments registering the fastest growth rates.

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.

India is the fastest growing market for paper globally and it presents an exciting scenario; paper consumption is poised for a big leap forward in sync with the economic growth. The futuristic view is that growth in paper consumption would be in multiples of GDP and hence an increase in consumption by one kg per capita would lead to an increase in demand of 1 million tonnes.

In spite of the sustained growth witnessed by the industry, the per capita paper consumption in India stands at 1314 kg which is well below the global average of 57 kg and significantly below the 200 kg in developed economies. This highlights the growth of potential demand in India.

Consumption of paper is closely linked to the economic development of a country. In India, though the per capita consumption of paper is low, it is gradually improving with economic growth. Industrial production, expenditure incurred on the print media, government spending on education, population growth and literacy levels are the key contributing factors.

Writing & printing paper segment has witnessed optimum capacity utilizations levels over the past few years due to steady demand growth.

As per CRISIL, demand in developing economies in Africa, Latin America and Asia (particularly India) will continue to grow at a steady rate over the next five years as rising literacy, corporate spend etc. will propel overall volume. The demand for W&P paper in India is expected to clock 5-6% CAGR owing to rising literacy rates, rise in enrollment rates and the governments higher spending on educational programs.

China is expected to add 8-9 million tonnes of capacity during 2020 to 2025, while Indias capacity addition is expected to be in the range of 0.5-1.5 million tonnes. Also, capacity addition in the European Union is expected to remain at 4-6 million tonnes during the next five years.

Your company has been able to operate at higher optimum levels of production and sale. Despite increasing digitization, the demand growth is expected to be benefitted and driven by a combination of factors i.e. rising income levels, growing per capita expenditure, rapid urbanization and a larger proportion of earning population, improved industrial activity and rise in the advertisements. The demand will continue to be driven and supported by greater Government thrust and spending on education sector, corporate spending on stationary and healthy growth in services sector.

3. Opportunities and Threats

The Indian paper industry is expected to grow at about 3.5-4.5% CAGR through 2025 to touch 22 million tonnes. As per capita paper consumption in India stands at 13-14 kg which is well below the global average of 57 kg and significantly below 200 kg in developing economies, which highlights an opportunity in terms of potential growth of paper demand in India. The demand will be driven and supported by higher Government spending on education initiatives, corporate spending on stationary and healthy growth in services sector. Inspite of advancement in technology, like the usage of iPads, Galaxy Tabs, Smart Phones, the increased preference for online storage and dissemination of data, the paper industry is poised for a consistent growth in the demand for paper in next few years. Despite the higher level of technology being used in the corporate sector, there has been no decline in the paper consumption. Infact paper demand continues to rise at a modest pace. The envisaged growth in the value-added printing & writing paper segment in India presents an invaluable opportunity and your company plans to leverage it by tapping its institutional strength in its distribution supply chain, cost competitiveness and its premium quality alongwith its branding.

The company has been one of the most cost competitive paper mills and a large player in the writing and printing segment. The continuous efforts of the company towards cost reduction and technology up-gradation has led to improved product quality, enhanced product range and increased production capacity, higher operational efficiencies and economies of scale. Further these initiatives have also enabled the company to manufacture premium quality paper, such as maplitho paper, specialty papers and premium copier paper, which is placed in the higher value segment, competing with quality of other large paper mills.

Raw material costs account for around 47 per cent of the operating income of mills in the paper industry. Agro and Wood based pulp are the main raw materials required for manufacturing W & P paper, especially in the higher end papers such as maplitho and coated paper. Indias wood resources are limited; therefore, cost of wood is much higher in global comparison. Since there is conspicuous absence of Governments policies favoring industrial/production plantation, securing future wood supplies will be the Industrys biggest challenge. In line with this increase in production, demand for raw materials will also go up. The different raw materials used to produce paper are - agri-residues, wood and bamboo pulp, as well as imported pulp, where your company has a distinct advantage.

Indian paper mills are categorized based on raw materials used by them in the manufacture of paper - wood/forest based mills, agro-based mills and wastepaper based mills. Wood accounts for 30-35% of production, while wastepaper and agri-residues account for 45-50% and 20-22%, respectively. India has a total land area of 3.3 million sq km with forests covering only 0.7 million sq km. About 78% of the total land area is nonforest area. With diminishing forest resources and limitations on enlarging man-made forests, there is scarcity of raw material for paper mills. Moreover, the limited raw material can be put to many alternative uses. To counter the issue of wood deficit, the paper mills gave thrust to initiatives like agro forestry which have now started yielding results.

Over the last few years, imported pulp has accounted for around 10-11 per cent of domestic production. With increase in growing demand for high quality premium paper, demand for wood is expected to grow in the next few years. With domestic wood supply being inadequate for this growing need, the mills will have to import wood in larger quantities. With Free Trade Agreements, imports are expected to continue challenging the domestic industry.

The alternative source of raw material is wastepaper/recycled paper - domestic and imported. Both together accounted for nearly 40 per cent of the total paper production. In India, however, the system of wastepaper collection is not very well developed in the domestic wastepaper segment. The recovery rate is low and consequently there is lower availability. This leads to domestic mills relying increasingly on imports to meet their demand.

The third alternative source of raw material for the paper industry is agri-residues such as bagasse, wheat straw, wild grass and other such agricultural wastes. Bagasse is the most widely-used agri-residue in the paper industry. However, availability of bagasse has been declining due to its increased use in power generation by sugar industry. Despite agri-residues being seasonal in nature, this is the segment of raw material which your company has mastered processing of, and has therefore gained an edge in the industry.

The changes in Government policies, environment standards and the paperless initiatives taken by the Govt. of India, coupled with Green initiatives in Corporate Governance leading to paperless compliances by the companies, is indicative of a slight threat to the paper industry. Although India does not import any significant quantity of W&P or paperboard, the share of imports over the next few years to remain a key factor, particularly in W&P.

4. Risks and Management Perception

The paper industry is labour intensive, power intensive as well as capital intensive and is exposed to several risks

i.e. changes in the government policies, environment policies, duties and taxes, technological obsolescence and external economic factors.

Your company adopts a comprehensive and integrated risk appraisal and mitigation process thereof as part of the process in risk management.

The company uses agro waste materials, primarily Sarkanda grass and Wheat straw, as the basic raw materials to manufacture paper. The availability of these raw materials is seasonal and is mainly dependent on good monsoon. The agro residue material does exist on the ground, but the adequate availability may be a constraint as free accessibility is getting limited due to increased capacities of the other paper mills in and around the region. This may not be able to sustain the future material requirements taking into account the increasing needs of premium quality paper. The continuous increase in prices of raw material, imported pulp and other inputs continues to be a matter of great concern for the industry. However, locational advantage of your companys paper mill provides an added access to the major raw material sources and insulates it, to quite some extent on this front. We have exclusive sources of suppliers connected to your company for the last more than three decades for supply of Agro raw materials, by way of long term contract arrangements.

The paper industry consumes a large amount of energy and water. Energy costs account for about 16-18 per cent of costs. Energy costs vary depending on the fuel used for generating power. The cost of power has increased as a result of inadequate supply and increase in tariff for industrial consumers. The prospect of availability of good quality fuel is diminishing. However, the company has got itself registered with Coal India Limited and has entered into a Fuel Supply Agreement and has been meeting part of its requirements in the cogeneration plant through procurement of coal, thus mitigating the cost increase to some extent.

Indias wood resources are limited; therefore, cost of wood is much higher in global comparison. In the absence of Governments enabling policies favoring industrial/production plantation, securing future wood supplies is Industrys biggest challenge.

To secure part of wood requirements, your company had developed a social Agro-forestry process by creation of a Nursery at the Mill to grow premium quality clonal plants which has been doing very well. At the Nursery, clonal varieties of fast growing hard wood trees are grown and distributed to farmers for them to plant in their land, and the company buys back the hardwood post the harvest, thereby positively uplifting the Greening India mission of the Government. Domestic land under cultivation is expanding by 10% every year; however, it is below the industry requirement. Also, this initiative has created major employment in the remote areas in close proximity to the mill thereby, helping rural development. We are also continuing our efforts for growing of plantations by touching base with the farming community and making them aware of the financial benefits attached to social farm forestry.

The company continued its efforts in arriving at a proper raw material mix, cost reductions and product mix optimization. The Chemical Recovery plant, Co-generation plant and other cost reduction measures coupled with variety of distinctive products manufactured with better and improved operational efficiencies has significantly increased its cost competitiveness.

Your company has also framed a Risk Management Policy to identify and assess the key risk areas, monitor and report compliance and effectiveness of the policy and procedure. A Risk Management Committee as per the regulatory requirements has also been constituted to oversee the risk management process in the Company.

5. Outlook

Paper plays a key role in the communication and as a packaging material. Demand for the paper is closely linked to the prevalent economy conditions. Paper industry continues to have reasonably bright prospect in India during next 5 years as the demand of paper and paper products grow in line with the GDP growth. Paper continues to enjoy a relatively healthy demand on account of (i) lifecycle of a paper product from manufacture to consumption and disposal is short, as paper is used more in the nature of a consumable and not as a durable (ii) Wide usage, right from an individual to a corporate entity and (iii) no real low cost substitutes for paper.

The Indian paper and paperboard industry has the potential and the capabilities to service the demand in domestic and international market; and also to create huge employment avenues in rural India through agro production and forestry. This will only strengthen if the competitiveness of the value chain is encouraged by the government.

While Writing & Printing paper does not face any major threat from substitutes, the increased preference for online storage and dissemination of data and information could marginally impact the demand growth. However, despite the higher level of technology being used in the corporate sector, there has been no perceptible decline in the paper demand.

Availability of adequate good quality agro raw materials at cost effective prices, higher capital outlay, high interest costs, long gestation period and stringent environment regulations are the major entry barriers for the Greenfield projects.

6. Companys Financial Performance & Analysis

During the year your Company achieved a production of 1,26,633 metric tonnes, as against 1,27,756 metric tonnes in the previous year. The quantitative figure for the sale of paper was 1,25,267 metric tonnes this year leaving 1,730 metric tonnes as closing stock, as against the sale of 1,27,390 metric tonnes in the previous year.

From the 2nd quarter onwards, there has been a slowdown in the economy, though considered temporary at time, but the economy did not recover and the markets were challenged by demand parameters, as well as a liquidity crunch. The sales realization has been impacted after the first quarter over the previous year. There has also been increase in the material and input costs. Despite this, improved operational efficiencies, better productivity and product quality, higher volumes of premium quality paper products like copier and surface sized paper, and enriched product mix coupled with better operating parameters have contributed to better sales as well as profitability.

However, the performance has been impacted due to COVID-19 pandemic outbreak, Nationwide lockdown and curfew imposed in the various parts of the country in March 2020 to prevent novel coronavirus (COVID-19) from spreading in the country towards the fag end of the year.

The figures given in the Financial statements for the current year under review show the following:

The company recorded a net sales turnover (net of GST) and including other income, at Rs. 75,350.53 lacs; operating profit at Rs. 12,732.74 lacs; Profit before Tax at Rs. 6,519.19 lacs. Net profit after tax and other comprehensive income (expense) is Rs. 7,167.61 lacs. The profit after tax for the year under review is higher due to the lower income tax culminating from the reduced tax rates announced by the Govt. in September 2019 in order to offer tax stimulus to the industry. Further, “Section 115 BAA of the Income Tax Act 1961, introduced by Taxation Laws (Amendment) Ordinance, 2019 gave a one-time irreversible option to Domestic Companies for payment of corporate tax at reduced rates. In view of the MAT Credits, the Company determined that it will continue to recognize tax expense at the existing income tax rate as applicable to the Company. Accordingly, the Company had evaluated the outstanding deferred tax liability (net) as at 31 March 2019, and based on current estimates, re-measured the deferred tax assets/liabilities likely to be reversed at the time the Company would opt for new tax regime which had resulted in write back of deferred tax liability amounting to Rs. 1,956.22 lacs using the revised annual effective income tax rate.”

The initiatives taken by your company in the recent years in improving productivity and operational efficiencies have led to achieving better operational performance. The company has continued to take up projects in focused areas for operational improvement and this has also led to improved operational efficiencies, productivity, reduction in operational costs, and sizeable increase in savings.

The results of cost reduction initiatives and operational efficiencies will continue to be more visible in the current financial year 2020-21 as your company has continued these initiatives to optimize capacity utilization, cost reduction, new products, optimizing production of better margin products by undertaking modification and up- gradation project consisting of a pulp mill, a chemical recovery plant and a captive power plant, for improving the cost effectivity, product quality and operations.

These initiatives have made your company not only one of the most cost competitive paper mills, but is also placed amongst the large paper player in the writing and printing segment. Furthermore, continuous research & development have enabled the company to manufacture papers of distinctive prime quality and broader product mix, which is competing with the premium quality of other large paper mills.

7. Internal Control Systems

Your Company has established adequate internal control systems to provide reasonable assurance that the assets are safeguarded and transactions are properly authorized, recorded and correctly reported. Your company has already implemented SAP to further strengthen the control systems. It is a common practice to lay down a well thought business plan for each year. From the annual business plan, detailed budgets for revenue and capital for each quarter are determined. The actual performance is reviewed in comparison with the budget and deviations, if any, are addressed adequately. The internal control mechanism is well established. The internal control system is supplemented by regular management reviews and periodical reviews by an independent firm of chartered accountants, which evaluate the functioning and quality of internal controls and checks; and provide assurance of its adequacy and effectiveness. The scope of the internal audit covers a wide variety of operational methods and ensures compliance with specified standards with regard to availability and suitability of policies, practices and procedures, extent of adherence, reliability of management information system and authorization procedures including steps for safeguarding of assets. The Reports of internal audit are placed before Audit Committee for review. The audit committee reviews the adequacy of the internal control systems, audit findings and suggestions. The Companys Statutory Auditors regularly interact with the Audit Committee to share their findings and the status of further improvement actions under implementation.

8. Human Resources and Industrial Relations

Your company enjoys the support of a committed and well satisfied human capital. Human resources are invaluable assets of the company and the Companys endeavor has always been to retain the best professional and technical talent. The company lays great emphasis on proper management of human resources and skill development and believes that the human resource is the most important ingredient for achieving excellence in performance and for the sustainable growth of the business of the company. These practices enable the company to keep the attrition rate well below the industry average. The management has a process driven approach that invests in training and skill development needs of the employees on a regular basis through succession planning, on the job training and training workshops. Progress made by the company has been possible in no small measures by efforts of the entire team.

Industrial relations were harmonious. Safety welfare and training at all levels of our employees continues to be the areas of major focus for the Company as recognised by the awards bestowed on the company by independent agencies.

9. Cautionary Statement

Statements in this “Managements Discussions and Analysis” are describing the Companys “forward looking statements” within the meaning of applicable laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include global and Indian demand supply conditions, finished goods prices, raw material availability and prices, cyclical demand, changes in Government regulations, environmental laws, tax regimes, economic developments within India and abroad and other factors such as litigation, industrial relations and other unforeseen events. The Company assumes no responsibility in respect of forward looking statements made herein which may undergo changes in future on the basis ofsubsequent developments, information or events.