N R Agarwal Industries Ltd Management Discussions

Global economy

Overview

Global economic growth declined from 3.5% in 2022 to an estimated 3.1% in 2023. A disproportionate share of global growth in 2023-24 is expected to come from Asia, despite the weaker-than-expected recovery in China, sustained weakness in USA, higher energy costs in Europe, weak global consumer sentiment on account of the Ukraine-Russia war, and the Red Sea crisis resulting in higher logistics costs. A tightening monetary policy translated into increased policy rates and interest rates for new loans.

Global trade in goods was expected to have declined nearly $2 trillion in 2023; trade in services was expected to have expanded $500 billion. The cost of Brent crude oil averaged $83 per barrel in 2023, down from $101 per barrel in 2022, with crude oil from Russia finding destinations outside the European Union and global crude oil demand falling short of expectations.

Regional growth (%)	2024	2023
World output	3.1	3.5
Advanced economies	1.7	2.5
Emerging and developing economies	4.1	3.8

Performance of major economies, 2023

Indian economy overview

The Indian economy was estimated to grow 7.8% in the 2023-24 fiscal against 7.2% in 2022-23 primarily driven by improved performance in the mining and quarrying, manufacturing and certain segments of the services sector. India retained its position as the fifth largest economy. The Indian rupee displayed relative resilience compared to the previous year; the rupee opened at H82.66 against the US dollar on the first trading day of 2023 and on December 27, 2023 was H83.35 versus the greenback, a depreciation of 0.8%.

In the 11 months of FY 2023-24, the CPI inflation averaged 5.4% with rural inflation exceeding urban inflation. Lower production and erratic weather led to a spike in food inflation. In contrast, core inflation averaged at 4.5%, a sharp decline from 6.2% in FY 2022-23, moderated by softening global commodity prices.

The FY 2023-24 growth in the economy was the highest since FY 2016-17, excluding the 9.7% post- Covid rebound in gross domestic product (GDP) in FY 2021-22 from the 5.8% contraction in FY 2020-21.

As per the first advance estimates of national income released by the National Statistical Office (NSO), the manufacturing sector output was estimated to grow 6.5% in FY 2023-24 compared to 1.3% in FY 2022-23.

Growth of the Indian economy

	FY21	FY22	FY23	FY24
Real GDP growth (%)	-6.6%	8.7	7.2	7.8

Growth of the Indian economy quarter by quarter, FY 2023-24

	Q1FY24	Q2FY24	Q3FY24	Q4FY24
Real GDP growth (%)	8.2	8.1	8.4	8.2

E: Estimated

(Source: Budget FY24; Economy Projections, RBI projections, Deccan Herald)

Real GDP or GDP at constant prices in 2023-24 was estimated at H171.79 lakh cr as against the provisional GDP estimate of 2022-23 of H160.06 lakh cr (released on May 31, 2023). Growth in real GDP during 2023-24 was estimated at 7.3% compared to 7.2% in 2022-23. Nominal GDP or GDP at current prices in 2023-24 was estimated at H296.58 lakh cr against the provisional 2022-23 GDP estimate of H272.41 lakh cr. The gross nonperforming asset ratio for scheduled commercial banks dropped to 3.2% as of September 2023, following a decline from 3.9% at the end of March 2023.

Indias exports of goods and services were expected to touch $900 billion in 2023-24 compared to $770 billion in the previous year despite global headwinds. Merchandise exports were expected to expand between $495 billion and $500 billion, while services exports were expected to touch $400 billion during the year. Indias net direct tax collection increased 19% to H14.71 lakh cr by January 2024.

India reached a pivotal phase in its S-curve, characterised by rising in urbanisation, industrialisation, household incomes and energy consumption. India emerged as the fifth largest economy with a GDP of $3.6 trillion and nominal per capita income of H1,23,945 in 2023-24.

Global paper and packaging industry overview

The global paper and paperboard packaging market size is expected to be $398.65 billion in 2024 and likely to reach $501.08 billion by 2029, growing at a CAGR of 4.68% during the forecast period of 2024-2029. The global consumption of paper and paperboard totalled 420 million tons in 2023 and is expected to reach 476 million tons by 2032. The US packaging market size is expected to grow from $200.98 billion in 2024 to $244.17 billion by 2029, at a CAGR of 3.97%.

The Asia Pacific paper packaging market size is expected to grow from $207.75 in 2024 to $265.27 billion by 2029, at a CAGR of 5.01% during the forecast period 20242029. The demand for corrugated board packaging in the region is witnessing significant growth due to the transport packaging flow of essential products, such as packaging for food and other consumer products, medical and pharmaceutical products, and tissue and hygiene products.

The printing and writing paper market size is expected to increase by $9.64 billion at a CAGR of 2.06% between 2023 and 2028. The revenue generated globally in the tissue and hygiene paper market was $351.70 billion in 2024.

The global paper packaging market is primarily driven by the rise in the e-commerce sector, increasing consumer demand for sustainable packaging, regulatory pressure for environmental compliance, continual technological innovation and global sustainability initiatives pushing for eco-friendly alternatives to traditional packaging materials. Additionally, innovations in printing technologies enable eye-catching branding and designs, further boosting the market. Industry trends encompass innovations in recyclable and biodegradable packaging solutions, aligning with sustainability goals.

Indian paper and packaging industry overview

The Indian paper and packaging market size is expected to grow from $15.96 billion in 2024 to $38.87 billion by 2029, growing at a CAGR of 19.48%. Imports of paper and paperboards have increased by 37% to around 1.47 million tons in April-December on FY 2023-24. Imports of paper and paperboard rose by 34% to 19.3 lakh tons in FY 2023-24 impacted the Make in India drive as well as deprived employment to 5 lakhs committed farmers who were aligned with the domestic paper industry through agro and farm forestry.

There is more than adequate domestic capacity in India to manufacture almost all grades of paper and large imports are impacting the commercial viability of most mills. Out of over 900 paper mills, only 553 are operational in India. Imports comprised paper and paperboard from ASEAN, which entered the country at zero import duty under the ASEAN-India free trade agreement. Besides zero duty concessions to ASEAN and Korean FTAs, import tariff concessions to China under the Asia Pacific Trade Agreement (APTA) also boosted paper imports. There is a subsidy by some of these countries to their paper mills, which creates a cost advantage over Indian paper mills.

In the financial year 2023, Indias exports of paper and paper board products were valued at approximately $3.04 billion. On the other hand, pulp and waste paper reported the lowest export value at only $3.59 million. Indias per capita paper usage stood at roughly 15 kg for 2023. The Indian paper industry accounts for 5% of global production, which indicates considerable headroom. The flexible packaging market in India is expected to grow by $15.57 billion during 2023-2028, accelerating at a CAGR of 12.69%. Demand for paper continues to rise especially in the packaging of FMCG products and ready-to-eat food. Packaging-grade paper accounts for 55% of the main types of paper produced domestically in the paper and paperboard industry. Packaging paper volume was expected to grow at 6-8% in 2023-24, driven by demand from the pharmaceutical and FMCG sectors. Writing and printing paper volume witnessed a modest 3-5% amid increased digitalisation.

The growth in the sector is being driven by a surge in e-commerce, food processing, pharmaceuticals, FMCG, the manufacturing industry and the healthcare sector. Additionally, numerous government initiatives including Make in India had a positive impact on the packaging industry.

The paper and packaging industry is currently the fifth largest sector in the Indian economy.

Government policy

The Indian packaging industry is getting a 1.4% benefit under the RoDTEP scheme. However, the industry is losing the input tax credit on fuels, electricity, construction of immovable assets, entertainment and car expenses, etc. leading to losing far more than the actual gain received from this programme. An increase in the benefits (from 1.4% to 3%) will provide added financial incentives for exporters to increase production and export more products. Additionally, this will encourage the industry players to invest in research, development and introduce new tech innovations.

Growth drivers of the paperboard industry

Growing literacy: In 2024, Indias literacy rate stood at 85.95%, which increased the demand for writing and printing paper.

Food packaging and beverage: The

Indian food and beverage packaging industry is experiencing growth, with market size projected to increase from $33.73 billion in 2023 to an estimated $46.25 billion by 2028, driven by factors like rising consumption, enhanced awareness, and government initiatives. The industry is witnessing a series of innovations, particularly in flexible packaging, such as pouches and bags, due to their adaptability and affordability. Sustainable packaging solutions are also gaining traction.

Growing population: Indias population in 2024 stood at 1.44 billion. The growth in the paper industry address the needs of this growing population.

Rising income levels: The middle- class income levels are expected to reach 40% by 2031 and 63% by 2047. Rising income has boosted consumer spending, with more people buying products accompanied by high-quality packaging solutions. The Indian paper industry is addressing this opportunity by capitalising on the growing demand for quality paperboard, packaging paper and paper board.

Company overview

N R Agarwal Industries Ltd, incorporated in 1993, is best known for quality finished paper products production, serving the domestic and international markets. It has roots in Mumbai, India, with production plants in Gujarat, the Company is reinforcing its production capacity with a new duplex board factory and building on its reputation for delivering superior products in India and the world over.

It mainly produces paper products used in FMCG packaging, textbooks, print media and notebooks. The Company has focused on product development, quality improvement and cost reduction. In FY 2023-24, the Company produced 2,48,000 MT of paper and paper board.

Financial capital analysis

Balance Sheet

- Borrowings for FY 2023-24 stood at H552.67 cr compared to H134.50 cr during FY 2022-23.

- Total non-current assets for FY 2023-24 stood at H1,202.37 cr compared to H701.52 cr in FY 2022- 23.

Profit and Loss statement

- Revenues decreased 26.78% to H1,293.13 cr in FY 2023-24 compared to H1,766.07 cr in FY 2022-23.

- EBITDA decreased 5.95% to H185.59 cr in FY 2023- 24 compared to H197.34 cr in FY 2022-23.

- Profit after tax increased 26.34% to H125.46 cr in FY 2023-24 compared to H99.30 cr in FY 2022-23.

- Total expenses for FY 2023-24 stood at H1164.97 cr compared to H1630.75 cr in FY 2022-23.

- Depreciation and amortisation stood at H37.41 cr in FY 2023-24 compared to H35.81 cr in FY 2022-23.

Risk management

Economic risk: Economic slowdown can moderate consumer spending, which could result in reduction in demand for paper products.

Mitigation: Indias GDP was estimated to grow at 7.8% in FY 2023-24, showing the countrys consumption potential and economic resilience. This creates wider opportunities for the market and the Company.

Digitisation risk: Digitalisation may cause a reduction in paper use.

Mitigation: The Company offers a range of quality unique products to meet the growing demand from the e-commerce industry. It has a distinct capacity to cater to consumer needs across small lots/order sizes. The Company enhanced its focus on paper packaging to capitalise on a growing market trend. During the year under review, the Companys new plant at Sarigam became operational.

Raw material risk: Raw materials shortage could affect operations.

Mitigation: The Company depends on local waste paper as raw material, reducing its dependence on raw material procurement.

Financial risk: A sharp rise in input costs can disrupt profitability.

Mitigation: The Companys effective input cost management and prompt debt repayment increased profitability, resulting in important shifts in profit after tax (PAT) and EBITDA.

Key numbers

Particulars	FY24	FY23
EBITDA/Turnover (%)	14.35	11.20
Debt-equity ratio	0.63	0.21
Return on Equity (%)	7.37	5.83
Book value per share (H)	446.72	373.48
Earnings per share (H)	73.72	58.35
Interest Coverage Ratio (x)	17.60	14.31
Current Ratio (x)	1.60	2.17
Net profit margin (%)	9.78	5.69

Human resources

The Company considers employees as important to its success and is committed to giving them the necessary skills to adapt to technological advancements. The Company arranged training programs in behavioural skills, technical, leadership, customer orientation, code of conduct safety and values during the year under review. As on March 31, 2024, the Company had a strength of 1,341 employees.

Internal control systems

The Company follows corporate governance principles, criteria in internal control and risk management systems. The Board of Directors gives strategic supervision and proper guidance to the Executive Directors and management and looks after the risk committees, control and the audit department. The Statutory auditors provide supervision to the control, risk committee and audit department of the Company.

Cautionary statement

The Management Discussion and Analysis report containing your Companys objectives, projections, estimates, and expectations may constitute certain statements, which are forward-looking within the meaning of applicable laws and regulations. The statements in this management discussion and analysis report could differ materially from those expressed or implied.