N R Agarwal Industries Ltd Management Discussions.

Global economic overview

Following a robust growth of 3.8% in 2017 and in the first half of 2018, the global economy slowed significantly in the second half of 2018, reflecting a confluence of factors affecting major economies like the failure of the Brexit negotiations, tightened financial conditions, geopolitical tension and higher crude oil costs. Owing to this, the global economy growth in 2018 was estimated at 3.6%.

Crude prices remained volatile since August 2018 as a result of multiple factors including American policy pertaining to Iranian exports and softening global demand. Oil prices dropped from a four year peak of US$ 81 per barrel in October 2018 to US$ 61 per barrel in February 2019. While advanced economies were showing signs of a slowdown, emerging economies like India and China were expected to fuel the worlds economic growth engines.

Global growth is expected to remain at 3.2% in 2019. The unwinding of the US fiscal stimulus and the fading of the favourable spill-overs from US demand to trading partners are expected to be offset by a pickup in growth in emerging markets and developing economies. Global oil supply is expected to increase gradually, lowering oil prices to US$68.76 a barrel in 2019 and to ~US$60 a barrel in 2023.

Global economic growth over six years

Year 2015 2016 2017(E) 2018(E) 2019 (P) 2020 (P)
Real GDP growth (%) 3.2 3.1 3.8 3.6 3.2 3.5

[Source: World Economic Outlook, July 2019] E: Estimated; P: Projected

Indian economic overview

India retained its position as the sixth-largest economy and the fastest-growing trillion-dollar economy through a major part of the year under review (except in the last quarter of 2018-19). After growing 7.2% in 2017-18, the Indian economy is estimated to have grown 6.8% in 2018-19 as per the Central Statistics Office release, May 2019.

The principal developments during the year under review comprised a sustained increase in per capita incomes decline in national inflation, steadying interest rates and weakened consumer sentiment from the second half of the financial year. The weaker sentiment was on account of a large non-banking financial institutions announcing its inability to address liabilities. This affected credit expansion, financial markets and consumer sentiment, which in turn resulted in slower GDP growth that declined to 5.8% by the fourth quarter of 2018-19, the slowest growth in a single quarter in years.

In 2018 the country attracted ~US$ 42 billion in FDI inflows as per the World Investment Report 2019. Driven by strong policy reforms, India witnessed a 23-notch jump to a record 77th position in the World Banks latest report on the Ease of Doing Business that captured the performance of 190 countries.

The commencement of the US-China trade war opened new opportunities for India, particularly in the agro sector. Inflation (including food and energy prices) was estimated at 2.6% on an annual basis, one of the lowest in years and well below the Reserve Bank of Indias medium-term target of 4%. The rupee rebounded after touching a low of 74.45 to a dollar to close the financial year at 69.44. During the fiscal under review, the Indian Government continued to invest deeper in digitisation, renewable energy capacity generation and infrastructure building.

Key government initiatives

The Indian government continued to take a number of initiatives in strengthening the national economy.

Bank recapitalisation scheme: In addition to infusing 2.1 lakh crore in public sector units, the Indian Government announced a capital infusion of 41,000 crore to boost credit for a strong impetus to the economy in FY2018-19. The Budget 2019-20 mandated that the Union Government will infuse 70,000 crore to strengthen and enhance their lending capacity. (Source: Hindu Business Line) Expanding infrastructure: Indias proposed expenditure of 5.97 trillion (US$ 89.7 billion) toward infrastructural development In the Union Budget 2018-19 is expected to strengthen the national economy. As of November 2018, total length of road-building projects awarded under Bharatmala Pariyojana (including residual NHDP works) was 6,460 kms for a total cost of 1.52 trillion (US$ 21.07 billion). The Government has announced an investment of 1,00,00,000 crore (US$ 1.5 trillion) in infrastructure over the next five years in Budget 2019-20. (Source: IBEF) Ujjwala Yojana and Saubhagya Yojana: With the help of this initiative, the Government has transformed the lives of every rural family, dramatically improving the ease of their living by providing electricity and clean cooking facility to all willing rural families by 2022.

UDAN: This Scheme is directed towards providing air connectivity to smaller Indian cities, enabling the common citizens to avail the option of travelling by air. A number of airports are likely to be constructed under this scheme. The Insolvency and Bankruptcy code (Amendment), Ordinance 2018: Passed in June 2018, the ordinance provides significant relief to home-buyers by recognising their status as financial creditors. The major beneficiary of the ordinance are the MSMEs, as it empowers the Indian Government to provide the MSMEs with diversification special dispensation under the code. (Source: PIB) Pradhan Mantri Kisan Samman Nidhi: In Februrary 2019, the Indian Government announced the Pradhan Mantri Kisan Samman Nidhi, a scheme promising an annual assured income of 6,000 (US$84.5) for any farmer owning 2 hectares of farmland. The budget for the fiscal year 2020 allocated 75,000 crore for the scheme, benefiting ~120 million land-owning farmer households.(Source: PIB)

Direct Benefit Transfer: The Direct Benefit Transfer initiative re-engineered the cash disbursement process in welfare schemes through simpler and faster flow of information/ funds to ensure accurate targeting of beneficiaries, de-duplication and reduction of fraud. In 2018-19 alone, this scheme is estimated to have transferred more than 3,00,000 crore and the gains to have accrued since scheme implementation (upto March 2019) is estimated at 1,41,677.56 crore. (Source: www.dbtbharat.gov.in)


Indias economy is expected to remain sluggish through 2019-20 before reviving thereafter in line with its long-term potential. (Source: CSO, Fitch, Economic Times, Business Standard, IBEF, Business Today, India Today)

Global pulp and paper industry overview

The pulp and paper industry is one of the worlds largest sectors. The sector is dominated by North American, Northern European and East Asian companies even as Latin American and Oceania players possess significant capacities. Over the next few years, India and China could enhance their capacity following sustained increase in demand. World production of paper and paperboard currently stands at ~390 million tonnes and is expected to reach 490 million tonnes by 2020. (Source: PG paper)

Key geographies

China: The pulp and paper industry in this country is faced with environmental, political, and economic pressures to reduce industrial wastewater effluents. In recent years, the Chinese market has begun to address the environmental hazards posed by the obsolete capacity through the imposition of environment protection taxes incorporated into local government taxation systems.

The US: The US continues to leverage robust cost management to stabilise profitability even as product line has proved challenging. However, considering the uncertainties in global macroeconomic development and the economic growth slowdown in developing countries, the demand outlook appears weak. Japan: The country continues to be the driving force behind the steady growth of the global paper industry, especially the packaging and household paper grades. Due to capacity reduction and continuous environment protection, paper prices increased. (Source: PG Paper)

SWOT analysis

Strengths Growing needs for packaging in line with manufacturing and growing e-commerce activities
• New market outlets stemming from a rising middle-class in emerging markets
• Rising demand for hygiene products
Weaknesses • Inability to address rising investment costs
• High sensitivity to feedstock costs (pulp)
• Increasing competition from plastic packaging
Opportunities • Increase in literacy increases demand for textbooks and notebooks.
• Increase in packaging needs increases demand for paper
Threats • Emergence of digitalisation
• Import threats


The global production of paper and paperboard is projected to reach 490 million tonnes per annum by 2020 from a level of 390 million tonnes per annum in 2018. The global paper and pulp production is expected to remain stable in 2019. European and American production could remain stable with China and Japan emerging as prominent paper producers.

Paper will focus on serving niche markets due to changing demand and production methods. In context of the internet economy, with the rapid transformation of the traditional media industry into new media and the rapid growth of online consumption, the product structure of the paper industry would need to adjust. (Source: PG paper)

Global paper packaging industry overview

In 2017, the global paper packaging market was valued at US$ 64.4 billion and is expected to reach a value of US$ 82.4 billion by 2023, registering a CAGR of ~4.19% during 2018-2023. The attributes likelight weight, bio-degradability, and recyclability are the advantages that make paper an essential component of modern life.

Rising consumer consciousness regarding sustainable packaging, along with the strict regulations imposed by various environmental protection agencies regarding the use environment-friendly packaging products, is driving the market for paper packaging. The rapid growth of online shopping has strengthened the use of cardboard and paper-based bags. (Source: Mordor Intelligence)

Indian paper industry overview

The Indian paper industry is attractively placed on account of no significant capacity being added while demand continues to rise. Imports, which were a significant threat, are reducing owing to a depreciating rupee and higher global paper realisations. Finally, solid Balance Sheets of stronger players, increasing cost of environmental compliance for new entrants and economies of scale imply that the industry is well placed to consolidate around existing leaders.

India is the fastest growing major paper market in the world registering a CAGR of ~8% from 2011-2016 vs 1% for the global paper industry. China and Indonesia have grown at 1% CAGR, and developed markets of USA & UK have declined at 1% and 3% CAGR in the same period respectively.

While India is a fast growing market, it is also fragmented - the top-3 players account for only 9% of the market share, versus. 68% in USA, 72% in Indonesia and 21% in China. The current industry scenario is ideal for consolidation as viable stressed assets get a acquired and healthy players to gain market share through inorganic expansions.

The current cyclical upturn in India has come after a period of stress, benefiting companies with strong Balance Sheets and adequate capacities.

The Indian paper industry is fragmented with over 1000 mills, of which about 750 mills are operational.

The paper Industry is highly capital intensive with heavy investments in land and machinery for paper mills. Also, repairs and maintenance of mills, cost of upgrading technology, cost of environmental compliance and establishing distribution network, all make manufacturing paper a capital intensive task.

The GST implementation increased costs for the unorganised sector, creating a level playing field.

The Indian paper industry is growing at around 6-7%. Despite the sustained growth in the industry, per capita paper consumption in India is estimated at less than 13 kilograms, well below the global average of 57 kilograms. The domestic demand in India grew from 9.3 million tonnes in FY08 to 17 million tonnes in FY18.

The industry is classified into four segments, printing and writing, packaging paper and board, specialty papers and newsprint. Printing and writing papers share remained stable at ~30%, while packaging paper and boards share increased from 46% in FY08 to 52% in FY18.

Domestic demand for printing and writing paper stood at 5 million tonnes per annum in 2018. Rising literacy and universalisation of education through legislative steps like Right to Education, governmental measures like Sarva Shiksha Abhiyan and mid-day meal schemes, increased spending on education are the principal reasons for growth in the demand for printing and writing paper.

On the supply front, the installed capacity of the industry was around ~14 million tonnes per annum with the industry operating at a capacity utilisation level of ~85 - 90%. After capacity addition in the early part of the decade, the planned domestic capacity (greenfield and brownfield) additions for paper and newsprint have slowed, primarily due to a shortage of key raw materials (partially mitigated by agroforestry initiatives). Capex in the form of modernisation and debottlenecking are being undertaken.

Indian packaging industry overview

Indian packaging industry is expected to grow from USD 31.7 billion in 2015 to USD 72.6 billion by FY20, driven by rising population, increase in income levels, ecommerce boom, organised retail and changing lifestyles. Fast-moving consumer goods is one of the primary growing segments in the retail sector and also one of the biggest end- users of the packaging industry. Pharmaceutical is another major user of the packaging industry. The per capita packaging consumption in India is quite low at 8.7 kg, compared with countries such as Germany (42kg) and Taiwan (19 kg), indicating headroom for the industry to grow. The Indian packaging industry contributes about 4 per cent to the global packaging sector. The packaging paper and board segment accounted for ~52% of the total demand for paper in India, the largest segment in an industry which grew at a CAGR of 8.3% from 4.3 million tonnes during FY08 to 8.8 million tonnes in FY18.

(Source: Economic Times)

Drivers of the packaging industry

E-commerce boom: Indias e-commerce revenues are expected to jump from US$ 39 billion in 2017 to US$ 120 billion in 2020, growing at an annual rate of 51% - the highest in the world. This is helping the countrys paper packaging segment to expand.

Growing FMCG: The Indian FMCG sector is the fourth largest sector of the Indian economy with household and personal care products accounting for 50% of all FMCG sales. The sector grew to US$ 52.8 billion during FY2017-18 from US$ 31.6 billion during 2010-11 and is expected to grow at 11-12% in 2019.

Pharmaceutical: Pharmaceutical exports grew from US$ 17.28 billion in FY18 to US$ 19.14 billion in FY19. Indias domestic pharmaceutical market turnover reached 1.29 lakh crore in 2018, growing 9.4 per cent year-on-year from 1.16 lakh crore in 2017.

Drivers of the demand for Indias paper industry

Rising income level: The annual income earned by an average Indian has doubled in seven years - from around 63,642 in 2011-12 to an estimated 125,000 in 2018-19. The increase has been attributed to low inflation, national growth and increased remittances. As India approaches the

US$2,000-per-capita-income mark, a hockey-stick curve may be expected in the growth of discretionary spending. Population growth: The growing Indian population has increased the number of ‘earning population. The proportion of Indian populace in the age group of 15-64 years increased from 55.4% in 1991 to 67% in 2018. A low median age implies a higher number of working people and spending potential of the national population. The median age of India is 27.9 years, one of the lowest globally in comparison to 38.1 years in the US, 46.9 years in Japan and 37.4 years in China.

Urbanisation: As India has urbanised, aspirations, lifestyle standards and consumption increased.

Increasing literacy: Indias youth literacy is expected to grow at 90% by 2020 from 74% in 2017.

Rising national literacy is expected to increase expenditure on textbooks, notebooks and paper products.

Growing print media demand: The circulation of print media reached 62 million copies a day in 2016, implying a 10-year-CAGR of ~5%, which is higher than most advanced economies marked by a decline.

Growth in packaging paper and board segment: The consumption of packaging paper and boards is driven by growth in the national economy and consumption.

Educational spending: India is a young market with 310 million students, which is roughly the size of the entire US population. Furthermore, this number has been growing at a rate of 1.7% y-o-y. India has over 250 million school-going students, more than any other country. It also has one of the largest network of higher educational institutions in the world. The number of colleges and universities in India reached 39,050 and 903 respectively in 2017-18, boosting the paper industry.

Regionalisation: Localization in coverage has resulted in the publishing of multi edition newspapers, combining national content with regional news.

Booming service sector: Indias service sector grew at a rate of more than 16% between 2006 and 2014 and was mainly driven by the export of IT and BPO services. With the robust growth in Indias service sector, there will be more demand of paper.

Growing consumption: Indias middle-class households grew from 65 million in 2006 to more than 75 million in 2015, indicating a long term growth trend.

Policy support: The Union Budget 2017-18 laid out a sum of 79,685.95 crore for the education sector, up by 9.9% from 72,394 crore in 2016-17. With the Central Government spending more on improving the countrys educational infrastructure, this would help in the offtake of writing and printing products could be sustained.

(Source: CSO, Business Standard, Times Now, Edelweiss Capital, Fortune India, Print Week, CIA – The World Factbook, Audit Bureau of Circulation, CEIC)


Indias demand for paper is expected to grow at a CAGR of 6.7% to 20.7 million tonnes in FY20. The demand for packaging paper and board segment is expected to grow at a CAGR of 8.9% and reach 11.4 million tonnes in FY20, riding a growth in retail products consumption (FMCG, F&B, pharmaceuticals and textiles, among others).

The demand for printing and writing paper is expected to grow at a CAGR of 4.2% and reach 5.7 million tonnes in FY20, riding a sustained national focus on education and a widening of the print media.

Paper manufacture in China could be affected following a ban in the import of select waste paper varieties, which could ease the pressure on raw material prices and improve realisations. Paper capacity in India is rationalizing and consolidating, especially in writing and printing paper. There is more discipline in adding capacity now than before, and pricing is more controlled. Multiple capacity additions are being made in the packaging segment. However, companies and industry experts believe this addition is in line with double-digit demand growth.

Company overview

NR Agarwal is one of the prominent manufacturers of duplex boards (paper packaging) and writing and printing paper. The Companys production facility in Gujarat comprises five paper units, which utilise waste paper as a raw material.

The Company produced 304000 tonnes in FY19. The Companys products were used in FMCG packaging, textbook and print media applications. As a knowledge-driven organisation, the Company emphasised product development, quality improvement and cost optimisation.

Financial performance

The Companys revenues grew by 9.53% to reach 1318.18 crore during FY2018-19 following an improvement in sales volume. EBIDTA stood at 192.69 crore compared to 163.50 crore in the previous year. Interest cost decreased to 3454.45 lakh in 2018-19 compared to 4016.84 lakh during the previous year. The Company reported a post-tax profit of 94.64 crore during FY2018-19 compared to a post-tax profit of 90.24 crore in the previous year. Consequently, the Company proposed a dividend of 4 per equity share of 10 each (fully paid-up).

Risk management

Slowdown in the economy may impact the industry

Mitigation: The Indian economy is poised for strong growth. After growing at 7.2% in 2017-18 the Indian economy grew at 6.8% in 2018-19 which is expected to revive in the foreseeable future.

Raw material scarcity can lead to price increases.

Mitigation: The Companys plant uses waste paper as raw material, procured from imports 48.82% as well as the domestic market 51.18% in FY19. Waste paper pricing dynamics play an important role in the Companys financials as cost of waste paper comprises ~ 82.21% of total raw material costs. Looking ahead, prices of waste paper internationally will see a downward trajectory following the ban on import of waste paper in China. Lowered raw material costs along with enhanced operational efficiency and increased realisations contributed to a higher EBIDTA margin of 14.52%.

With rapid digitisation, paper demand could decline.

Mitigation: Digitisation could negatively affect paper consumption but in turn could accelerate economic growth that could translate into enhanced paper consumption. The Company has maintained its sectoral leadership by being constantly innovative. The Company is also focusing on the packaging paper segment to capitalise on its growing demand led by the e-commerce industry.

High funding cost could affect capex requirements

Mitigation: The Company optimised its debt-equity ratio to 0.33 during FY2018-19 from 1.32 during FY2017-18 while the Companys interest cover stood at a robust 5.24 x as on March 31, 2019. Timely repayment of debts and a moderate gearing helped raise additional debt in a cost-effective manner.

Human resources and industrial relations

The Company believes that the quality of the employees is the key to its success and is committed to equip them with skills, enabling them to seamlessly evolve with ongoing technological advancements. During the year, the Company organised training programmes in different areas such as technical skills, behavioural skills, business excellence, general management, advanced management, leadership skills, customer orientation, safety, values and code of conduct. The Companys employee strength stood at 1506 as on March 31, 2019.

Internal control systems and their adequacy

The Company has adequate internal control systems including suitable monitoring procedures commensurate with its size and the nature of the business. The internal control systems provide for all documented policies, guidelines, authorization and approval procedures. Both

Internal Auditors and Statutory Auditors have verified, Internal Financial Controls (IFC) at entity level and operations level and satisfied about control effectiveness.

The controls are reviewed at regular intervals to ensure that transactions are properly authorised and correctly reported and assets are safeguarded. The statutory auditors while conducting the statutory audit, review and evaluate the internal controls and their observations are discussed with the Audit committee of the Board.

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 differ materially from those expressed or implied. The important factors that could make a difference to the Companys operations include global and Indian demand and 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 the world, as well as other factors such as litigation and industrial relations.