Orient Paper & Industries Ltd Management Discussions

INDUSTRY STRUCTURE & DEVELOPMENT

Frequent geopolitical realignments are shaping a new world order. This is impacting major policy decisions, resulting in the restructuring of supply chains, coupled with the development and reliance on domestic value chains, in several sectors. These developments have led to prolonged inflation in the developed world and a gradual but steady curtailment in spending power.

This sense of global uncertainty and ambiguity is compounded by other factors. For instance, China is battling an array of challenges such as sluggish exports, reduced FDI, a decline in real estate prices, and rising unemployment. Also, elections are taking place in more than 60 countries, with approximately 45% of the global population exercising their right to vote. This has presented an opportunity for a global reset as people choose their world leaders.

Amid this flux, India has emerged as a sweet spot, with a stable government, controlled inflation, the largest youth demographic, a buoyant domestic market, and a e of confluenc rapidly expanding digital economy. This developments, globally and domestically, has created unprecedented opportunities for manufacturing in India.

Indias GDP is estimated to have grown @ 7.8% in FY24, thus maintaining the countrys position as a promising economy owing to resilient domestic consumption, government spending on infrastructure development and private-sector investments.

The focus on improving manufacturing capabilities and the digitalisation of processes and systems augurs well for various industries, including paper, a major employer and contributor to the Indian economy. While the global pulp & paper industry registered a weak 1-3% growth in FY24, the Indian pulp & paper industry grew by 4-6%. This growth was driven by several factors, including:

1. Economic Growth: India moving from a $3-trillion economy to a $5-trillion economy augurs well for the growth of sectors such as education, health and hygiene.

2. Growth in the hospitality and tourism sectors:

Developing India as a tourist hub will increase consumption of various tissue products in the country.

3. Increase in disposable income and changing flurry consumer preferences: Buyers becoming more socially responsible and willing to spend more on experiences will create a favourable environment for paper manufacturers to focus on paperboard and packaging paper.

Moderate global demand for paper and paperboard in FY24

Global demand for paper in FY24 is estimated to have grown by 1-3%. The Writing and Printing (W&P) segment, which witnessed a 0-1 % decline, is expected to see demand fall in the long term due to digitisation, with the world moving to a ‘Print and Digital phase. Newsprint demand too experienced a contraction, of 4-6 %. Demand is expected to decline further, with the rise of e-paper readership. On the other hand, demand from the e-commerce segment is expected to drive growth in the paperboard segment by 0-1%. Therefore, long-term demand for paper will be driven by the paperboard sub-segment.

In 2023, the global pulp industry experienced a significant decline in prices due to oversupply and weak demand, with hardwood pulp prices decreasing by approximately 32% and softwood prices by approximately 24%. This oversupply was attributed to the commissioning of low-cost pulp capacity in Latin America, coupled with higher production amid higher downstream inventories and economic challenges in major economies leading to weak demand. There has also been a consistent reallocation of pulp capacity from high-cost geographies to low-cost regions such as Latin America and Indonesia.

In India, the paper industry relies primarily on agro-based raw materials and wastepaper due to limited availability of pulpwood. However, the quality of paper produced from these substitutes is inferior to wood-based alternatives. Additionally, India faces challenges in wastepaper collection and recovery, resulting in lower availability and the need for significant imports. In such a scenario, companies that have secured access to future supplies, along with flexibility in their processes to incorporate various raw material options, will be able to maintain cost efficiency and experience seamless continuity in operations.

Source: IMF Outlook, Hawkins Wright, CRISIL Research

INDIAN PAPER INDUSTRY OUTLOOK

The paper industry in India was valued at 1,020 bn in

FY23 but experienced a contraction of ~11%, falling to

907 bn in FY24. The decline is attributed to reduced realisations caused by cheaper imports despite an increase imports from low-cost in demand. Q4 saw a

Asian countries such as Indonesia, owing to the Red-Sea shipping crisis, which raised the cost of shipping to Europe by up to 60% and increased transit time by up to 15-20 days. Conversely, the crisis also affected the movement of wastepaper from the European Union to Indian players in the recycled value chain.

TISSUE PAPER

The tissue paper market in India is projected to experience an annual growth rate of ~13%, higher than the global and

Asia average (CAGR till 2030). This growth is supported by various factors that influence demand. For instance, government schemes like the Swachh Bharat Abhiyan and the Covid-19 pandemic have greatly accelerated the adoption of a healthy and hygienic lifestyle, while also raising sanitation standards. Economic factors such as a burgeoning population of affluent Indians, which is experiencing a double-digit CAGR, has created high growth in categories such as leisure, hotels, recreation, food, durables, retail and medical services. This has accelerated product demand, where premium brands within any category are likely to sustain high growth rates for longer periods, given the increased spending power of

‘Affluent

WRITING & PRINTING

Defying the global trend, which will see demand in the Writing and Printing (W&P) segment fall in the long term, the market in India is expected to register a CAGR of 4-6% till FY27. Indias paper industry has been closely associated with the national objectives of literacy, a green India, generating rural employment, and the use of sustainable resources, which is driving growth in this segment. Increasing consumer awareness and the preference for sustainable solutions is creating significant opportunities for products and solutions that are plastic substitutes. Additionally, the growth of the organised retail sector and the governments emphasis on education and literacy, with the New Education Policy, has improved the literacy rate.

Consequently, more and more students are entering the education system, resulting in sustained volume growth in the W&P segment.

CAUSTIC SODA

Caustic soda, a critical ingredient in the paper manufacturing process, is projected to witness an increase in demand, with a CAGR of 4.2%, alongside capacity growth at a CAGR of 6%. However, the market has been under pressure, with disruptions in the global supply chain leading to volatile prices. The textile industry a major consumer of caustic soda has experienced a slowdown in recent times, directly impacting this market. Besides, the influx of low-cost imports has intensified market competition and exerted downward pressure on prices.

Source: Alkali Manufacturers Association of India (AMAI)

REVIEW AND ANALYSIS OF ORIENT PAPERS PERFORMANCE

The year under review saw Orient Paper strengthening its transformation strategy to build a truly customer-centric organisation, with a continuous focus on sustainable growth and progress. Adopting a multi-pronged approach, the company aims to become more than just a paper supplier. Through targeted involvement with micro-markets via Hub Meets and by engaging with customers through the Orient Stars digital platform, Orient Paper has shared best practices and expanded the market presence of new products such as its Bamboo Tissue range.

Orient Papers commitment to revamping its product offerings and developing the value chain to bolster category growth has enhanced its relevance in high-growth segments such as health and hygiene, education, and sustainable products. The company introduced 11 new

SKUs: 6 in the Writing and Printing segment like Cartridge Paper, 2 in the Wellness and Hygiene segment like Carrier

Tissue, and 3 in the Sustainable Product category, which included Eco Bag, Cup Stock and virgin Bamboo Tissue

Paper that promotes environmentally conscious choices for consumers and businesses. These new products accounted for ~2,700 MT in FY24, with the customer base continuing to grow each month. Its transition to

ECF bleaching process underscored its commitment to environmental sustainability.

On the operations side, in the first phase of debottlenecking,

Orient Paper increased its capacity by 36% in FY24, and modernised and digitalised several manufacturing processes such as the pulp-mill and paper-machine sections. Upgrading its operations led to a planned increase in downtime. The companys total W&P paper production amounted to 48,534 MT, while its tissue production amounted to 34,897 MT in FY24. Value-Added Products represented 61% of the companys product mix. To achieve long-term competitiveness and maintain its status as a responsible corporate citizen, Orient Paper embarked on an ambitious project, Mission Khushi. An industry-first, this is a customer-centric initiative with a focus on enhancing customer engagement and enriching the stakeholder experience. The aim is to empower employees to become customer champions and build deeper connections with the companys value-chain partners.

The company also laid out a blueprint to become a pioneering water-positive paper enterprise by FY27, and achieve carbon-neutral operations by FY29. This year also saw the highest-ever plantation, on ~19,570 acres, and an approximately 15% increase of renewables in its energy mix. Additionally, Orient Paper transformed its agroforestry programme by implementing Good Agricultural Practices (GAP) across 22,500 acres, benefitting 38,154 families.

Another leap in the companys transformation journey has been the establishment of a strong foundation for its Industry 4.0 roadmap. In FY24, Orient Paper successfully implemented a comprehensive upgrade plan for its control systems across its production units by transitioning to a fully equipped QCS set-up on T1, T2 and T3. Simultaneously, the company implemented fully equipped DCS systems in its pulp mill recovery, Tissue 3 units and ClO2. It also added 684 new field instruments to further strengthen its control systems. Additionally, the company worked on the stabilisation of its SAP-HANA system and its adoption, as well as setting the network infrastructure for its next phase of digitalisation. By laying a strong foundation in FY24, the company is setting up systems for seamless interconnectivity through Integrated Control Systems (ICS) in FY25.

Orient Papers focus on building people capability led to a systematic skill-enhancement plan, including training programmes conducted through OEMs. This led to a phenomenal increase in training hours this year a jump of 343%.

STRENGTHS	WEAKNESSES	OPPORTUNITIES	THREATS
Strong goodwill and reputation in the industry	Generational gap in technology	Availability of land in the region for plantation	Increased global pulp capacity
Presence in high-growth segments	Sub-optimal scale in todays context	High-growth potential in the health and hygiene sector	Excess capacity in countries like Indonesia and China
Seasoned leadership and strong domain expertise	High labour cost per ton	Opportunities arising out of the New Education Policy	Risk associated with changes in government policies
World-class governance	High energy cost per ton	Conditions for growth in VAP Plastic Substitution	Excess forthcoming domestic capacity in tissue
Extensive infrastructure for seamlessly scaling growth Integrated paper manufacturing	Product mix	Government initiatives aimed at promoting agroforestry

ORIENTPAPERSFINANCIALPERFORMANCE FOR FY 2023-24

The Companys turnover for FY24 was Rs. 831.94 crores against Rs. 942.96 crores in FY23. af tax was Rs 6.23 crores this year. Netprofit

It invested Rs. 158 crores on capital projects during the year.

Critical ratios:

	2023-24	2022-23
(i) Debtors Turnover Ratio	54.57	45.94
(ii) Inventory Turnover Ratio	6.33	9.42
(iii) Interest Coverage Ratio	2.87	7.91
(iv) Current Ratio	0.49	0.77
(v) Debt Equity Ratio	0.20	0.18
(vi) Operating Profit Margin (%)	10.37	20.27
(vii) Return on Net Worth (%)	0.40	6.47

Reasons for significant changes in ratios have been explained in relevant sections above.

ENVIRONMENT PROTECTION & COMPLIANCE

In FY24, the company expanded its ESG (Environmental, Social and Governance) agenda, moving from mere compliance to setting new benchmarks. Its action plan covers 16 of the 17 UN-SDG goals, with a significant focus on reducing its carbon footprint and enhancing its efforts in soil and water conservation.

The company has made major strides towards becoming carbon neutral, aiming to reduce its per-ton dependence on coal by ~30% in 36 months, owing to its operational excellence and the adoption of superior technology

(via capex) in its power plant. As per UNFCCC-CDM methodology (AR-ACM0003) of carbon accounting via GHG removal creating sinks by afforestation and reforestation activities the company will be net carbon negative in 60 months (by FY29), considering CO2 sequestration by its large-scale plantation initiatives across primarily barren lands.

Orient Papers efforts in water conservation resulted in conserving ~86% of the water it uses in its operations, due to the creation of more than 1,440 water-harvesting structures.

HUMAN RESOURCES AND INDUSTRIAL RELATIONS

The company is strenuously pursuing its policy of ongoing training and motivation to achieve greater efficiency and competencies. The total number of permanent employees as of 31^st March 2024 was 1422.

Industrial relations were harmonious. Safety, welfare and training at all levels of employees continue to be areas of major focus for the company.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The company has established adequate internal control systems, which provide reasonable assurances regarding safeguarding the companys assets, promoting operational efficiency, and ensuring compliance with various statutory provisions. In addition to its own internal audit department, Orient Paper has appointed M/S Deloitte Haskins & Sells LLP to regularly review internal control systems in business processes and verify compliance with relevant policies and procedures. Reports of these internal audits are reviewed by the companys senior management and are also comprehensively discussed in meetings of the audit committee. The audit committee reviews the adequacy of internal control systems, audit findings and suggestions

The internal audit group also keeps track of and monitors the progress on implementation of suggestions for improvements.

The Companys statutory auditors regularly interact with the audit committee to share their findings and of further improvement actions under implementation.

OUTLOOK

• Global influence

FY24 saw a net market pulp capacity addition of 1.6 million MT, resulting in a 4% increase in supply. FY25 is poised to witness a further 8% net addition (3.3 million MT) to market pulp capacity. This is likely to result in a sharp drop in pulp prices, globally, resulting in pressure on paper prices. Although consumption is projected to increase by 1-3%, it is likely that some high-cost capacity in North America and Europe may be phased out. There may be a further capacity increase of 1.6 million MT in FY26. The net effects of this supply-demand gap are estimated to be absorbed in the system by 2027. Excess supply from low-cost manufacturers such as Indonesia and China are adding to pricing pressure in the domestic market.

? Cost implications

Fuel costs are likely to remain range-bound until clarity emerges on the Ukraine-Russia conflict. Similarly, raw material prices are likely to increase further due to a continued demand-and-supply gap, with no additional supplies expected before 2026.

· Demand projections

The W&P segment is expected to experience lower single-digit growth (~4% volume growth vs global degrowth of -0.5%), while the tissue segment is likely

. to witness a healthy ~13% growth.

Cautionary statement

Statements in this report on Management Discussion &

Analysis relating to the companys objectives, projections, status estimates, expectations, or predictions, may be forward-looking statements within the meaning of applicable security laws or regulations. These statements are based on certain assumptions and expectations of future events. Actual results could, however, differ materially from those expressed or implied. Important factors that could make a difference to the companys operations include global and domestic demand-supply conditions, selling prices, raw material costs and availability, changes in government regulations and tax structure, general economic developments in India and abroad, 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 based on subsequent developments, information or events.