Orient Paper & Industries Ltd Management Discussions.

Overall economy

The Indian economy continued to be one of the fastest growing large economies expected to register a growth of ~7% for the year under review.

The principal developments during the year under review comprised stabilization of GST, sustained increase in per capita income, decline in inflation, steadying interest rates, and good growth in GDP for the first 3 quarteRs. However, consumer sentiment started weakening from the 4th quarter on account of a large non-banking financial company announcing its inability to address liabilities. This affected credit expansion, financial markets and consumer sentiment, which resulted in a slower than expected GDP growth in the 4th quarter.

The reduction in interest rates by the Reserve Bank of India is aimed at boosting the economy. IMD has also forecasted a near-normal monsoon. One can therefore look forward to a revival in Indias growth momentum riding on continued investment in education sector and infrastructure building. Assuming no major global and domestic political shocks, India is expected to grow at 7.1% in FY19-20.

Indian paper industry - structure & development

Despite India being one of the fastest growing paper markets across the world, the per capita paper consumption of paper in India is still far lower at a little above 13 kilograms, which is well below the global average of 57 kilograms per head. Even on a conservative basis this is expected to reach 17 kilograms by FY24-25, which will mean an additional demand of 4-5 million tons of paper during this period.

Writing & printing papers

The share of writing and printing paper in the Indian market was pegged at 30%, accounting for an industry size of 5.1 million tons in FY17-18 compared to 2.9 million tons in FY07-08. This increase was driven by rising literacy rate, universalisation of education through Right to Education, governmental measures like Sarva Shiksha Abhiyan, the mid-day meal scheme and increased educational spending.

The demand for writing & printing paper was robust during the year under review due to the following factors;

• Higher international prices of pulp and paper resulting in lower imports and higher exports.

• Increasing demand from the education sector.

• Imposition of anti-dumping duty on the import of photo-copying papers.

• Rising circulation of newspapers and magazines

• Increasing urbanization, which catalysed a shift in consumption pattern

These factors resulted in double-digit growth in the production of writing & printing paper during the year under review as against the retrospective growth of 5%-6%.

This higher-than-expected demand growth resulted in the full utilization of available production capacities. At the same time there are no new major capacities expected to come on stream in the next 2-3 years. Therefore, domestic demand for writing & printing papers should remain fairly firm in the near future.

Tissue papers

The Indian tissue paper market continued to grow at double-digit rates, emerging as the fastest growing segment within Indias paper industry. The countrys per capita consumption of tissue is pegged at a mere 0.14 kilograms compared to emerging economies like Russia (3.2 kilograms), South Africa (4 kilograms) and Brazil (5.4 kilograms). Riding on the back of rising disposable incomes and increasing hygiene awareness, the domestic demand for tissue paper is expected to continue to grow significantly.

There is also a growing demand for quality tissue papers from export markets where Orient has made deep inroads in several markets with exports of over 50% of its total Tissue paper sales.

We are confident that with fast changing lifestyles and growing awareness about health & hygiene, demand for tissue papers is bound to increase rapidly and are therefore determined to keep increasing our capacities in this segment.

Opportunities & Threats:

The supply and demand for writing & printing paper is fairly balanced in India. With no new major capacities in the offing, the market for writing and printing paper is expected to remain firm. Orients Platinum grade of writing & printing paper is considered the gold standard for the note-book segment and is being increasingly used in the printing segment as well.

The tissue paper segment is one of the fastest growing in India and abroad. Orient Paper is the largest producer of tissue paper in India, commanding a major share of the virgin tissue paper market. Besides, the Company was successful in exporting nearly 50% of its tissue paper production, where our product was well accepted with attractive prospects.

The Companys pulping capacity is short of requirements following the recent addition to the tissue paper manufacturing capacity. In view of this, the Company is in the process of increasing its pulping capacity to address this shortfall and moderate costs. Post this pulp mill upgradation, we shall consider further addition to our Tissue paper production capacity.

The other challenges facing the Company and corresponding counter-initiatives comprise:

Pulpwood availability and costs:

- We are working towards self-sufficiency in the procurement of pulpwood from areas proximate to our plant to reduce the carbon footprint and delivered cost of pulpwood. In doing so, we planted one crore clonal saplings in proximity to the plant during the year under review. As a result, local pulpwood procurement increased by over 35% over the previous year.

Water security: To mitigate the challenge arising from shortage of water in summer in deficient monsoon years, the Company constructed four water reservoirs inside the plant premises. Further, the Company obtained approval for building a concrete barrage on River Sone and is already in the process of building the same. This initiative will increase our water storage capacity to 1000 MG, which will be adequate to meet our total water requirement for more than five months.

Review and analysis of our performance

As a result of our continuous focus on ensuring best- in-class quality of our products, reducing our costs and increasing efficiencies, we achieved our best-ever results.

The Companys operational income increased 5.69% to Rs. 710.04 cr during the year under review compared with Rs. 671.80 cr in the previous year.

The Company achieved a PBIDT of Rs. 171.64 cr compared to Rs. 123.11 cr in the previous year; cash profit was Rs. 161.67 cr against Rs. 108.42 cr in the previous year.

The Companys PBT for the year was Rs. 130.06 cr compared to Rs. 80.11 cr in the previous year.

The Companys net profit after tax more than doubled at Rs. 101.65 cr as against Rs. 49.29 cr in the previous year.

The Company invested RS.21.75 cr in capital projects during the year under review.

The Company reduced its total term debt and overdraft to only RS.28.49 cr as at 31st March 2019.

Significant ratios

2018-19 2017-18
Debtors Turnover Ratio 21.16 21.98
Inventory Turnover Ratio 10.43 9.68
Interest Coverage Ratio 17.21 8.38
Current Ratio 0.98 0.66
Debt Equity Ratio 0.01 0.03
Operating Profit Margin (%) 24.17 18.33
Return on Net Worth (%) 12.70 6.72

The Company is therefore in a strong financial and operational position to capitalize on opportunities presented by a resurgent India.

Future growth plans

The Company is undertaking an expansion project at a cost of RS.225 cr to expand its pulping capacity and expects this investment to yield a ROCE of over 20%. This will also pave the way for further expansion of our Tissue paper production capacity. This project should get completed around the 4th quarter of 2020-21.

Risk management

Attrition risk: Customer attrition could affect business sustainability.

Mitigation: The Company strives to maintain longstanding Healthy relationships with its customers with transparent and ethical dealings. Further the Companys superior quality products helps it to minimize customer attrition as well.

Compliance risk: Non-compliance with statutory norms could invite penalties.

Mitigation: The Company works indefatigably towards meeting all the environmental norms and promotion of clean and healthy environment. The Companys various certifications as detailed elsewhere in this report which speaks volumes about the Companys commitment to environment and statutory norms.

Raw material risk: Raw material scarcity can lead to price increases.

Mitigation: Orient has focused on sourcing its raw materials from the proximal areas to the plant. In 2018-19, the Company procured close to 40% of raw materials from local areas (within 200 kms from plant).

Liquidity risk: A liquidity crunch could adversely affect day-to-day operations.

Mitigation: The Company is currently virtually debt free and has been fairly cautious in managing its cash flow.

Digitization risk: With rapid digitisation, paper demand could decline.

Mitigation: Digitisation could affect paper consumption but in turn could accelerate economic growth that could translate into enhanced paper consumption. Further, the Company has emerged as the market leader in tissue segment and intends to generate increasing revenues from this segment which is not affected by digitization.

Environmental compliance

The Company takes pride in the fact that it complies with all environmental norms; it is the only integrated paper plant to achieve zero liquid discharge. These efforts have been recognized by several organisations who bestowed a number of awards and certifications (as shown elsewhere in this report).

Corporate social responsibility

Corporate Social Responsibility has always been an integral part of our operating philosophy irrespective of the statutory requirement. As in the past, we have this year also undertaken several activities as detailed in Annexure I.

Human resources and industrial relations

The Companys workforce represents its foundation. The Company continued its policy of continuous training and motivation to enhance efficiencies and competencies. Progress made by the Company was made possible in no small measure by the efforts of the entire team. The total number of permanent employees as on 31 March 2019 was 1593.

Industrial relations remained harmonious. Long-term wage agreements were most amicably settled with the workers representatives. Safety, welfare and training at all levels of our employees continue to be areas of major focus for the Company as recognized by several awards bestowed on the Company by independent agencies.

Internal control systems and their adequacy

The Company has established adequate internal control systems, which provide reasonable assurances with regard to safeguarding Companys assets, promoting operational efficiencies and ensuring compliance with various statutory provisions. In addition to its own internal audit department, the Company has retained Ernst & Young LLP to regularly review internal control systems in business processes and verify compliance with the laid down policies and procedures. Reports of these internal audits are reviewed by the senior management and are also placed before and comprehensively discussed at 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 a 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 the status of further improvement actions under implementation.

Cautionary statement

Statements in this report on Management discussion and analysis relating to the Companys objectives, projections, estimates, expectations or predictions may be forward looking statements within the meaning of applicable security laws or regulations. These statements are based upon 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 on the basis of subsequent developments, information or events.