i) Industry Structure &Developments :
The Indian Paper Industry has been historically segmented on a three dimensional matrix
identified by size, grades manufactured and raw materials utilised. Government policies on
indirect taxation rates applicable to output have relied on this segmentation. Generally,
tariff rates have protected smaller units utilising “unconventional” raw
material. Over the years, the growth of various segments, investment levels in specific
segments, technological changes, industry fragmentation and intensity of competition have
been significantly influenced by the Governments tariff policy.
Over 600 players currently populate the domesticindustry and the estimated output
across all grades is about 20 million metric tonnes per annum (MTPA). Global paper
consumption is about 400 Million Tonnes per annum and about 50% is recycled each year.
Global demand forecast for the year 2030 is 480 Million Tonnes.The three broad segments of
the market are Writing and Printing Grades (Cultural), Packaging Grades (Industrial) and
Newsprint.
The “Industrial” Segment of the paper market broadly comprises of Corrugated
Case Materials,(CCM) and Duplex Boards -white lined and coated or uncoated. Fragmentation
is severe in this segment which constitutes about 50% of the total output of Paper &
Board. This segment entirely relies upon “unconventional” raw material such as
waste paper (imported and domestically sourced) and, to a limited extent, on agricultural
residues. The average size of units in this segment is now about 15,000 MTPA and most
units cater to local area demand from small semiauto corrugated box factories and small
printers. Although the other segments in the Indian paper industry are also fragmented by
international standards, the degree of fragmentation is less severe.
Historically, the bulk of the output of “Cultural” grades - comprising of
writing, printing, office stationery paper and speciality paper has been the preserve of
the larger producers, who use forest based raw materials in integrated pulping facilities
augmented by imported market pulp. This segment has been consistently taxed at higher
rates due to its size and use of “conventional” forest based raw material.
Investment in plant for these players has also been higher. With a relatively smaller
number of players and high import tariff protection, prices of end products, generally
perceived to be of higher quality, have been high. “Lower end cultural grades”
manufactured by smaller players using unconventional raw materials in low investment,
low-tech plants cater to consumers in the price sensitive subsegment of this market. This
sub segment has historically depended heavily on the tariff differential based on size and
raw material for its viability. Some of the mid-sized players in the writing and printing
segment are in the process of expansion and modernization and are installing wider/faster
machines with full fledged de-inking plants to produce the higher quality that is
increasingly preferred and for which consumers are willing to pay more. Several of the
“large-integrated” forest based producers have also recently increased forest
based pulping capacities The cultural paper segment contributes about 35% of the annual
paper and paperboard production with a current demand growth rate of about 6 to 7% per
annum. The high investment levels required and limited “conventional” fiber
resources are the major deterrents to growth in this segment for both existing players as
well as new entrants.
The Indian Paper industry which accounts for about 4.5% of global production, in recent
times has registered faster growth rates of about 7%. The domestic demand is expected to
grow at about 6 to 7% p.a. Paper industry plays an important role in the socio-economic
development of the country.
Despite several infrastructural impediments there is a strong growth in demand in
several sub-segments of the Indian Paper Industry. There is perceptible shift in
preference for higher quality products in both the Industrial and Cultural
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Segments and players with the right grade-quality mix are seeing opportunities for
profitable growth. As per our assessment, most of the dominant players in each industry
segment will be operating near to capacity and one can expect a round of capacity
additions which will however be circumscribed by factors peculiar to individual units such
as the ability to raise funds cost effectively, availability of raw material and low cost
energy.
ii) Opportunities & threats:
The Indian Governments policy for the paper industry lacks perspective. It is
necessary that the Government come up with a clear policy on pulpwood plantations that can
benefit the paper industry in terms of introducing more virgin fiber into the fiber
basket. In the face of fierce global competition, sustenance of industry with only
agro-based raw materials and recycled fiber will be very difficult to achieve. The
Government also needs to create a more conducive atmosphere for investment into this
sector.
In the medium term, much of the growth in the packaging segment of the Industry is
expected to be based on recycling of waste paper. This is already the trend in China.
Indian paper companies in the packaging segment are also expected to fuel their near to
medium term growth through waste paper imports from regions of surplus such as North
America and Europe.
Much has changed in the global recycled fiber flow pattern since theimposition of a
complete ban on the imports of wastepaper by the Chinese Government.
China continues to be the largest consumer of paper and board and the Chinese demand
constitutes a large proportion of Global demand - particularly for packaging of
manufactured consumer goods for domestic and international consumption. The complete ban
on imports with effect from January 2020 of wastepaper by the Chinese Government is the
culmination of a series of progressively stringent rules on the quality of imported
wastepaper imposed since 2017. During the period 2018-2021, Chinese paper manufacturing
capacity was hamstrung by the shortage of imported recycled paper to the extent of about
25%. This caused a spurt in prices of domestic recycled fiber and a jump in paper prices,
particularly for containerboard which constitutes about 55 million MT per year of the
Chinese paper demand. The shortage in containerboard supply of about 12-14 million MTwas
met during 2019, 2020 by imports from other regions of both recycled roll pulp and
finished product.Many Indian mills, due to the generally poor quality couldonly meet the
low-end demand of Roll Pulp during this period. Over the period,large Chinese producers
began to set up world class capacities outside China, particularly in Southeast Asia,
where wastepaper imports are not banned. In 2022, they fillmuch of the demand supply gap
in the China market.The lucrativeness of the demand for Roll Pulp from Indian mills, has
since disappeared but brought new, low-end capacities of Containerboard into the Indian
marketresulting in a capacity overhang in India. This situation is driving up domestic
fiber prices and depressing finished product prices.
The China ban has also driven up Global prices of virgin pulp and consequently higher
end Containerboard grades like Kraft Liner. Opportunity lies in substituting these
expensive grades with high performance recycled grades with acceptable aesthetics and
strength. Opportunity also lies in substituting other grades based on Virgin Pulp like
mailer bag stock which has a rising demand from the e-commerce sector.
Large capacities created by Chinese groups in Southeast Asia in constitute a large
demand for imported recycled waste.They also possess relative buying strengths and
constitute a cost threat to that extent. Over time, however, as domestic capacities
stabilize and domestic collection improves, a larger proportion is expected to be sourced
domestically with the fiber basket being upgraded by pulp imports. The strength of any
firm in this industry is however expected to come from a presence throughout the supply
chain from raw material to packaging production and delivery.
Whilst this is a capital-intensive industry, the current structure of depreciation tax
shields, finance (interest) costs and relatively short-term repayment horizons places
severe limitations on fresh investments.
This phenomenon has effectively increased the project cost on expansion and new
green-field investments. At the same time, the continuous reduction of import tariffs
keeps margins under pressure.
The absence of large-scale investments and green field projects in a rapidly growing
economy with one of the lowest per capita paper consumption rates is testimony to this
situation. Further, the ban on single-use plastic is favourable to Paper Industry.
iii) Segment wise or product wise performance:
The Company is engaged in the business of manufacture and sale of Paper & Paper
products. In the context of IndAS-108 -Operating Segments, Paper and Paper Products
constitute the only reportable segment of the Company.
iv) Outlook:
Growth rate of the Indian economy expected around 7% in FY 2022-23 as against 8.5% (on
lower base of earlier year due to Covid-19 effect) )in 2021-22 .
Demand for paper in FY 2024 is expected to revive towards the end of first half, after
the sluggish demand in the past one year, as a fallout of inflationary conditions
prevailing globally, which seems to have corrected to a great extent, as a result of
measures taken by the Central Banks during the past one year.
Innovative cost containment and cost cutting will be required by paper mills to not
only maintain business volumes but to capture a larger portion of a slowly growing pie.
v) Risks and Concerns:
New, large scale manufacturing capacities are being created in several down-stream
industries such as electronic goods, white goods, cell phones and fast moving consumer
goods. These industries that have been seeing a year-on- year growth of 8 to 10% are
expected to also slow but not as much as the general slowdown in the economy.
The Government has also prioritized policies aimed at promoting rapid up-gradation in
supply chain systems for retail distribution and export of fruits and vegetables. The
automotive components industry is also growing and demanding wooden packaging substitutes.
The footwear and garments exports segments are growing but at a more moderate pace as
export markets slow.
All these and other trends indicate that there will be a better than average growth in
the demand for high-quality, world-class packaging material produced in state-of-the art
facilities and delivered just-in-time.
Whilst one would ordinarily expect these trends to encourage strong players in the
paper converting industries to either expand or paper producers to forward integrate and
seize the opportunities for growth, this has not actually happened due to the uncertainty
from the flip flop tariff policy decisions.
Historically, the policy of “reservation” of this industry for the small
scale sector has resulted in extreme fragmentation with low productivity, small capacities
and poor quality of output. The indirect tax structure and the industry structure of
consuming industries highlighted earlier allows these capacities to continue to exist
albeit marginally and this production base continues to supply the existing demand, its
survival being circumscribed by the tax/tariff structure applicable to users of packaging
material.
During February 2008, corrugated box manufacturing was taken off the list of products
reserved for the small scale industries. This change should see consolidation of
production in the corrugated box industry as well as a significant shift in the overall
quality of boxes. These changes would elevate the quality requirements for corrugating
case paper - both liners and fluting, placing significant pressure on paper manufacturers
in terms of fresh investments in paper making processes to meet the emerging quality
requirements. New, better capitalized and organized players are expected to enter the
market. However, the current tariff structure in the entire value chain from raw material
for the paper industry to the final consumer product as well as the vertical value chain
split described earlier will shape the speed of evolution and growth of this segment.
vi) Internal Control Systems:
Your company has an adequate internal control system in place. The internal control
system is proactive. The company has an audit committee which oversees the adequacies of
the internal control systems and reports to the Board.
vii) Discussion on financial performance with respect to operational performance:
Revenue from operations for the financial year 2022-23 at Rs 287.85 crores, decreased
by 5.73% from Rs 305.35 crores in the previous year.
Profit before interest, depreciation, tax (PBDIT) in FY 2022-23 showed a loss of Rs 502
lacs, as against Rs 3,822 lacs profit in the preceding year. Finance costs were higher at
Rs 1624 lacs from Rs 588 lakhs as the Project Term loan interest is getting charged as
revenue expenditure, also with increased utilization of working capital facility, from
banks. After making a depreciation provision of Rs 1,603 lacs (Previous year 944 lacs),
loss before Exceptional income & tax was Rs3,130 lacsfPrevious year Profit Rs 2,291
lacs). Exceptional income of Rs 1,327 lakhs (previous year Rs 273 lakhs) on sale of part
of an immovable property (held for sale), led the loss before tax to Rs 2,403 lakhs
(previous year Profit before tax Rs 2,564 lakhs).
Company has opted for new regime of Income tax, wherein effective tax rate is 25.17%
sans certain exemptions and allowances like additional depreciation, from FY 2021-22.
Provision for current tax Rs Nil (Rs 559 lacs) & deferred tax assets credit of Rs
753 lakhs is considered in view of loss (considering net effect of deferred tax of Rs 160
lakhs reduction due to opting of lower tax rate in the previous year),net loss for the
year stood at Rs 1,650 lacs. (Previous Year profit Rs 2,165 lacs)
The major reasons for the large and negative change in operating results were:
• Inventory Losses due to volatility in the prices of imported raw material; There
was a very steep and unprecedented
fall in the prices of imported raw material (approximately $160 over 60 days) after a
very steep rise (about $120 over 6 months) during the last two quarters of 2021-22 when
the Company was in the process of building up inventories for the new expanded capacity.
• A very steep increase in imported coal prices (about 3 times per unit heating
value) due to the Geopolitical situation created by the Ukraine conflict;This resulted in
energy costs rising from around Rs 5500 to Rs. 11,000 per MT. The impact on kraft paper
manufacturers was uneven with those depending on Cogeneration for energy production and
using imported fuel being the worst affected. Many of the smaller kraft paper capacities
that source electricity from the grid remained less affected as the cost of grid
electricity, being largely dependent on domestic coal, rose much less. Some manufacturers
depending on wheeling and banking of captive/owned solar/ wind power facilities fared the
best as they substituted costlier purchased electricity with energy from their own
facilities. The need to pass on costs to buyers by the different players in the industry
thus varied and the rise in finished product prices for us who are 100% dependent on
Cogenerated energy from imported coal was far short of the requirement based on the rise
in fuel cost.
• Decline in volumes during the retraining of operating staff, stabilization of
the new paper machine and pulping system.
• Losses in terms of higher specific energy consumption during the transition and
stabilization of production from the older paper machines to the new paper machine.
The Expansion project to increase paper manufacturing capacity by addition of a new
state of the art paper plant has now fully been completed and the processes are being
optimized for improving efficiency. Production on the older paper machines stopped during
the last quarter of 2022-23. Workmen and Supervisory staff are now trained well enough to
operate the relatively sophisticated new production facilities.
We optimistically report that fuel prices are decreasing gradually, and operating
volumes are increasing. Paper from the new Paper Machine has been received well in the
market. New grades planned have been successfully introduced.
Key Financial Ratios - Given in Note No. 43 of the Notes to Financial Statements.
viii) Material developments in Human Resonrces/Industrial Relations front:
The industrial relations climate in the Company during the year was cordial and
harmonius. A 6 year Wage settlement agreement signed with workers union at the Paper Mill
was in force upto 31-3-2022. Negotiation for agreement for the subsequent period is in
progress. In case of the Box unit, a 4 year Wage settlement agreement signed with workers
union is in force upto 31-3-2024.
The focus of HR activities is on employee involvement in operations of the company for
effective results.
Efforts are being directed at building a strong management team oriented to
entrepreneurial thinking and innovation in problem solving.
As on 31st March 2023, the Company had on its rolls, 347 employees
consisting of 213 workmen and 134 technical/ supervisory/ Administrative staff in
different locations.
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