Satia Industries Ltd Management Discussions.

GLOBAL ECONOMY OVERVIEW

The global economy is expected to grow by approximately 2.7% in 2020. As per the World Bank, growth among emerging and developing economy is forecasted to fall to a 4 year low of 4% in 2019. The growth is constrained by sluggish investment and risks including rising trade barriers, renewed financial stress, and sharper than expected slowdowns in several major economies. Current economic momentum remains weak, while heightened debt levels and subdued investment growth in developing economies are holding countries back from achieving their potential. With growth in advanced economies projected to gradually decline to about 1.7% once economic slack is eliminated, the further pickup in global activity will entirely be driven by emerging markets and developing economies.

The ongoing US-China trade war is snowballing fears about damage to global economic growth. The repercussions can be more volatile in both commodity prices and currencies. However, India is amongst few economies that stand to benefit from the trade tensions as it can tap export opportunities for sectors like chemicals, textiles, agriculture, and overall manufacturing sector.

INDIAN ECONOMY OVERVIEW

The Indian GDP has grown to 6.8% in Financial Year 2019. The decline in GDP growth is on account of multiple factors like, fallout of NBFCs, low credit growth, tight liquidity conditions, dismal growth in wages and flat exports owing to a global slowdown. Indian Manufacturing continued its downtrend growing at 3.1%. However, GDP growth rate is expected to bottom out in the coming quarters. RBI has cut key policy rates for the third time in a row this calendar year, for improving liquidity scenario. With Government continuing to roll out policies focusing on rural population, there could be some relief to the ongoing distress and signs of recovery should be visible in the second half of the financial year.

GLOBAL PAPER & PAPERBOARD PACKAGING MARKET

The pulp and paper industry is one of the largest industries in the world. Global Paper & Paperboard Packaging market is expected to grow at a CAGR of 3.6% from USD 199.01 Bn in 2018 to a projected value of USD 264.09 Bn by 2026. The increase in the estimated market value of the industry can be anticipated with the increase in levels of sustainable packaging methods and different paper materials.

The industry is dominated by China, the United States and Japan which account for nearly half of the worlds total paper production. China is one of the largest consumers of pulp and paper products driving the global demand and supply scenario for pulp and paper products.

INDIAN PAPER & PAPER PRODUCTS MARKET

The Indian paper & paper products market is expected to grow at a CAGR of 7.8% from USD 8.6 Bn in 2018 to USD 13.4 Bn by 2024. In spite of the continuous growth in the industry, the per capita paper consumption in India at a little over 13 kg, which is way behind the global average of 57 kg.

This market is categorised based on raw materials, applications and region. The geographical location of the paper mill decides the type of raw materials used in the production. Most mills in the northern and western regions of India depend largely on agricultural residues and wastepaper such as rice, husk, wheat straw and recycled fibre as their raw materials while pulp & paper production in southern and eastern regions use wood and bamboo as raw materials. Depending on the raw materials, the market is divided into waste & recycled paper, wood and agro residue. The waste & recycled paper segment is projected to dominate the market due to rising environmental, political, and economic pressures to reduce the cutting down of trees for producing pulp. Further, based on application, the market has been categorised into writing & printing paper, paperboard & packaging, newsprint and speciality paper.

PULP & PAPER EXPORTS & IMPORTS

The members of the Indian Paper Manufacturing Association had conveyed their request to the Revenue Board and Ministry of Finance to place the Paper Industry into the red category whereby import duty could be imposed to make it a level playing field for domestic manufacturers. The IPMA has also asked the government to review the FTA agreements which are due in 2019 with the Asian countries due to the splurge of heavy imports from South Korea and other countries.

PRINTING & WRITING PAPER SEGMENT

The newsprint segment market is forecasted to grow at an annual rate of 2.1%, the writing and printing paper segment at 4.9%, packaging paper / paperboard segment at 8.4%, tissue paper segment at 17.8% and other paper/ paperboards at 10.75% per annum.

By the year 2024-25, domestic consumption is estimated to increase to 23.5 Mn TPA while the production would be 22.0 Mn TPA. About 1 Mn TPA of integrated pulp, paper and paperboard capacity is required to be created in India on an annual basis over the current capacity to meet the growing demand. Such investments would create a gross capital formation of INR 8,500 Cr per year directly employing 15,000 people and giving additional livelihoods of 72 Mn man-days per annum for people involved in agro / farm forestry.

GROWTH DRIVERS

The demand for paper will be largely driven by: Education:

Education sector has a direct co-relation with the growth of this Industry. The higher the governments focus on this sector, the higher will be the demand for Paper products. According to Union Budget 2019-20, the Government of India has allocated INR 94,853.64 Cr for the education sector and out of the total allocation, INR 56,563.63 Cr has been allocated to the school sector development. Seeing the growth in the education sector, improving literacy rates and a large number of students enrolling themselves in schools and colleges, this is expected to drive the growth in the industry.

Offices:

The use of printing paper for legal and formal documents favours the growth.

Economic activity:

The rise in economic activities such as manufacturing sector and office space are driving the demand.

Consumerism:

Higher disposable income along with urbanisation is anticipated to initiate new consumer behaviours which in turn will increase the demand for paper and its products.

Demographics and economy:

Increase in literacy rate and high spending on books, magazines, online shopping, fast food consumption along with ban on plastic is driving the growth.

OPPORTUNITIES

With the current growth in GDP, per capita consumption of Paper and Paper products is expected to increase which will further increase the demand for paper. Our per capita consumption of paper stands at 13 kg, for every one kg additional increase it will eventually increase the consumption of 1 Mn tonnes of paper and paper products a year.

Eventually going ahead with rising environmental awareness and growing concern of the government to slowly ban the use of plastic in India is further lying like a big opportunity for the paper industry. The Government of Indias efforts towards understanding the situation and taking measures to support the domestic industry like the definite Anti-Dumping duty imposed on uncoated copier paper originating in or exported from Indonesia, Thailand and Singapore is applaudable.

The governments recent move in the Budget of FY20 to avail 10% customs duty on imported textbooks is also shown as a resilience of the government to support the domestic industry on all fronts. The government wants to slowly reduce the imports of materials where we have the capacities to fulfil our domestic needs.

RISKS

The Paper Industry is cyclical in nature and its performance depends on the global pulp and paper demand-supply situation. China remains a major factor affecting the global demand and supply situation due to being one of the biggest consumers of paper products in the world. Global Pulp prices are dependent on global factors where global pressures can improve commodity prices from here on.

Import pressures from ASEAN countries remain to mount pressure on domestic players. Majority of the players in the industry have announced their expansion plans, however without supported raw material bases, this might create a demand-supply mismatch in the paper industry. Paper Industry has been placed in the red category by the Central Pollution Control Board and securing environmental clearances for further expansion places is a hurdle for the Industry. However, the company is well equipped to deal with this because the company has a well-diversified portfolio of products. The company also has a diverse raw material mix which gives it the flexibility to guide and maintain raw material costs to a minimum. The companys backward integrated facility from pulp processing, paper production, chemical recovery plant and inhouse power generation help the company to manage the costs effectively. Further, through continued thrust on manufacturing high-quality surface sized paper with a higher gsm will pave way for strong prospective growth for the company. Companys strategic location in Punjab, provides superior access to rice husk and wheat straw which puts it into a favourable position where the company can avoid any additional freight costs. With high capacity utilization, a robust demand outlook and a wider product portfolio range will help the company sustain the growth prospects of the