voith paper fabrics india ltd share price Management discussions


MANAGEMENT DISCUSSION & ANALYSIS REPORT

INDUSTRY STRUCTURE & DEVELOPMENTS

Paper Industry is a significant indicator of the direction in which the World Economy has been moving. It is an important and essential industry for any country, and per capita paper consumption of a country is often used to track the growth and advancement in areas such as its economic progress and focus on education.

Paper Industry in India is not a forest-based industry, but an agro-based industry, providing jobs and income to lakhs of farmers involved in cultivating trees. The paper industry seeks to maintain and contribute to society, foster the well-being of our communities, and utilizes sustainable manufacturing practices and fiber procurement measures that protect the environment and ensure that our resources will be as available for future generations as they are today. Paper addresses growing humankind needs in areas like education, sanitation, packaging and communication.

The Indian paper industry is highly fragmented, with varying sizes ranging from 10 TPD to 1500 TPD. 75-80% of paper production is from medium and small category mills. The CO2 emission from the Indian Pulp & Paper sector was around 30.5 million MT in 2019 contributing just 1.09% of total CO2 emissions. The average emission intensity for the Indian Pulp & Paper industry is 1.58 MTCO2 e/MT paper. The per capita consumption of paper in India is 15.75 Kg which is significantly low compared to global per capita paper consumption of 57 Kg. The paper sector advanced rapidly during the period of planned development since independence and occupies an important position in Indian economy for its extended role in development.

The Indian paper industry consists of four basic segments of product category: Writing & Printing, Board & Packaging, Tissues, & Speciality papers. Owing to increased adoption of paper-based packaging products in India, the wrapping & packaging segment is projected to lead the market in the near future. The rapid penetration of e-commerce and retail sector across the world has created huge demand for both wrapping & packing papers. New innovations and trends are constantly emerging in the paper industry. The novel coronavirus has brought a focus on cleanliness creating new opportunities for tissue and toilet papers. During past few years, e-commerce boom has created a structural change in consumer habits. With the increase in online shopping, there has been a significant surge in corrugated and container board demand. The impressive growth of paper industry is also contributed by the education sector as the paper products have been and always will be an important component of the education market. Schools of all levels, from elementary to college use a lot of paper, and hence become the biggest consumers of paper.

Pulp & paper are considered as the most recyclable and sustainable material available in the world today. Owing to rising environmental concerns, both manufacturers and consumers are shifting their preference towards more sustainable paper packaging solutions. The aggregate demand of paper is increasing, owing to strong customer base and growth in the sector. In recent times, leading FMCG companies have started adopting paper-based packaging solutions to meet sustainable goals in terms of reducing the dependence on plastic and by way of promoting recyclability. Such initiatives are projected to positively impact the paper industry. Nowadays, the environmental concerns are also an area of focus by every nation, and this is further compelling the manufacturers to shift towards more eco-friendly paper packaging solutions. Leading food, cosmetics and FMCG companies are continuously engaging with paper manufacturers to develop advanced paper packaging solutions to meet their commitments towards sustainability.

OUR STRENGTHS

The Paper industry plays an important role in socio-economic, as well as sustainable and environmental, development. It not only serves as a public utility but also fulfils a critical national requirement. Being an established participant in the industry with a satisfied customer base and with the strong support of Voith Group, the company is better placed than its competitors to command a formidable position in the industry.

Besides this, with the support of a strong R&D facility of the Voith Group, the company can also provide novel and customized solutions to the problems of its customers. Further, the enthusiasm and untiring efforts of employees at all levels has enabled your company to constantly progress over its existence of more than 50 years under varying economic conditions. The availability of seasoned and young talent-pool gives the confidence that company would continue to grow in coming years also.

OUR WEAKNESSES

Paper industry consumes a considerable amount of wood and water and since these resources are scarce in nature, it remains under the policy constraints by the Central/State government. The pulp and paper manufacturing sector are also energy and raw materials intensive, with high capital costs and long investment cycle.

The products of the company are majorly consumed by the paper mills and hence, the future prospects of the company are directly related with the growth of Paper industry in India. High cost of production, fiber scarcity and capital intensive nature of the industry are some of its weaknesses.

THE OPPORTUNITIES

Paper is very important commodity and part and parcel of our everyday life. The paper industry is diversifying and responding to an increased globalized marketplace. The industry has an excellent track record in resource utilization and innovation.

The demand of paper in India is consistently increasing and Indian paper companies have been able to profit from a tight supply scenario. The paper industry occupies an important place in the overall growth and development - economic as well as cultural - of the economy. The spread of education and literacy is bound to increase demand for paper. Furthermore, the growing concern about plastic packaging and the recent plastic ban also serves as an indicator of growing paper industry.

Paper packaging is lightweight & convenient for logistics. Also, the increasing need for sustainability in retail packaging to reduce the adverse effect of plastic packaging waste pushes demand for paper based packaging products, With expanding online retailing, demand for corrugated boxes and paper bags is expected to increase in future. The wrapping and packing segment generated major of pulp and paper market share and is likely to continue in coming years also. This growth is attributable to the rising usage of paper based packaging products. Additionally, the increasing penetration of the retail sector and e-commerce is continuing the surge in demand for wrapping & packing papers.

There are ongoing efforts to reduce or eliminate the use of plastic for packaging. This anti-plastic sentiment is beneficial to the pulp and paper industry. In that, it encourages biodegradable alternatives. In fact, the use of plant based raw materials is being explored. This is being driven by governmental agencies and by consumers that are health conscious and committed to finding eco-friendly options.

Apart from that, the prominent FMCG, cosmetics and food companies are joining hands with pulp and paper manufacturers to develop novel paper packaging solutions. Another encouraging aspect is that Indian paper industry has trained manpower whose skill can be gainfully used to adapt with modern technology for manufacturing paper and paper board of international standard at relatively lower manpower cost inputs.

Also, lower per capita consumption of paper in India, rising awareness in consumers and growth of the organized food sector, increased usage of packaging paper and improved logistical capabilities are the factors providing ample scope for long term growth of the paper industry.

THE THREATS

Major issues confronting Indias pulp and paper industry are high cost of production caused by inadequate availability and high cost of raw materials, power cost and concentration of mills in one particular area, non-availability of good-quality fiber, uneconomical plant size, technological obsolescence and environmental challenges.

In 2017 alone, more than 125 factories in Gujarat and Maharashtra have closed due to 35% increase in raw material cost. The industry uses a lot of water, it also releases greenhouse gases and hazardous substances into the atmosphere. Also, the conversion of indigenous tropical and subtropical forests for the paper industry resulted in a massive loss of biodiversity.

The paper industry in India may also suffer due to use of old technology, as adoption of new technology would require significant capital investments by paper manufacturing companies to effectively tackle competition from global players.

Also, the policies of government relating to environment protection may create additional threat for the paper industry in future. Anyhow, we are prepared to face any challenge and expect to come out of it successfully.

SEGMENT WISE REPORTING

As per Ind AS 108, the operating segment of the Company is identified to be as "manufacturing and selling of paper machine clothing", as the ‘Chief Operating Decision Maker ("CODM") reviews business performance at an overall Company level as one segment. Hence, there is no separate reportable segment.

OUTLOOK

Paper is an important commodity which invariably touches upon our everyday life and there are broadly three identified reasons for the strengthening of the industry. These are, increasing e-commerce demand for container board as a packaging material, new market outlet for the middle class in emerging markets, and increasing demand for hygiene products. Also, digital technology in paper and pulp production is changing the way manufacturing processes are being automated. Manual processes can be digitized to increase production and precision. High levels of manufacturing uniformity at lower energy production are attainable.

Paper plays a key role in communication and as a packaging material. Demand for paper is closely linked to the prevalent economic conditions. Paper industry continues to have a reasonably moderate prospect in India during next few years as the demand of paper products grow in line with the GDP growth. Paper continues to enjoy a relatively healthy demand on account of (i) lifecycle of a paper product from manufacture to consumption and disposal is short, as paper is used more in the nature of a consumable and not as a durable (ii) Wide usage, right from an individual to a corporate entity and (iii) no real low cost substitutes for paper.

The long-term demand outlook for Indian paper industry remains favorable, driven by increasing literacy levels, growth in print media, higher government spending on education sector, changing urban lifestyle as well as continuing economic growth. Given that these factors are likely to be sustained, the paper industry is likely to continue growing at the rate of 6-8% per annum in the medium to long term, assuming 5-6% CAGR, the per capita paper consumption in India will be 55% and 63% of the world average by 2035 and 2040 respectively.

The growing retail and e-commerce industries, along with the growing demand for environment friendly packaging products, currently represents as the key factors driving the growth of the market. Furthermore, increasing consciousness among consumers regarding sustainable packaging and the implementation of favorable government policies are providing a boost to the market growth. Government of various developed and emerging nations are promoting the usage of paper based products as an alternative to plastic for minimizing pollution and toxin levels in the environment.

Additionally, the rapid growing food and beverages industry across the globe is acting as another growth inducing factor. Food manufacturing organizations are adopting food grade paper packaging products to retain the nutrient content and maintain the quality of the food contents. Other factors, including various product innovations to enhance the efficiency of the product and to produce visually appealing variants are projected to drive the paper packaging market growth in the coming years.

The long-term outlook of the Indian paper and packaging board market remains positive with growth primarily expected to be driven by the packaging segment. However, continuous technical upgrading is necessary for the paper sector to improve.

RISKS & CONCERNS

The paper industry is labour intensive as well as capital intensive and is exposed to several risks i.e. changes in government policies, environmental policies, duties and taxes, technological obsolescence and external economic factors.

The Company has a Management Team that meets periodically to analyze and minimize the potential risks to the Company, which are an inherent part of every business.

INTERNAL CONTROL SYSTEMS & ADEQUACY

The Company has adequate internal control systems commensurate with its size. All operating parameters are monitored and controlled. The Audit Committee of its Board of Directors, comprising of Independent Directors, also reviews the systems on regular intervals. Moreover, the Company has appointed M/s Lodha & Co., Chartered Accountants, as its internal auditors and they periodically test the efficacy of the internal control systems.

Also, the statutory auditors, M/s B S R & Co. LLP, Chartered Accountants, have evaluated and given their opinion on the Internal Financial Control, as per the provisions of the Companies Act, 2013.

FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

During the year under review, the company had been able to enhance its sales & profits due to its operational efficiency brought about through better utilisation of available resources and proper execution of business strategies. The Company continued the implementation of ‘Operational Excellence (OPEX) Programme which also contributed to the bottom line.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES/INDUSTRIAL RELATIONS FRONT

Your Company views its human capital as a key source of competitive advantage. A blend of youth and seasoned experience has created a multi-skilled team that has imparted flexibility to the organization to capitalize on the opportunities and deliver value to all stakeholders. The industrial relations in the Company continue to remain healthy, cordial and harmonious.

There were 128 permanent employees on the rolls of the Company as on 31st March, 2023.

SIGNIFICANT CHANGES (25% OR MORE) IN KEY FINANCIAL RATIOS AND CHANGE IN RETURN ON NET WORTH

In all specified key financial ratios, the change over previous year is less than 25% and not significant.

Further, as compared to previous year (10.24%), the change in ‘Return on Net Worth in the current year (10.07%) amounts to decrease of 0.17%. This is primarily due to increase in net-worth for the year under review.

CERTIFICATIONS

The Company is conscious of protecting the environment and has initiated various eco-friendly practices including rainwater-harvesting system. It is our continuous effort to keep the premises and surroundings clean and green. The Company is continuing with the ISO 9001:2015, ISO 14001:2015 and ISO 45001:2018 certifications by TUV.

CAUTIONARY STATEMENT

Statements in the foregoing paragraphs of this report describing the current industry structure, outlook, opportunities etc. reflect the estimation and opinion of the Company. The same are based on certain assumptions and expectations of future events. The actual results may substantially diverge from the same as they depend upon the global political, economic and social situation. Further, change in Government regulations, environmental laws, tax structure, cyclical demand, demand & supply conditions, cost of raw materials & their availability and other related factors such as litigation, Industrial relations and other unforeseen events can also have a bearing on the above statements.

The Company assumes no responsibility in respect of forward looking statement made herein which may undergo changes in future on the basis of subsequent developments, information or events.