Voith Paper Fabrics India Ltd Management Discussions

INDUSTRY STRUCTURE & DEVELOPMENTS

Indian paper industry remains largely a fragmented sector. It consists of small, medium and large paper mills, having production ranging from 5 to 2000 tons per day. Yet, Indias Paper Industry accounts for about 5% of the worlds production of paper. The estimated turnover of the industry is over INR 80,000 crore and its contribution to the exchequer is around INR 5,000 crore. The industry provides direct employment to 500,000 persons, and indirectly to around 1.5 million.

Most of the paper mills are in existence for a long time and hence present technologies fall in a wide spectrum ranging from oldest to the most modern. The mills use a variety of raw material viz. wood, bamboo, recovered fibre, bagasse, wheat straw, etc. The geographical spread of the industry, as well as market, is mainly responsible for the regional balance of production and consumption.

Over the last few years, packaging industry has been an important sector driving technology and innovation growth in the country and adding value to the various manufacturing sectors including agriculture and FMCG segments. Packaging is considered to be the 5^th largest sector of Indian economy and is one of the high growth industries in India.

Indias Paper and Packaging industries show large potential. Demand for paper is growing mainly due to an increase in demand for packaged products. In current scenario, 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.

Sustainability is at the core of Indias paper industry because paper is treated as one of the most environmentally sustainable products.

It is biodegradable, recyclable and produced from the sources which are renewable and sustainable. With an emphasis on sustainability, teamwork and good governance, Voith is now poised to carry its legacy forward as a future-ready enterprise.

With the rising ability to read and write, education and development, the demand for paper has significantly increased in India. The impressive growth witnessed by paper industry is also contributed by the education sector. By offering affordable paper products, the industry enhances accessibility to books and learning for students. Therefore, it can be said that both the paper industry and education sector are inter-dependent and inter-linked.

The paper industry has the potential to provide environment friendly solutions in lieu of single-use plastic. The clean India mission is not possible without the paper industry. The government has been sincerely working to ban single use plastics and there is no other viable alternative than paper.

Indian paper and newsprint industry has a huge potential and prospects in coming future. There are vast demands in the areas of tea bags, filter paper, tissue paper, medical grade coated paper etc.

OUR STRENGTHS

The continuous effort of the Company towards cost reduction and technology upgradation has led to increased production efficiency, improved quality of products, enhanced product range and also helps in achieving economies of scale. The Company manufactures entire range of Paper Machine Clothing (Industrial Felts) for customers.

The Companys products enjoy very good standing in the market due to constant enhancement in quality and efficient after sales services provided by a dedicated and experienced technical support team. Also, the Company belongs to the Voith Group of Germany and gets full support of the Group in carrying out its operations. The Company also provides customized solutions to the problems of its customers, making it their preferred partner.

OUR WEAKNESSES

Paper industry in India faces some problems as well, which may restrict its future growth prospects. One of the serious problems for this industry is scarcity of raw materials. Due to absence of organized plantation in degraded forests, the industry is deprived of reliable local raw material resources. This leads to high reliance on imported raw materials and thereby increased cost of production. Besides this, the industry also remains subjected to policies of state/central governments as well.

There is a need for industrial plantation policies which will allow the growing of paper industry specific species on a large scale, thereby reducing its cost which will, in turn, lower the cost of production of paper.

THE OPPORTUNITIES

Moving away from single-use plastics is a huge opportunity for the pulp and paper industry. Currently, around 40% of all packaging is plastic based and around 30% is paper or fiber based. This is likely to change in favor of the paper industry in coming future. The packaging industry in India is growing rapidly due to increased consumerism, e-commerce growth and organized retail. Packaging paper is a vital component for various packaging solutions, contributing to the enhanced demand for paper products.

The Indian pulp & paper market is one of the fastest growing in the world. The demand for paper products including packaging, writing and printing paper and specialty paper has been steadily increasing. The paper industry has been actively promoting recycling initiatives. The use of recycled paper helps in conserving natural resources and reducing adverse impact on environment.

In the last few years, pulp and paper industry around the world has been trying to become environment friendly. There are several mills globally and in India, which have invested their time and money in developing new technologies and adopting environment friendly manufacturing practices. Use of alternate raw materials has been the biggest shift in this direction. Today high quality paper is being manufactured using raw material other than wood, which would certainly have a positive impact on the environment.

Rising income has boosted consumer spending, with more people buying products with high quality packaging solutions. The Indian paper industry has tapped into this opportunity by capitalizing on the growing demand for high quality paperboard and packaging paper.

THE THREATS

The paper industry is highly capital intensive, requiring significant investments in equipment, infrastructure, and raw materials. As a result, the cost of production can be a major factor in the profitability and sustainability of the industry. The industry also uses massive amount of water and energy - especially electricity - to run its machines, these again pose a major threat to the industry.

The widespread adoption of digital media and paperless reading, has affected the demand for printing & writing paper as well as newsprint. In the context of the internet economy age, with the rapid transformation of the traditional media industry into new media, the product structure of the paper industry may face some sort of pressure for adjustment. However, we are committed to face the challenges that we may come across and expect to overcome them with success.

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 industry plays a vital role in the economic growth of a country through revenue generations and earnings. The growth in paper industry is being driven by a surge in e-commerce, food processing, FMCG, healthcare etc. The significant upsurge is fuelled by a growing demand for paper-based products, evolving consumer preferences, and increasing emphasis on sustainable packaging solutions. The Indian paper and paperboard industry has the potential and the capabilities to service the demand in domestic and international market; and also to create employment opportunities in rural India through agro production and forestry.

Food producers, especially prominent FMCG brands, have set ambitious targets to reduce the use of plastics in food packaging and adopt new eco-friendly materials to retain the nutrient content and maintain the quality of the food contents. As sustainability grows, consumers are increasingly looking for ‘green products. For instance, Air India and the Indian Railways are replacing plastic packaging with eco-friendly paper and planning to use wooden cutlery to take a step toward sustainability. Many brands are basing their packaging choices on the environmental implications that accompany them by shifting away from single-use packaging and toward using compostable, recyclable, and reusable materials. In view of these developments, the Indian paper and paperboard packaging market is expected to grow significantly in coming years.

RISKS & CONCERNS

Risks are inherent to businesses and the paper industry is no exception. Besides being labour intensive and capital intensive, the industry remains exposed to other factors such as, changes in government policies, environmental policies, duties and taxes, technological obsolescence, other external economic and geo-political factors.

The Company has a Management Team that periodically assesses the potential risks to the Company and the ways to mitigate or minimize the same.

INTERNAL CONTROL SYSTEMS & ADEQUACY

The Company has adequate internal control systems commensurate with the nature and size of its operations. All operating parameters are monitored and controlled periodically. The Audit Committee of its Board of Directors, comprising of Independent Directors, also reviews the systems at 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 contributes 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 well experienced mentors has helped to form a multi-talented team having potential to seize any opportunity that may come its way. The industrial relations in the Company continue to remain healthy, cordial and harmonious.

There were 136 permanent employees on the rolls of the Company as on 31^st March, 2024.

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 (10.07%), the change in ‘Return on Net Worth in the current year (10.42%) amounts to 3.48% increase. This is primarily due to enhanced profits 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 having validity until 2027.

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.