West Coast Paper Mills Ltd Management Discussions.
A. INDUSTRY STRUCTURE & DEVELOPMENTS GLOBAL PAPER INDUSTRY OVERVIEW
The Global Paper & Paperboard Packaging Market is poised to grow at a CAGR of around 4.3% over the next decade to reach approximately $263.3 billion by 2025.
World paper output is expected to increase to 450 million metric tonnes by the year 2021 from 410 million in 2017. The growth forecast in the year 2019 is 18% for Board and Packaging, 23% for Tissue, 9% for speciality grade paper and (-) 11% for Graphic paper.
The world paper industry is currently facing far-reaching structural changes due to the digitalization of society and businesses, the globalization of industries and the consequent re-distribution of wealth across the globe. A new, more competitive business environment is taking shape, ending the dominance of traditional Western markets and giving rise to new, dynamic playing fields for the worlds paper, tissue and packaging board industry.
The worlds three largest paper producing countries - China, the United States and Japan, collectively account for approximately half of the worlds total paper production. The sector entered in 2018 on better conditions after significant capacity withdrawals throughout the industry in recent years. More specifically in North America, the US paper market is benefitting from a positive impact from USD weakness on industry and trade.
The graphic paper market is expected to continue to face declining demand worldwide. But this decline should be balanced by the increase in demand for packaging - industrial as well as consumer and tissue products. All in all, demand for fiber-based products is set to increase globally with some segments growing faster than others. The one hazy spot in demand might be concerns over how fast it will grow in China. Given Chinas weight in the global paper and board market, even relatively modest slowdown can have significant impact.
INDIAN PAPER INDUSTRY
India holds 15th rank among paper producing countries in the world, however, the countrys share in global paper demand is gradually increasing with rising domestic demand while demand in the western nations is contracting. The domestic demand in India grew from 9.3 million tonnes in FY 2008 to 17 million tonnes in FY 2018 witnessing a CAGR of 7%. Overall paper demand is growing at a CAGR of 6-7% is likely to reach approximately 20 million tonnes in 201920.
The per capita consumption of paper in India currently stands at about 13 kg which is relatively lower compared to other developed and developing countries and 57 kg global average in per capita paper consumption and the Asian average of 40 kg. However, the per capita consumption is expected to touch about 17 Kg by 2024-25
The paper Industry is fragmented with over 750 paper mills, of which less than 100 mills have a capacity of 50,000 TPA or more. Most of the paper mills are in existence for a long time and hence the existing technologies fall in a wide spectrum ranging from oldest to the most modern. However, the focus of paper industry is now shifting towards more eco-friendly products and technology. The mills use a variety of raw material viz. wood, bamboo, recycled fibre, bagasse, wheat straw, rice husk etc. The specie wise share is 30-35% wood based, 45-50% recycled fibre based and 20-22% agro residue based raw material.
The Indian Paper Industry currently has a turnover (net of taxes) of over 50,000 Crores and contributes over 4,500 Crores per annum to the national exchequer. Even more importantly it provides employment opportunities to over 2 million people directly and indirectly, mostly in rural Areas.
In India, Capacity-wise Industrial and Packaging Paper accounts for about 45%, Printing & Writing Paper 31%, Speciality Paper 6% and Newsprint 18% of total production. The growth rate in the year 2015-16 was 9.42% in packaging paper/ board, 4.98% in writing & printing paper, 16.63% in tissue paper and 2.33% in newsprint.
Writing/ printing paper & paperboard are the two larger & more profitable segments in the sector. The Printing and Writing segment demand is expected to grow at a CAGR of 4.2% whereas demand for Packaging Paper and Board segment is expected to grow at a CAGR of 8.9%.
The demand drivers include rising income levels, growing per capita expenditure, likely pick up from the education sector, requirement of better quality packaging of FMCG products marketed through organized retail and increasing preference for ready to eat foods. On the other hand, the challenges include access to quality and cost competitive raw material, competition from imports and technology obsolescence.
The availability of raw-material has always been a matter of concern for the Industry. Against the current demand of 11 million TPA for pulpable wood by paper industry, domestic availability is 9 million TPA only. The projected demand is expected to increase significantly, and hence the Industry has been requesting the Government to allot degraded revenue and forest lands. This will not only fulfil the requirement of raw-material, but also result in employment generation for rural unskilled population. However, the government has not considered the request. Nevertheless, the Industry in general has taken initiatives by taking up Farm / Social Forestry programme whereby plantation is taken in a big way on the unproductive revenue land and thus generating not only income to the farmers but also providing employment to the rural unskilled population.
Major Paper producing countries of Latin America, Europe and Asia, including China, Indonesia, Malaysia, etc., have adopted a policy of granting forest concessions to large Paper Mills to plant, protect and harvest Pulpwood in a cost effective manner. In absence of similar enabling policies, Paper Mills in India have to necessarily depend upon small and scattered plantations developed through Industrys social forestry initiative or Government controlled forests. In the process, the cost of collection and transportation increase significantly. As a result, cost of raw-materials in India has been continuously going up and has become most uncompetitive in comparison to the major paper producing countries in the world.
Given the above status of availability, the Industry is facing severe shortage of wood apart from continuously increasing cost of procurement particularly in the context of unplanned expansion by the Industry without raw-material back-up and focusing only on Andhra Pradesh for sourcing the requirement.
Indian optical fiber cables market is growing by leaps and bounds due to expansion of telecom infrastructure throughout the country and is expected to continue its growth momentum for another next ten years with India launching 5G by 2020-21.
Annual global IP traffic is expected to increase three fold from 1.5 ZB in 2017 to reach 4.8ZB (Zettabyte) in 2022, thus growing at a CAGR of 26%. Also, monthly IP traffic at 16GB per capita in 2017 is expected to reach 100 GB per capita in 2022 (nearly achieving 50GB in 2019).
Currently, the towers in India are connected with fiber to roughly 20% in comparison to 90% globally. This is expected to reach 60% in next 3 years.
B. OPPORTUNITIES AND THREATS PAPER DIVISION:
With the growth in GDP, the low per capita consumption of Paper & Paperboard in the country is bound to improve, resulting in increased consumption of paper. As against the present per capita consumption of 13 kg, every one kg incremental per capita consumption results in additional demand of more than one million ton a year. This indicates there is a lot of scope for growth of paper demand in India.
Increasing population and literacy rate, improvement in manufacturing sector and changing lifestyle of individuals are expected to further boost the demand of paper in India. Additionally, increasing environmental concerns and awareness resulting in ban on one-time plastic use material by many states in India has opened up new market for paper industry.
However, there is increasing threat from imported paper as the Import duty on Paper & Paperboard for ASEAN countries has been reduced from 2.50% to 0% with effect from 01.01.2014 which resulted in increase in cheaper imports to 3.31 million tonnes in 2017-18 as against 2.50 million tonnes in 2016-17 and 1.47 million tonnes in 201516. Total Imports has increased to 17.20 million tonnes in 2017-18 as against 14.17 million tonnes in 2016-17 and 11.13 million tonnes in the year 2015-16. Increase in imported paper results in continued pricing pressures on the domestic players in the paper segment. Continuation of anti dumping duties in the US market for Asian countries could also result in negative implications for the domestic paper industry. Govt. of India vide customs notification dated 04.12.2018 has imposed definite Anti Dumping duty in benchmark form for a period of 3 years in the Anti dumping investigation concerning imports of "Uncoated Copier Paper" originating in or exported from Indonesia, Thailand and Singapore. However, this action has not yielded desired result and there still exists a large price gap between imported and Indian copier paper which continues to hit the domestic industry.
Bharat Net completed 2.5 lakhs Gram Panchayats connected in phase I and another 2.5 lakhs are getting connected in phase II with cable requirement of 3 lakhs km (7.5 million km fibre). In phase III, there will be further cable requirement for ring structure of about 12 lakhs km (about 50 million km fibre). Thus, there will be drastic increase of OFC layout in next 5 years. BBNL phase II tender are out under Turnkey - EPC contract basis which has again increased our scope for getting into EPC business to increase turnover and profitability.
The threat is current downtrend in Optical fiber prices due to US China trade barriers. This has resulted in slow down of 5G deployment in China. This could be looked as shift of opportunity by 1-2 years.
C. SEGMENT-WISE PERFORMANCE
The Company operates in two business segments - Paper / Paperboard (including Duplex Board) at Dandeli and Telecommunication Cables at Mysore, besides having Wind Mills of 1.75 MW capacity in Tamilnadu for power generation. Detailed segment-wise performance is mentioned in the Directors Report.
D. OUTLOOK PAPER DIVISION:
The Paper Industry is cyclical in nature and its performance depends on the global pulp and paper demand supply situation. The domestic paper sector is likely to see marginal improvement in demand from education and corporate sectors, aided by expected higher GDP growth of the country.
Import pressures are likely to be continued and could result in pricing pressures on paper products particularly copier and maplitho segments. However, the Company has a well-diversified product base which partially insulates it from the imports and cyclicity. Previous year, the Company has developed and introduced some new product variants like Walk up, Straw Base Straw Fold, Aqua base, Wax cote, Base paper for sublimation coating etc. to improvise its product mix and capture new markets. Further, continued thrust on manufacturing different variants of cup stock paper and lower gsm range having double digit growth prospects augurs well for maintaining the market share in this competitive segment.
The Company has been investing heavily into modernizing equipment, improving quality, and developing personnel to maintain its position as a global leader. The Company has fully integrated paper and pulp facility, right from processing pulp from the woods to using captive power source. This helps the Company manage the cost effectively. The size and scale of the operations gives us an edge in sourcing Raw Materials as well as in transporting finished goods at best possible rates. The scale benefits and improved productivity and efficiency that we have brought in the Company over the last few years has helped us improve profitability. Also, this year your company significantly brought down its raw material cost by reducing the imports of costlier wooden chips from 43 percent to 17 percent.
With optimum capacity utilization, good demand outlook and progressive shift into environmental friendly and value- added products; the company is expected to sustain its growth prospects.
Looking at the upcoming demand and competition, the Company has started the commercial production of its subsidiary company, West Coast Opticable Ltd. on 23rd August 2018 to increase its capacity with new set of machines. This will increase the market share of the Cable Division.
We could rope in new customers and increase volume to the existing customers thereby efficiently utilizing the existing capacity.Further, to increase productivity and profitability in coming years Cable Division has planned to go for investment in Draw Tower in order to draw optical fibre on its own, which is the prime raw material for Cable Division. The new facility is expected to come into operation from 2020.
We have already started with an EPC project for laying cables with a small test order in Uttaranchal and are expecting good business in 2019-20.
E. RISKS AND CONCERNS
The Company has derived 94% of its revenue from Paper/ Paperboard and Duplex Board business and 6% from Cable business in 2018 -19.
The availability of conventional raw-material is a matter of concern and thereby causes pressure on raw material procurement prices.
Threat from excessive inflow of imported paper at cheaper price will continued to be there in near future and the Company needs to take timely remedial action to overcome such impacts.
Regarding Charter on Corporate Responsibility for Environmental Protection (CREP) guidelines which was launched in 2003, the Company has already taken the required actions to implement the same and all the parameters are well within the guidelines.
The Company has state-of-art Effluent Treatment Plant and has gone for 100% Elemental Chlorine Free bleaching from 14.02.2010. It is also meeting all the norms as prescribed under Environment Protection Act, 1986 and other environmental laws as well as CREP requirement consistently.
The Company is taking various actions to reduce water consumption in the Mills. Further all the actions are being taken to reduce the specific energy consumption to meet the norms prescribed under PAT-Cycle -II.
F. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
The Company has adequate internal control system for business processes with regard to efficiency of operations, financial reporting and controls, compliance with applicable laws and regulations etc., clearly defined roles and responsibilities for all managerial positions have also been institutionalized. All operating parameters are monitored and controlled. Regular internal audits and checks ensure that responsibilities are executed effectively. The Audit Committee of the Board of Directors periodically reviews the adequacy and efficacy of internal control systems and suggests improvement for strengthening these.
The Company has designed and implemented a process driven framework for Internal Financial Controls ("IFC") within the meaning of the explanation to Section 134(5) (e) of the Companies Act, 2013. For the year ended March 31,2019, the Company has sound IFC commensurate with the nature and size of its business operations and is operating effectively and no material weakness exist. The Company has a process in place to continuously monitor the same and identify gaps, if any, and implement new and/or improved controls wherever the effect of such gaps would have a material effect on the Companys operations.
G. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE
This has been dealt with in the Directors Report.
H. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED
During the year, the Companys industrial relations are cordial. The Company has entered into tripartite long term wage revision settlement with Joint Negotiation Committee (JNC) of Unions on 04.05.2016 for the period from 01.01.2015 to 31.12.2018. Process of tripartite long term wage revision settlement with Joint Negotiation Committee (JNC) of Unions from 01.01.2019 is going on.
The Company has drawn specific programme to improve the skills of the workers and staff. Further, it is providing necessary training to the manpower with both locally and abroad suppliers. There is continuous interaction between the Management, Unions and Labour for improving the knowledge and training of the workers.
Total employees of the Company as on 31.03.2019 are 2398.
I. DETAILS OF SIGNIFICANT CHANGES (i.e. change of 25% or more as compared to the immediately previous financial year)
There is no significant change vis-a-vis the previous financial year.
Statements in this report on Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations or predictions may be "forward looking statements" within the meaning of applicable securities laws or regulations. These statements are based on certain assumptions and expectations of future events. Actual results could 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, finished goods prices, raw material cost and availability, changes in Government regulations, tax regimes, economic developments within India and other factors such as litigation and industrial relations. The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements on the basis of any subsequent developments, information or events.