Yash Pakka Ltd Management Discussions.

Global economic overview

The world economy slowed down further in calendar year 2015 on account of lower global economic growth, compared with calendar year 2014. Global activity continued to decelerate, triggered by slowing growth in emerging and developing markets as they contribute to about 70% of the global growth.

World GDP fell to 2.3% in the last quarter of the calendar year 2015, below the threshold of 2.5%, which indicates recessionary trends and hence, Morgan Stanley has commensurately raised their global recession risk probability from 20% to 30%. Growth in the US fell to 1.6% from 1.8% last year. Today, the Chinese economy is being hampered by a slowdown in imports and exports and declining investments and manufacturing activity. This is causing a spillover effect on other economies linked with trade channels. Japan received the single-biggest downgrade for any country with GDP declining by half to just 0.6% in the fiscal year 2015-16 as compared with 1.2% in 2014-15.

Global GDP growth is projected at 3.4% in 2016 and 3.6% in 2017.

Growth in advanced economies is projected to rise by 0.2 percentage points in 2016 to 2.1% and hold steady in 2017. Growth in emerging market and developing economies is projected to increase from 4% in 2015 - the lowest since the 2008-09 financial crisis - to 4.3% and 4.7% in 2016 and 2017, respectively (Source: IMF, January 2016).

Indian economic overview

It is believed that the Indian economy started to heal in 2015-16. As per the advance estimates report dated 8 February 2016 of the Central Statistics Office (CSO), the growth in GDP during 2015-16 is estimated at 7.6%, as compared with the growth rate of 7.2% in the financial year 2014-15. Manufacturing growth for 2015-16 is likely to be at 9.5%, much higher than the 5.5% growth in 2014-15. The sectors that are likely to register growth rate of over 7% include financial, real estate and professional services; trade; hotels; transport; communication and services related to broadcasting and manufacturing.

Indias GDP grew at an annual rate of 7.4% in the July-to-September quarter of 2015-16 (Q2FY16), putting it firmly ahead of China, where growth slowed to 6.9% during the same period. Declining oil prices have helped raise the GDP, as corporate margins increased, household purchasing power improved, tax collections increased and subsidy bills declined.

Global paper industry

As per a Euler Hermes report, the global paper and printing industry is estimated at USD 1,270 billion, registering a de-growth of 6% in 2015 as compared with 2014. This is expected to further drop in the current year (2016) with sales projected to decline by 2%.

This contraction is primarily due to the transition to digital media and paperless communication across most developed economies. However, manufacturing boom in several emerging markets have partially offset the decline by driving increased demand for paper used in packaging materials.

The upstream pulp sector continues to cope with a moderating demand worldwide. Over 2015, most regions saw pulp production (and prices) declining, especially leading producer China (down 2% y-o-y) and Brazil (down 2.5% y-o-y) since an annual high in 2012. Asia, which accounts for 45% of the total paper and board demand, can barely make up for the sluggish demand from either Western Europe or slowing-down Latin America. The situation seems most challenging in Europe because of the strong dollar, which weighs down on European pulp buyers. Add to this, the growing competition from digital devices leading to plant mill closures.

Interestingly, tissue and corrugated papers are the only two sub-sectors to stand out, still on a positive trajectory, thanks to a rising demand for e-commerce packaging.

As per IBIS World, paper price increases in the single-digits should be expected from now until the year 2018. Coated papers are expected to witness a 1.5% increase while flexible packaging paper is projected to have an exceptionally high increase of 2.6%. These forecasts have been impacted by numerous factors. Examples include high levels of construction and a consistent improvement in the US economy. These two factors alone have greatly increased the demand for paper products. As various industries continue to require paper goods for their manufacturing and production processes, the price of paper is likely increase due to higher demand.

The global paper and pulp mills industry is expected to experience a significant turnaround. Once considered a declining industry in response to the decline of traditional print media, paper and pulp mills around the world have refocused their paper processing efforts towards end products such as cardboard, hygienic products, sanitary products and packaging materials. Over the next five years to 2021, industry value-added, which measures the industrys contribution to the world economy, is forecast to increase at an annualized rate of 4.2%. Comparatively, world GDP is forecast to rise at an average annual rate of 3.6% over the same period. The industry is growing at a faster rate than the global GDP, which is a key indicator of its current life cycle stage (Source: Ibis World).

Indian paper industry

The Indian paper industry accounts for about 3% of the worlds production of paper. The sectors estimated turnover is around Rs.50,000 crore and its contribution to the exchequer is around Rs.4,500 crore. The industry provides employment to more than 0.5 million people directly and another 1.5 million indirectly.

The operating capacity of the industry currently stands at around 13 million tonnes (MT). As per Indian Paper Manufacturers Association (IPMA), during 2015-16, domestic production is estimated at 12.2 MT. As per rough industry estimates, the overall paper consumption has now touched 13.9 MT and per capita consumption is pegged at about 10 kg. Demand for paper has been growing at around 8% per annum, mirroring the growth in GDP, and making the country one of the fastest-growing paper markets in the world.

An India Ratings report estimates Indias per capita paper consumption at 10.8 kg, which pales even against similar developing nations like 22 kg in Indonesia, 28 kg in Malaysia and 42 kg in China. The global average stands at 54 kg. This indicates that there is significant headroom for growth in India. Besides, policy factors also have a key role to play in the growth of the domestic paper industry. The governments sustained focus on literacy, increased consumerism and expansion in organised retail are expected to positively affect paper consumption and demand in India.

In the country, digital media has a lot of ground to cover, at least as far as penetration is concerned, primarily in rural areas. Paper is an established business and its consumption is being encouraged. What was heartening was that despite the challenges, the packaging side of the segment continues to grow. Over the last six years, the Indian paper sector has invested about Rs.20,000 crore in capacity enhancement, technology upgradation and acquisitions. With this investment, companies in the sector are now seeking to improve their balance sheets. While the sector is eager to expand capacity further, decisions in this regard will depend on how soon companies can improve their financials.

Drivers of demand

Growth in consumption of paper and paper products is driven by several sustainable factors in India and a number of economic trends and lifestyle changes are driving the growth of paper consumption in the country.

Growth in the education sector.

The government has increased focus on education and initiated several central and state-level programs such as the landmark Sarva Shiksha Abhiyan (Education for All) and Operation Blackboard. This has had a positive effect on Indias literacy rate which reached approximately 74% in 2011, as per the latest data available. Besides, the youth literacy rate between the 15-24 years population is estimated at a much higher 90.2% (in 2015). The result of these programmes has been increased expenditure on textbooks and notebooks, providing a good opportunity for paper companies. Additionally, with higher literacy levels, circulation of other print media, such as newspapers, has also increased.

Increased corporate activity and lifestyle changes.

Economic development and globalization have led to an increase in corporate activity and increased per capita consumption of paper.

Concurrently, rising commercial activity has spurred demand for packaged goods. Lifestyle changes have also pushed up the demand for specialty paper, such as tissue paper.

Growth in press publications.

India is the second largest print market in the world, with a readership base of over 250 million. There are approximately 130,000 printing presses in India. The printing and packaging industry is growing at a compound annual growth rate (CAGR) of over 16%. The strong growth in the printing industry is expected to continue to fuel demand for paper.

Increased demand for packaging.

With a turnover of USD 24.6 billion and high doubledigit growth rate, the Indian packaging industry is expected to reach a size of USD 32 billion by 2020 as per www.packworld.com . Additionally, the Indian FMCG sector is growing at a rapid pace due to strong demand from a large and growing middle-class as well as the advent of new entrants. As a result, the packaging industry, growing by more than 15% annually, will likely increase demand for corrugated boxes, leading to increased demand for Kraft paper.

Growing population affluence.

Indias GDP has grown at a rate of about 7% in the last decade, increasing affluence. This has led to increased consumption growth in key urban towns and rural markets. The higher consumption per capita leads to a higher newspaper and magazine reader base, which in turn fuels demand for paper.

The package has arrived!

With a turnover of over USD 25 billion currently, the Indian packaging industry is expected to reach USD 32 billion by 2020. Heres a look at the key facts and drivers of the Indian packaging industry.

The per capita consumption of packaged beverages and food in India is still very low compared with the other regions. However, expenditure on these products has doubled in the last five years. Within the next five years it will increase by another 14% annually, as the demand for processed food is rising due to growing disposable incomes, urbanization and a young population.

The Indian food services industry, estimated at nearly USD 14 billion, is growing at a healthy 17% CAGR, which has significant implications for the packaging sector as a whole. Besides, the Indian QSR (quick service restaurant) market is expected to touch Rs.25,000 crore by 2020 from the current size of Rs.8,500 crore.

Plans are currently in place, thanks to public and private funding, to establish 30-40 mega food parks. Corresponding infrastructure for packing, packaging transport, and refrigeration are part of these plans. Hence, this development is expected to provide food manufacturing - and, by extension, packaging - a big boost. In fact, by 2015, more than USD 25 billion is estimated to have been pumped into the food sector and the required infrastructure.

Packaging has an annual global turnover of about USD 550 billion and Indias share is miniscule in the global context. According to a recent McKinsey report, there will be a 10x increase in Indias middle-class population by 2025, which will further trigger the consumption of packaging materials. This will bring another growth spurt to packaging. Besides, Morgan Stanley has indicated that the GMV (gross merchandise value) of the countrys top-three e-commerce companies exceeded that of the top-10 offline retailers in 2015, representing a historic feat for the countrys e-commerce sector. Going forward, the key growth drivers of e-commerce will be greater Internet penetration, a rise in the number of online shoppers and an increase in per capita income. Morgan Stanley has estimated that by 2020, Indias e-commerce market will surge to a staggering size of USD 119 billion.

India is the fastest growing market for paper globally and the country presents an exciting scenario with paper consumption poised for a big leap forward in-sync with the economic growth. The forward view is that growth in paper consumption would be in multiples of GDP and hence an increase in consumption by one kg per capita would lead to an increase in demand of one million tonnes (Source: IPMA).

Despite the continued focus on digitisation, Indias demand for paper is expected to rise 53% in the next six years (2014-20), primarily due to a sustained increase in the number of school-going children in rural areas.

Growing consumerism, modern retailing, rising literacy (continued government spending on education through the Sarva Shiksha Abhiyan) and the increasing use of documentation will keep demand for paper buoyant. Though Indias per capita consumption is quite low compared with global peers, things are looking up and demand is set to rise from the current 13 MT to an estimated 20 MT by 2020.

Indian economic outlook

The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit (CAD) and commitment to fiscal rectitude.

The Economic Survey has pegged the economys growth at 7-7.75% in 2016-17.

The Finance Minister has stated that the GDP growth target could move up from 7.5% to 8-8.5% in 2016-17 if the monsoon rainfall matches the 106% of the long-period average, as forecasted by the Indian Meteorological Department (IMD) in its first-stage forecast.

Risk management

At Yash Papers, our risk management framework helps identify risks and ensure that mitigation plans are in place for risks with a high likelihood of occurrence with accompanying potential impacts. The industry in which we operate is highly competitive and selling prices are subject to volatility. Capacity additions combined with product substitution risks (for instance the advancement of electronic alternatives and alternative packaging solutions) and increasing environmental considerations have a significant impact on the supply-demand balance and hence on market prices. At Yash Papers, we continuously monitor industry developments in terms of changes in capacity as well as trends and developments in our own product markets and take corrective risk-mitigated actions to ride over the potential challenges.

Human resources

Yash Papers is a knowledge-driven organization focused on judicious people recruitment and retention. The Companys HR function focuses on employee training, values inculcation and enhanced functional expertise.

The Companys key HR objective is to ensure that employees are aware of expected roles leading to organizational momentum.

During the year under report, the Company conducted several training sessions for all tiers of the organization, enabling them to hone their skills and stay competitive in a dynamic and challenging industry environment. The top management also conducted several discussions with employees to discuss multiple issues including leadership qualities, values, responsibilities, workplace freedom and empowered decision-making. Going ahead, the Company will continue to invest in people to strengthen its production processes, product quality and service delivery.

During the year under report, the Company also focused on the automation of key HR processes for employee benefit. The result of these initiatives was that the Company was able to keep its attrition levels well under control, much below the industry average. The Companys headcount stood at 363 as on 31 March 2016, registering a net addition of 27 during the year.

Internal control systems and their adequacy

In any industry, the processes and internal control systems play a critical role in the health of the Company. The Companys well- defined organizational structure, documented policy guidelines, defined authority matrix and internal controls ensure efficiency of operations, compliance with internal policies and applicable laws and regulations as well as protection of resources. Moreover, the Company continuously upgrades these systems in line with the best available practices. The internal control system is supplemented by extensive internal audits, regular reviews by the management and standard policies and guidelines to ensure reliability of financial and all other records to prepare financial statements and other data.

Cautionary statement

Statements made in the Management Discussion and Analysis report relating to projections, estimates, expectations or predictions are based on certain assumptions. The Company cannot guarantee that these assumptions are accurate or will be realised. The actual results, performance or achievements of the Company could thus differ materially from those projected or estimated.