Paper: Improved prospects? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Paper: Improved prospects?

Apr 24, 2006

The domestic paper industry has been in the limelight due to its strong linkages with India's GDP growth and a firm trend in paper prices. In this write-up, we shall examine some of the factors that are expected to drive the growth of the industry and the challenges ahead. The growth drivers...
Strong demand: Growth in demand for paper is expected to be around 6% to 7% over the next couple of years, more or less in tandem with the GDP growth. Different factors shall drive the demand for different sections of the industry. For example, the government's increased thrust on education and growth of the media and IT industry is expected to aid the growth of writing and printing paper. A rise in industrial activity and demand for better packaging across sectors will propel the growth for industrial paper. Increasing number of players and the anticipated boom in the newspaper circulations is expected to boost demand for newsprint.

The volumes story: With the rising demand for paper, most of the large paper companies such as BILT and Tamilnadu Newsprint (TNPL) are operating at nearly 100% capacity. These companies along with players such as Andhra Pradesh Paper Mills and JK Paper are augmenting capacities in order to cater to this demand. The capacity additions have already started taking place and are thus expected to contribute to volume growth going forward.

Increase in realisations: While the demand has been growing at 6% per annum, capacity expansions have been growing at 3%, highlighting the demand-supply mismatch. This has contributed to an upward trend in paper prices and consequently improved realisations. Though the addition of new capacities is likely to catch up with demand over a period of time, in the medium term atleast, the outlook appears stable with paper prices likely to remain firm.

Contribution from value added products: Of late paper companies have been shifting their focus to certain categories of the writing and paper segment (coated, copier), which have a relatively better margin profile as compared to newsprint. To cite examples, BILT's strong presence in the value added coated paper segment and the higher end of the uncoated paper segment, has resulted in the company earning operating margins of about 25%. These margins are the best not only in the Indian paper industry but are also superior in comparison to its global peers. Similarly, TNPL has over the years reduced its emphasis on newsprint and turned its focus to copier paper, consequently contributing to margin expansion of the company.

The challenges...
Raw material constraints: Over the years, Indian paper companies have faced raw material shortages. This is because in India, the government does not allow paper companies to have private plantations. The fact that raw material costs constitute around half of the total expenditure means that wielding control over the same assumes significant importance. Many of these players have to either depend upon the government or look to import pulp, the chief material required for making paper. To counter this problem, BILT and TNPL have started focusing on social farm forestry programme for securing pulp. This initiative is expected to play a critical role in ensuring pulp requirements in the long-term.

High capital cost: Not many greenfield projects have come up in the past in the paper industry on account of the high cost involved. To give a perspective, the cost of setting up a greenfield paper unit with its captive power plant is pegged at Rs 0.1 m per tonne. The last two major greenfield projects that came up in India were TNPL's bagasse-based 90,000 tonne per annum mill in 1984, followed by Sinar Mas' 115,000 tonne per annum coated paper plant in 1996. As a result, most of the capacities being added at present are brownfield expansions.

Threat from imports: With the government having reduced the customs duty on both writing and printing paper and newsprint, the sector faces an increasing risk of competition from imports. For example, while the customs duty for writing and printing paper has been reduced from 140% in FY90 to 15% in FY05, the duty on newsprint is as low as 5%. That said, it is mostly the newsprint and coated paper that are expected to face the threat of imports as the domestic prices are closely aligned with the international prices. Other paper segments as such are largely unaffected by the trends in the international paper market.

To sum up...
Paper companies have been historically accorded lower valuations on account of high input and capital costs, strict environmental regulations and difficulty in procuring raw material. Considering the highly fragmented nature of the industry, we believe that it is the larger paper companies that will retain competitive advantage over their relatively smaller peers. What will eventually differentiate one company from the other is the ability to integrate operations, fibre-sourcing strengths, efficient cost structures, emphasis on brand value and distribution and a strong product portfolio. These factors at the end of the day will contribute to revenues, profitability and ultimately to shareholder returns in the long term.

Equitymaster requests your view! Post a comment on "Paper: Improved prospects?". Click here!


More Views on News

N.R.AGARWAL 2020-21 Annual Report Analysis (Annual Result Update)

Nov 22, 2021 | Updated on Nov 22, 2021

Here's an analysis of the annual report of N.R.AGARWAL for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of N.R.AGARWAL. Also includes updates on the valuation of N.R.AGARWAL.

TAMIL NADU NEWSPRINT 2020-21 Annual Report Analysis (Annual Result Update)

Nov 19, 2021 | Updated on Nov 19, 2021

Here's an analysis of the annual report of TAMIL NADU NEWSPRINT for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of TAMIL NADU NEWSPRINT. Also includes updates on the valuation of TAMIL NADU NEWSPRINT.

JK PAPER Announces Quarterly Results (1QFY22); Net Profit Up 3818.0% (Quarterly Result Update)

Aug 3, 2021 | Updated on Aug 3, 2021

For the quarter ended June 2021, JK PAPER has posted a net profit of Rs 1 bn (up 3818.0% YoY). Sales on the other hand came in at Rs 7 bn (up 40.8% YoY). Read on for a complete analysis of JK PAPER's quarterly results.

JK PAPER Announces Quarterly Results (1QFY21); Net Profit Down 81.6% (Quarterly Result Update)

Aug 24, 2020 | Updated on Aug 24, 2020

For the quarter ended June 2020, JK PAPER has posted a net profit of Rs 250 m (down 81.6% YoY). Sales on the other hand came in at Rs 5 bn (down 34.9% YoY). Read on for a complete analysis of JK PAPER's quarterly results.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

The Biggest Winners and Losers in India's Transition to Electric Vehicles (Profit Hunter)

Nov 26, 2021

How India's EV transition could be a major headwind for the incumbents.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms