Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Paper: Improved prospects? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Apr 24, 2006

    Paper: Improved prospects?

    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

    Sorry! There are no related views on news for this company/sector.

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms