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The changing landscape of Paper industry - Views on News from Equitymaster
 
 
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  • Jun 27, 2011

    The changing landscape of Paper industry

    Paper, and the pulp papermaking process, was developed in China during the early 2nd century AD. Paper spread from China through the Islamic world to medieval Europe in the 13th century, where the first water-powered paper mills were built. In the 19th century, industrial manufacture greatly lowered its cost, enabling mass exchange of information and contributing to significant cultural shifts. In 1844, Canadian inventor Charles Fenerty and German F.G. Keller independently developed processes for pulping wood fibers.

    The government of India set up the first paper mill - Hindustan Paper Company in 1970. This was to intensify the movement for literacy through the growth of the paper industry. Today it is one of the largest manufacturers of paper and newsprint in South East Asia.

    The Indian paper industry has come a long way since then. In those days, paper was used only to print books and journals. With the introduction of computers, the scene has changed considerably. Demand for printouts and photocopies have given a new boost to the industry. At the same time, changing trend of using digitized books and online newspapers has affected the demand for paper. Let us have a look at what drives the paper industry currently and what to expect in the future.

    The shift in demand drivers

    On per capita basis, India consumes 9 kg paper as compared to world average of 58 kg. However, with more disposable income in the hands of the people, the scene is fast changing. People now prefer branded goods. Similar is the case with paper too. Consumers are now buying more of branded notebooks and files as compared to non branded ones. Indians are becoming more environment friendly thereby replacing plastic with paper. India Inc has been doing well and requires more of copier paper, paper for print outs, marketing etc. All these factors will ensure that paper industry continues to grow in line with the growth in GDP over the next few years.

    At present, paper industry has both organized and unorganized players. But, majority of paper is produced by only a handful of organized players. Paper sector is capital intensive in nature that is it requires huge investment in land, machinery, captive power plant and working capital. This acts as a deterrent to new players who want to enter this business. There are a number of environmental clearances that have to be obtained and a few regulations that need to be followed by the paper companies.

    Paper is mainly made from wood (of trees) which results in cutting of trees. Thus, the companies voluntarily plant more trees to ensure a steady supply of raw material in the form of wood.

    Government support - A major catalyst

    The Indian government has been focusing on its flagship literacy scheme - Sarvashiksha Abhiyaan. It has set aside a sum of Rs 640 bn for this purpose which will be utilized towards setting up of schools as well as printing of study material.

    At present 100% FDI (Foreign Direct Investment) is permitted in the sector. It is one of the priority sectors declared by the government. This implies that the government should promote the growth of this sector by providing fiscal incentives. The paper mills use a variety of raw material viz. wood, bamboo, recycled fibre, bagasse, wheat straw, rice husk, etc. Of these, approximately 35% are based on chemical pulp, 44% on recycled fibre and 21% on agro-residues. The government encourages the use of waste paper as raw material because it conserves energy. Accordingly, import duty has been reduced to 2.5% from 5% applicable earlier.

    Challenges in the offing

    Although the paper industry has been growing in line with the growth in GDP over the past few years, we must not forget that the average GDP growth was not much. With India expected to register 9% growth rates in future, it will be quite a challenge to maintain this ratio. The world is getting digitized and people are moving away from newspapers to e papers. As a result the demand for newsprint is likely to get affected. The Indian government has abolished import duty on imported newsprint. This brings the prices of imported newsprint and domestic newsprint at par thereby affecting the demand for newsprint produced by domestic players. Paper requires wood as raw material which is not so easily available. Thus the paper companies are planting more trees to source wood for pulp. There are other environmental concerns like pollution of water as well.

    What is in it for investors?

    India is being perceived as one of the most promising markets for paper. This is because of rising consumption and growing environmental concerns. As stated earlier, average consumption in India is still very low as compared with the other countries. Global paper manufacturers have been eyeing an opportunity to earn higher revenues by catering to such huge demand.

    The industry players have average return ratios equal to 9-10% which does not seem to be too attractive. However, of late, most of the paper companies have shifted focus from newsprint to other categories. They are concentrating on value added products (like fancy and coated paper) that ensure higher profits. The higher profits will ultimately filter into return ratios for investors. . Thus investors need to look out for companies that have a diversified portfolio of products and are focused on returns.

     

     

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    3 Responses to "The changing landscape of Paper industry"

    akshaya

    Jul 4, 2011

    look ta players like Ballarpur. They are into copies, diaries, high quality papers used in printers. In many companies , paper produced by BILT is used for printers etc.
    Also, have a look at JK Paper, primarily due to its cheap valuation on a replacement cost basis.
    PS: I hold ballarpur paper.

    Like 

    Badri

    Jun 29, 2011

    Any views on the sugar industry?

    Like 

    Dara J Kalyaniwala

    Jun 27, 2011

    You end the article with "Thus investors need to look out for companies that have a diversified portfolio of products and are focused on returns".

    Can you look at the Paper Industry and find which companeis have a diversified product portfolio and are focussed on returns? This could be shared with at least the life-time subscribers.

    Like 
      
    Equitymaster requests your view! Post a comment on "The changing landscape of Paper industry". Click here!
     

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