Writing and printing paper cos to pen a 4-5% revenue rebound this fiscal: Crisil Ratings
Volume growth of W&P paper manufacturers, which got a push last fiscal from implementation of the National Education Policy 2020, will moderate this fiscal due to continued digitalization, Crisil said.
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Writing and printing (W&P) paper manufacturers will see revenue recover 4-5% this fiscal, after declining 7% last fiscal, on the back of improvement in realisations and volume, said Crisil Ratings.
Realisations, which declined ~12% last fiscal, will improve 2-3%, driven by better demand-supply dynamics due to no material increase in imports of low-cost W&P into India (18-20% of total volume) from member countries of the Association of Southeast Asian Nations (ASEAN)1, increased domestic production, and there being no new domestic capacity addition.
Volume growth of W&P paper manufacturers, which got a push last fiscal from implementation of the National Education Policy 2020, will moderate by 200-300 basis points (bps) this fiscal due to continued digitalisation, although demand from the banking, education and judiciary sectors will keep it in positive territory, at 2-3%, as per Crisil.
Operating profitability will rebound 200-250 bps as prices of hardwood (key input to make pulp, the primary raw material) ease with improving supply. Continued focus on process efficiency will also support profitability. The consequent increase in accruals, along with low capital expenditure (capex), will keep credit profiles stable.
Our analysis of 11 paper makers, which account for ~50% of the W&P paper market, indicates as much.
Says Shounak Chakravarty, Director, Crisil Ratings, “No fresh capacity is expected to come up in ASEAN countries as manufacturers there are prioritising paperboard production owing to better demand dynamics and return metrics. Therefore, import of W&P paper from these countries, which accounted for ~55% of total import into India last fiscal – is not expected to rise this fiscal.
With no fresh domestic capacity addition in sight and remaining imports from non-ASEAN countries continuing to be less cost competitive than Indian W&P paper makers, we expect a modest increase in realisations after the sharp decline clocked last fiscal. Further, an almost similar growth in volumes will help revenue of W&P paper manufacturers revenue rebound 4-5%.”
W&P paper has extensive application in education and related services such as coaching, as well as in the banking and judiciary sectors. Stable enrolment in the K-12 (kindergarten to standard 12) segment, rise in coaching centres, increasing know-your-customer documentation as more people come into banking channels, and steady demand from the judiciary segment will help keep volume growth positive even as increasing digitalisation suppresses growth.
With volume growth in low single digit, W&P paper makers are unlikely to take up fresh capacity expansion this fiscal. This will keep capacity utilisation healthy at 86-87%. However, investments for process efficiency will continue, including recovery and reuse of in-process chemicals as well as energy-efficient production methods such as optimisation of ash and moisture. These efforts are expected to improve yields and profitability.
Says Pallavi Singh, Associate Director, Crisil Ratings, “Process efficiency measures, along with softer hardwood prices, will aid margin recovery of ~250 bps to 15-16% this fiscal from a five-year low of 12-13% last fiscal. Acreage under hardwood plantation, which had dipped during the pandemic, has increased sharply since fiscal 2023. Increased harvest will ease the supply situation from the second half of this fiscal. Consequently, prices of hardwood, which had surged ~15% last fiscal, will drop 2-3% on a higher base, but will remain substantially higher than previous three year average due to sustained demand from other wood-based industries.”
The combination of revenue recovery and improving operating profit will aid cash accrual. Credit profiles of W&P paper makers will also benefit from negligible capex and stable working capital cycle.
