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SAPM CIA-1

INDUSTRY ANALYSIS OF PAPER INDUSTRY

Submitted By: RAUNAK DOSHI 1021327 4th MBA M

INDIAN PAPER INDUSTRY


The Indian Paper Industry is a booming industry and is expected to grow in the years to come. The usage of paper cannot be ignored and this awareness is bound to bring about changes in the paper industry for the better. It is a well known fact that the use of plastic is being objected to these days. The reason being, there are few plastics which do not possess the property of being degradable, as such, use of plastic is being discouraged. Excessive use of non degradable plastics upsets the ecological equilibrium. The Indian Paper Industry accounts for about 1.6% of the worlds production of paper and paperboard. The estimated turnover of the industry is Rs 25,000 crore (USD 5.95 billion) approximately and its contribution to the exchequer is around Rs. 2918 crore (USD 0.69 billion). The industry provides employment to more than 0.12 million people directly and 0.34 million people indirectly.

Introduction
The Rs. 25,000-crore Indian paper industry accounts for about 1.6% of the worlds paper and paperboard production even though the country accounts for nearly 16% of the global population. The Indian paper industrys market size has been estimated at Rs.321 billion, growing at a CAGR of 10.5% from around Rs. 195 billion in 2003-04 to Rs. 321billion in 200809. In 2009-10, the country produced 9.18 million tons of paper, growing at an average 6-7% compared with 2% growth in developed countries (Source: Assocham). The paper industry growth is forecast at 8.4% annually, touching 11.5 million tons in 2011-12and 15 million tons by 2015 (Source: Business Line, 7 May, 2010).

In India, paperboard accounts for nearly 47.3% of the total market size, followed by writing and printing paper (29.6%), newsprint (19.5%) and speciality paper (3.6%) according to CRISIL Research. India is among the worlds fastest growing paper markets; an increase in consumption by one kg per capita can potentially increase annual paper demand by a million tons. Indias paper

production is forecasted to grow at a CAGR of 8.4% while consumption is pegged at a CAGR of 9% till 2012-13 on account of a growing demand for tissue paper, tea bags, filter paper, light weight online coated paper and medical grade coated paper (Source: Business Line, 7 May, 2010).

Positive macro triggers: Low per capita consumption: Indias per capita paper consumption grew 10.6% in2009-10 (from 8.3 kg in 2008-09 to 9.18 kg) compared with 42 kg in China and 350 kg in developed countries (Source: Assocham), implying a large scope for correction. Export opportunity: A number of European and US paper mills are shutting down owing to overcapacity and cost issues, an attractive export opportunity for Indian paper mills. Besides, Indian paper manufacturers, utilising agriculture-based raw material, possess a sustainable growth opportunity on account of growing environment consciousness. Packaging industry: The Rs. 77,570-crore Indian packaging industry (as on April 2010)grew around 15% year-on-year (Source: Indianpackagingshow.com). The paper board market size was about Rs. 120 billion in 2009; demand grew at a 3.4% CAGR from 3.7 million tons in 2004 to 4.4 million tons in 2009 (Source: CRISIL Research), riding a growth in the pharmaceutical, cigarettes, textile, FMCG, consumer durable and retail segments. Changing lifestyles: With improving domestic living standards, demand for speciality paper (tissue paper, fine art paper, business card paper and greeting card paper) is expected to increase at around 8% CAGR

Paper type Writing and printing paper

Uses Writing, stationery printing,

Varieties Cream map paperboard, copier and coated paper wove, litho,

Demand drivers Population literacy, growth, public and level of

private

spending on education, level of business activity, increasing

presence of modern retail formats and growth in the printing

industry Paperboard Industrial purpose Kraft recycled paper, board Growth in the packaging

industry, industrial production and development in packaging technology and substitution by other materials

and virgin board

Speciality paper

Tissue paper, fine art paper, paper for

Duplex, grey and white board and MG posters

Consumption

of

this

paper

variety is linked to the standard of living as well as per capita income

specialized

industrial

usages such as steel mill kraft, insulation grades, etc Newsprint paper Printing of newspapers and magazines Glazed and

Growing

economy,

growing

standard paper

circulation and readership

MAJOR PLAYERS IN THE INDUSTRY  Ballarpur industries  Hindustan paper corp  ITC  Tamil nadu news print  JK paper  Khanna paper mills  West coast paper mills  Rama newsprint & paper mills  Andhra Pradesh paper mills  Orient paper & ind  Star paper mills

Demand and supply: Domestic paper demand grew steadily at a CAGR of 6.5% from6.8 million tons in 2003 to 9.3 million tons in 2009 (Source: CRISIL Research).With rising economic growth, share of the paperboard segment in total demand has increased. The paperboard segment accounts for around 47% of demand, while the writing and printing, newsprint and speciality paper segment accounts for nearly 30%, 20% and 3%respectively. It is expected that by 2014, paperboard demand will grow at a 7% CAGR due to a healthy growth in industrial production and recovery in the consumer goods sector. Demand for writing and printing paper is expected to grow 6.5% CAGR, driven by the governments thrust on education and overall economic growth.

Estimated paper demand Paper demand statistics Per capita consumption (Kg) Growth (%) in per capita 2005 7 2006 7.3 4.20% 2007 7.8 6.80% 2008 8.3 6.40% 2009 9.18 10.60% 2010 9.4 3.20% 2011E 10 6.30%

consumption Indian population (mn) Growth (%) Total paper demand (mn MT) Growth (%) 7.7 1,096 1,114 1.60% 8.1 5.80% 1,131 1.50% 8.8 7.80% 1,147 1.40% 9.5 8.10% 1,164 1.40% 10.2 8.10% 1,182 1.50% 10.2 8.10% 1,199 1.50% 12 8.10%

Source: Census 2001, National Sample Survey Organisation, IPMA, Karvy estimates

Production: The Indian paper industry is fragmented; the top five producers accounting for around 20-22% of the total Indian paper capacity. In 2009, the annual operating capacity was 9.1 million tons and annual production was 7.4 million tons, and with currently undertaken expansions, another 15 lac tons is expected to be added by 2012 (Source: CRISIL Research).

Consumption: As paper consumption is linked to economic development, India has emerged as one of the worlds fastest growing paper markets. Per capita consumption increased from 8.3 kg during 2008-09 to 9.18 kg in 2009-10, a growth of 10.6% (Source: Assocham),even though this is low compared with Japans 250 kg, Koreas 170 kg, Chinas 45 kg, world average per capita consumption of 56 kg and Asian average of 46kg.

Price: Raw materials and power constitutes the major cost, accounting for around 55-60%of the total costs. The paper industry faces a demand-supply mismatch, resulting in price rise. The cost of pulp has been rising after the global slump, reaching an all time high of USD 974 per ton as

on 2009 (Source: CMIE). Moreover, an earthquake in Chile recently disrupted pulp supplies of about three million tones, resulting in an increase in price of pulp globally. Further, the US government withdrew a subsidy of USD 125-150 per ton for the treatment of black liquor (generated during pulp manufacturing), which is a harmful effluent and by-product of kraft paper manufacture. The withdrawal of the subsidy discouraged wood use for pulp manufacture, boosting the demand for its alternative waste paper. As per CRISIL estimates, the domestic prices of paper are expected to increase over2010-11 and 2011-12. The manufacturers are increasing capacity significantly, adding about1.5 to 2 million tons between 2008 and 2012, most of which are in the writing and printing segment. Paperboard prices are likely to increase by 10-12%, owing to lower capacity additions and higher demand growth.

THE INDUSTRY REGULATION Government has completely delicensed the paper industry with effect from17th July, 1997. The entrepreneurs are now required to file an Industrial Entrepreneur Memorandum with the Secretariat for Industrial Assistance for setting up a new paper mill or substantial expansion of the existing mill in permissible locations. Foreign participation is permissible. Most of the paper mills are in existence for a long time and hence present technologies fall in a wide spectrum ranging from oldest to the most modern.

Import-export India imports about two million tonnes of pulp (soft wood and hardwood) and waste paper (sack waste for unbleached grades, envelopes waste, cup stock for white grades and magazine waste) for newsprint. The following prime grades of paper are imported from USA, Europe, Dubai and Singapore: label stock, wet strength papers, tea bag tissue, soft tissue, filter paper, insulation kraft, extensible kraft, decorative laminates, overlay tissue, thermal papers, digital papers, coated papers/boards and some specialities. Stock lots of all grades totaling about 200,000 tonnes arrive every year mostly from USA and Europe. These are imported by traders in major metro cities of Mumbai, Chennai, Cochin, Bengaluru and Delhi. India has surplus to export some grades. It exports following grades of papers to Middle East, South Eastern countries, Eastern Europe and USA: A4 copiers, wood-free (mostly from bamboo and agro waste by several small mills), MG varieties (from small agro based mills), coated duplex (mostly recycled fibre) and large quantity of converted products like stationery items, calendars, books, magazines, childrens play books and comics.

Capacity, Production and Raw material There are, at present, about 515 units engaged in the manufacture of paper and paperboards and newsprint in India. The country is almost self-sufficient in manufacture of most varieties of paper and paperboards. Import, however, is confined only to certain specialty papers. To meet part of its raw material needs the industry has to rely on imported wood pulp and wastepaper. At present about 60.8 per cent of the total production is based on non-wood raw material and 39.2 per cent based on wood. Performance of the industry has been constrained due to high cost of production caused by inadequate availability and high cost of raw materials, power cost and concentration of mills in one particular area.

Several policy measures have been initiated in recent years to remove the bottlenecks of availability of raw materials and infrastructure development. To bridge the gap of short supply of raw materials, duty on pulp and waste paper and wood logs/chips have been reduced. The capacity utilization of the industry is low at 60%. About 194 paper mills, particularly small mills, are sick and /or lying closed. Several policy measures have been initiated in recent years. Cost structure Main costs for a paper manufacturer are raw materials, power and fuel, and chemicals. Transportation and employee costs also account for a substantial part of total cost. Over the last few years, most input costs, especially raw material costs, have been on the rise, due to higher demand and lower availability. Going forward, with further growth in demand, CRISIL Research expects input costs to increase in the medium term.

Raw material Forecast Domestic manufactures use three types of raw materials in the manufacture of paper- forest products(wood and bamboo), agri-residues (bagasse, straw, cotton, etc.) and wastepaper (recycled paper). In 2006-07, wood accounted for 30 per cent of production, agri-residues for 32

per cent and domestic waste paper for 17 per cent. Imported wastepaper accounted for 15 per cent of production and imported pulp for 6 per cent. However, over the next 5 years, with production expected to increase at a CAGR of 6.7 per cent, demand for raw materials is also expected to increase correspondingly. However, domestic supply will not be able to keep pace with demand, and this will result in higher consumption of imported raw materials. As indicated by our research, imported raw materials will cater to around 27 per cent of the domestic production by 2011-12.

Raw Material (i) For Wood Based industry Revision of forest policy so that plantation can be raised by industry/Cooperatives of farmers/State Government. De-graded forest land to be made available to the industry for raising plantations. (ii) For Waste Paper based Industry Import of waste paper at minimum import duty. Introduction of eco labeling system where in products made from recycled fibre are rated higher than the products made from virgin fibre. Introduction of modern and effective collection and grading system. (iii) For Agro Based Industry Funds to be made available for technology upgradation for handling & processing of agro residue fibre, in small & medium scale industries.

Domestic paper industry The domestic paper industry is estimated at around 10 million tonnes yearly. Of this, the writing and paper segment accounts for 3.8 mt, the packaging grade paper segment is around 4.5 mt and the newsprint industry about 1.7 mt. The domestic yearly per capita consumption of paper is only 9.2 kg, much lower than many other developing economies. The figure in China and Indonesia is estimated at 42 kg and 23 kg, respectively. However, all segments of the industry are growing at eight to nine per cent or above.

Forecast: y y Growth in Indian paper industry is expected to accelerate. CRISINFAC estimates the growth at 7.6% in the next 5 years.

Branded copier, coated paper and duplex board segments will grow at a faster pace

GROWTH DRIVERS  Economic growth  Targeted growth of 12% for manufacturing sector  Increasing literacy rate  Increasing government spending on education  Population growth  Changing demographics  Higher urbanization (2.5% growth)

 Higher proportion of young adults  Increasing living standards  Demand for high quality magazines  Lifestyle changes & media growth  Increase in advertising and direct mailers

Growth Pangs

The increasing demand for paper brings with it new challenges of economies of scale, efficient usage of resources, need to develop and expand sustainable use of fibre, and value chain management, etc. Despite the fact that the Indian Paper Industry holds its importance to the national economy, unfortunately it stands fragmented. Paper sector is dominated by small and medium size units; number of mills of capacity 50000 tons per annum or more is not more than 25. Less than half a dozen mills account for almost 90% production of newsprint in the country. There is a growing need to modernize the Indian mills, improve productivity and build new capacities.

CAPACITY ADDITIONS Paper industry to witness large scale capacity additions over the next 3 years Around 2.5 million tones of capacity is expected to come on stream over the next 5 years, with most large and medium scale players adding capacities. The total capital expenditure is estimated at Rs 120-150 billion. CRISIL Research expects the total supply to grow at a CAGR of 6.5 per cent over the next 5 years. Although incremental demand is expected to absorb the growth in capacity over the medium term, capacity additions in the short term (3-4 years) are expected to be higher than the incremental production, resulting in an increase in supply. Medium term projections say that the demand will continue to be above supplies. Paperboard capacity addition announced 2 lac tpa, mostly in lower end recycled boards.

RATIO ANALYSIS
RETURN RATIOS On Net worth PBIT Net of P&E/Avg. net worth PAT/Avg. net worth 4.795429 1.255359 5.756688 3.062713 6.325320 3.613002 5.968650 3.169735 5.155530 2.327752 3.826939 1.091774 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

On Capital Employed PBIT employed PAT Net of P&E/Avg. capital employed Net of P&E/Avg. capital 2.544345 0.652654 3.240451 1.229887 3.55066 1.56969 3.237181 1.210630 2.590499 0.819515 1.848033 0.197190

On Total Assets PBIT Net of P&E/Avg. total assets PAT Net of P&E/Avg. total assets 1.455027 0.37323 1.856325 0.704553 2.12883 0.94112 1.999266 0.747678 1.646212 0.520786 1.185568 0.126503

No. of Cos.

210

215

215

211

197

179

PROFITABILITY RATIOS

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

On Total Income PBDTA/Total Income PBT/Total Income PAT/Total Income 7.9199454 3.1626675 1.8419719 11.416412 6.414481 4.5823446 12.225716 7.9640422 5.7508165 11.663947 7.5424792 5.4064627 9.8077821 5.1829559 4.0261344 8.5210786 3.3067573 2.0160567

On Sales PBDTA Net of P&E/Total Income Net of P&E PBT Net of P&E/Total Income Net of P&E PAT Net of P&E/Total Income Net of P&E 7.9760297 3.162524 1.8262188 10.289317 5.1951719 3.3292588 11.0991 6.7698333 4.5215044 10.269661 6.0642742 3.8847653 8.7368939 4.0398798 2.8650017 7.3698839 2.0759608 0.7655564

No. of Companies

210

215

215

211

197

179

Capital investments of the industry in the past few years The Indian paper industry is expected to attract Rs 10,000 crore investments in three to five years for setting up green field projects as well as capacity expansion of the existing plants Among others, ITC is setting up one large paper mill. Seshasayee is also almost doubling its paper production from the present 120,000 tonne per year to 250,000 tonne in three years with an investment of Rs 350 crore. Sree Sakthi Paper Mills, the Kochi based paper mill company is investing Rs. 180 million to expand its production capacity to 85,000 tpa. The company which produces Kraft paper for packaging and duplex board has two production units one at Chalakkudy and another in Edyar in Kerala. It has invested high speed pressure formers to improve the quality of duplex board. The expansion programme was completed by end of April 2010.

GROWTH OF THE INDUSTRY IN THE PAST YEARS Larger players may shift to use waste paper for raw material. Indian paper industry is struggling to get raw materials at effective price as there is no government policy to favour paper industry for forestation and also at importing pulp. Though quality of final product remained a concern till few years had been sorted out with advanced technology. Among the larger mills, TN Newsprint and Century Pulp and Paper already have recycled fibre. Internationally, recycled paper forms 30% of the component as raw materials.

OUTLOOK The demand for upstream market of paper products, like, tissue paper, tea bags, filter paper, light weight online coated paper, medical grade coated paper, etc., is growing up. These developments are expected to give fillip to the industry.

Indian paper industry needs the following for being globally more competitive. i. ii. iii. iv. v. Sustained availability of good quality of raw materials (forest based) and bulk import of waste paper to supplement the availability of raw materials. Adequate modernization of the manufacturing assets. Improvement of the infrastructure. Quality improvements and reduction in cost of production Import policy conducive for import of material, equipment, instruments, raw materials & technologies which are bearing of the quality and environment.

DEVELOPMENTAL CHALLENGES Enhancing Industrys competitiveness to face global competition Economies of scale De-fragmentation of industry Modernization of mills Building new capacities Meeting incremental demand of paper Productivity/quality improvement Creation of robust raw material base Environmental upgradation and green technologies Setting mechanism for collection, sorting, grading and utilisation of recyclable waste paper

y y y y y y y y y y

ISSUES AND CONCERNS

The Indian paper and paperboards industry has potential and also capabilities to service the growing demand in domestic and international market and also to create huge employment avenues in the rural-India through agro/production forestry and at mills, provided the competitiveness of the value chain is encouraged by the government. Wood: Indias wood resources are limited therefore, cost of wood is much higher in global comparison. Since there is conspicuous absence of Government enabling policies favouring industrial/production plantation, securing future wood supplies will be Industrys biggest challenge.

Bagasse/ Straw: Though annual availability of agro residues is large yet, this may not be able to sustain the future growth of the Industry, taking due account of quality of paper required, environmental issues involved, etc. Moreover, bagasse is increasingly used by sugar mills for cogeneration of power and no more easily available to the paper mills as raw material. Energy Cost: The Government of India has recently withdrawn core sector status hitherto enjoyed by the paper industry. Cost of coal is escalating and prospect of availability of quality coal is diminishing. The imported coal price had crossed USD 100/MT; such steep price rise had resulted in escalation of cost of production of those mills which happened to be dependent on imported coal for generation of steam/power. Also, power purchased from the grid is proving expensive for the industry.

Top line and bottom line of the industry


Paper, Newsprint & Paper Products
Rs. Crore (Non-Annualised) Sales Industrial sales Mar-05 13187.14 12781.04 Mar-06 14753.8 14514.61 Mar-07 16789.68 16611.05 Mar-08 18100.75 17816.51 Mar-09 19384.52 19087.43 Mar-10 19276.43 18940.42

PAT

248.34

697.53

992.22

1015.83

802.01

399.15

REFERENCES:
Industry data from PROWESS DATABASE

http://industrytracker.wordpress.com/2011/04/19/paper-industry/
http://economictimes.indiatimes.com/news/news-by-industry/indl-goods-/-svs/paper-/-wood-/-glass/plastic/-marbles/production-capacity-to-up-nearly-50-with-new-plant-jkpaper/articleshow/7932244.cms http://www.business-standard.com/india/news/indian-paper-industry-could-attract-rs-10000cr/398440/ http://www.ipma.co.in/paper_industry_overview.asp http://www.business-standard.com/india/news/indian-paper-industry-could-attract-rs-10000cr/398440/ http://paper.industry-focus.net/ http://www.economywatch.com/world-industries/paper/indian.html http://www.ipma.co.in/percentage_share.asp