PAPER INDUSTRY

1: During 2011 to 2016, the Indian paper industry witnessed a CAGR of almost 8
per cent, as against the growth of one per cent for the global paper industry. India’s
paper industry contributes about 3 per cent of the world's production of paper.
2: The paper industry is divided into four different segments, viz. printing & writing
(P&W), packaging paper & board, specialty papers & others, and newsprint. According
to Indian Paper Mills Association (IPMA) estimates, the industry provides employment
to over 5 lakh people across approximately 750 paper mills.
3: Paper industry is capital intensive due to the high cost of investment in land and
machinery for paper mills, repairs and maintenance of mills, cost of upgrading
technology, cost of environmental compliance, growing wood plantations and
establishing a distribution network. All these factors make paper manufacturing a
highly capital-intensive industry LAST BUT NOT THE LEAST IS CYCLICAL IN
NATURE.
4: Top 5 players account for 12 per cent of the market, whereas in other markets
such as USA, China and Indonesia, the top three players account for market share of
68 per cent, 21 per cent and 72 per cent, respectively. Also, the introduction of GST
would lead to surge in costs for the unorganised and tax-evading players.
5: Earlier, the unorganised players used to have an edge over the organised
players due to the tax evasion, which will be longer available under the GST era. This
provides huge opportunity for organised and incumbent big players to gain market
share from the unorganised and smaller players. The demand for packaging paper
and board segment is expected to grow at a CAGR of 8.9 per cent and reach 11.4
million tonnes in FY20. The demand is expected to grow from industries like FMCG,
food and beverage, pharmaceutical, and textiles among others. There is a growing
trend of paper consumption owing to increased urbanisation, requirement of better
quality packaging for FMCG products marketed through organised retail and
increasing preference for ready-to-eat foods.

6: Notably, recent plastic ban by the Maharashtra government would be yet

another catalyst for paper industry as industries which use plastic will move to
alternatives. There are almost 20 states that have completely banned use of plastic,
which provides the demand trigger for alternatives such as paper. The per capita
consumption of paper in India stands at about 13 kg, which is far below compared to
other developed and developing nations and the global average of 57 kg and the Asian
average of 40 kg.

RISKS

India is a wood deficient country where the demand is 11 million tons for pulp and the
supply is 9 million tons, The demand will increase to 15 million tons by 2024-25.
Increasing digital trend may affect in long run, also the govt intervention is very high.

VERDICT:
Going forward, paper consumption is expected to grow over 50 per cent to 20 million
tonnes by 2020 and to 23.5 million tonnes by 2024-25. Looking from demand
perspective, the country’s current per capita consumption of 13 kg is far lower than
other developed and developing nations. Every one kg incremental per capita
consumption results in additional demand of more than one million tonnes a year. This
provides huge potential for paper industry to grow steadily in the years to come. During
2017-18, capacities of almost 3 lakh tonnes per annum were shut down in China due
to lack of environmental compliance. Indian manufacturers using waste paper stand
to benefit because of lower global waste paper prices due to excess availability. When
the markets are witnessing deterioration in paper consumption amid extensive use of
digital platform, the other growing industry such as e-commerce is likely act as cushion
for paper industry as it is likely to fuel growth of packaging paper and board segment.
Additionally, the increasing consumerism and literacy will also provide support to the
paper industry.

OUR PICK

Our pick is in the kraft and industrial packaging section: GENUS PAPERS. The stock
has already delivered 1 bag return in past 1 year, still a lot of steam is left due to
consistent increase in PAT and EPS. The stock has corrected more than 30% from
the recent highs. The Fair value as per DCF and BEN Graham Valuation method is
14.25/-. Stock is available at cheap as per valuations, method. The company is a
leading player in the sub-sector and is growing @ CAGR of 14.2% where as whole
industry grew @ 9.2%. One can enter at CMP or add below 12/- for the immediate
TGT of 14.25 as per TTM P/E.