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Paper - Industrial
Introduction Contents
Industry Risk Score (IRS) reflects the impact of industry variables on
the cash flows and debt repayment ability of the companies in the
industry over 3-4 years. The risk score for an industry is arrived at, by
Executive summary 3
aggregating the scores assigned to the parameters relevant for the
industry. Background 4
The industry risk scores have been graded on a seven-point scale, Input-related risk 5
with 1 indicating high risk and 7 indicating low risk.
Extent of competition 6
Risk score Risk factors
6.01 - 7.00 Highly favourable Financial risk 6
4.51 - 6.00 Favourable
4.01 - 4.50 Marginally favourable Annexure 7
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Executive summary
Demand for industrial paper is expected to grow at a CAGR of about 7.5 per cent between 2015-16 and
2020-21, as compared to around 5 per cent CAGR over the past five years, as the economic activities pick
up gradually. The key input for industrial paper players is wastepaper. Domestic wastepaper meets about
65-70 per cent of wastepaper requirement and the remaining is met through imports. In 2016-17 we expect
international wastepaper prices to fall by around 6 per cent y-o-y, primarily on account of expected subdued
demand from countries like China following slower economic growth. This will result in moderate 50-150 bps
rise in profitability margins for the players. In 2017-18, while the international wastepaper prices are
expected to remain stable, domestic wastepaper prices are expected to witness an increase. Despite this,
margins are expected to remain stable owing to anticipated rise in realisations during the year following
strong demand in the domestic market.
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PAPER - INDUSTRIAL
Background
The industrial paper segment is highly fragmented as compared to the W&P paper segment. Industrial
paper can be sub-classified into tertiary packaging (kraft paper), consumer packaging (duplex/ recycled
boards - greyback and whiteback, and virgin boards - folding box board/ solid bleached board (FBB/SBB). In
2015-16, industrial paper demand constituted about 47 per cent of overall paper demand. Within industrial
paper, tertiary packaging paper (kraft paper) accounted for around 57 per cent, recycled boards accounted
for 32 per cent and virgin boards accounted for the remaining 11 per cent.
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Industry risk parameters
Demand - Supply
In 2016-17 and 2017-18, demand is expected to improve by about 7 per cent CAGR, primarily on account of
improvement in economic activity and rising demand for consumer goods. The growth would largely be driven
by revival in demand from key end-user industries such as FMCG, Retailing, consumer durables etc.
Moreover, rapidly rising penetration e-Commerce and organized retailing will further boost the demand over
the long term. On the supply front, growth in capacity addition will be slower than growth in demand, thereby
resulting into gradual improvement in operating rates from 77-78 currently to 82-83 till 2020-21.
Government policies
There are no direct government policies that influence the industrial paper market. Even as far as the duties
are concerned, there is no major impact as demand is largely met indigenously due to specific packaging
needs of customers and high level of customisation. Hence, government policies relating to import duties do
not affect the industrial paper segment to a large extent. The import duty on wastepaper under FTA
agreement for ASEAN countries remain zero.
The key input for industrial paper players is wastepaper. Domestic wastepaper meets about 65-70 per cent of
wastepaper requirement and 30-35 per cent is imported. This high proportion of Imports in raw material mix is
due to low recovery rates in India (less than 30 per cent as compared to about 65 per cent rate in developed
market), given its highly fragmented mechanism. Since India imports a high proportion of waste paper, prices
are subject to volatility in the international prices and currency exchange rates. In 2016, global waste paper
prices are expected to decline by about 2-7 per cent to average $190-$200 per tonne due to falling demand
from China. China, with about 36 per cent share, is the world's largest consumer of recovered paper (RCP)
and with import contributing to about 35-40 per cent.Sharp fall in global wastepaper prices will put pressure on
domestic waste paper prices, which are expected to fall by 2 per cent during the year.
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PAPER - INDUSTRIAL
Extent of Competition
The domestic paper industry is highly fragmented with more than 700 paper mills with a majority of them in
the paperboard segment.The top 10 players in this segment account for only approximately 15 per cent of
total volumes produced. However, some of these players operate in the high value added segments (such as
virgin boards and recycled boards), which are relatively consolidated and enjoy better pricing flexibility.
Smaller players, which account for majority of the production, usually operate in the kraft paper (tertiary
packaging) segment. This segment is highly fragmented and players are exposed to the changes in the
economic cycle.Imports do not account for a significant portion in this segment, as the level of customisation
is high and the orders placed do not justify the demand for foreign players to export.
Financial Risk
Paper - Industrial: Financial parameters
Select Financial
Unit Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
parameters
Rs
Aggregate turnover 11447 10846 13258 13919 14873 15346 18017
million
Operating profit margin Per cent 10.1 10.7 9.4 6.2 7.8 6.9 8
Return on capital
Per cent 12.3 12.8 10.9 6.5 8.5 6.1 9.5
employed
Net profit margin Per cent 3.2 4.5 3.5 0.2 1.3 0.7 0.9
Return on equity Per cent 10.9 13.2 11.2 0.6 4.8 2.4 3.8
Interest coverage ratio Times 3.3 3.8 3.9 2.5 3.1 3 2.6
Debt-equity ratio Times 1 0.8 1 1 1 1.2 1.2
Current ratio Times 1.5 1.4 1.6 1.4 1.4 1.3 1.3
Assets turnover ratio Times 1.4 1.3 1.5 1.5 1.6 1.5 1.3
Raw materials days Days 49 54 46 43 43 43 46
WIP holding days Days 3 3 3 3 4 3 3
Finished goods days Days 10 7 8 8 6 7 8
Debtors days Days 33 33 32 35 37 38 36
Creditors days Days 72 88 61 73 89 94 98
Nos. of companies No 5 5 5 5 5 5 5
Source: CRISIL Research
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Annexure
N R Agarwal Inds. Ltd.,Ruchira Papers Ltd.,Shree Ajit Pulp & Paper Ltd.,South India Paper Mills Ltd.,Star Paper Mills Ltd.
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PAPER - INDUSTRIAL
Market Position 20
Size Related Pricing Advantages 10
Industrial paper is fragmented with the top 15 players accounting for only 15 per cent of the
market. These players enjoy a certain level of pricing flexibility.
Proximity to Market 30
Players, having production facilities closer to the consuming hubs, have better access to
marketplace and cost advantage in terms of reduced freight cost and lead time. Accordingly,
majority of the consumption is local in nature (depending on variety required).
Financial Ability to Withstand Price Competition 35
Increase in raw material prices during phases of low demand tend to lower the profitability of
players as they are not able to pass-on the rise in costs further. The companies, which have
the ability to absorb prices, are at a lower risk of going out of business.
Product Range 25
The product range varies like kraft paper (esp. for industrial applications) and duplex paper
(mainly for consumer applications). Even within these categories, product range varies
significantly as per the quality (BF) which has different applications. The diversification across
product range helps to mitigate slowdown in a segment or application. For instance, ITC is
present across kraft, duplex
Source: CRISIL Research
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