Synopsis

India's writing and printing paper industry anticipates measured improvement this fiscal year. Operating margins are projected to expand significantly due to lower hardwood prices. Increased domestic hardwood availability offers relief on a key input cost. Demand is expected to remain steady, supported by education and banking sectors. Manufacturers are focusing on efficiency investments rather than capacity expansion.

Kolkata: India’s writing and printing (W&P) paper industry is set for measured improvement this fiscal, with operating margins expected to expand by around 150 basis points to 13.5%, driven largely by easing hardwood prices, according to Crisil Ratings. The rating agency said a post-pandemic plantation cycle is increasing domestic hardwood availability, providing relief on a key input cost even as digitisation keeps structural demand growth subdued.

An analysis of 13 W&P paper makers, accounting for around 70% of industry revenue, indicates that the margin improvement will be supported by lower wood costs and efficiency-led investments rather than pricing alone.

Also read: ADB approves USD 42.2 mln loan to boost bamboo industry in northeast region

“The margin story this fiscal is not being driven by pricing alone. A favourable hardwood cycle is the bigger swing factor,” said Shounak Chakravarty, Director, Crisil Ratings.

With plantation acreage added after the pandemic now entering harvest, domestic hardwood prices are expected to soften further after declining last fiscal. Wood accounts for around 50-55% of operating costs through its contribution to pulp costs. Increased supply at lower prices, coupled with tighter process controls, is therefore expected to lift operating margins to around 13.5% this fiscal from 12% last fiscal.

Realisations are also expected to improve by 2-3%, aided by higher landed costs of imported paper due to elevated freight rates and rupee depreciation. This should partly offset inflation in logistics, employee expenses and other fixed costs.

Demand, however, is likely to remain steady rather than buoyant. Education-related consumption, including demand from coaching institutes, along with usage by the banking and judiciary segments, is expected to support 3-4% volume growth. Rising digitisation, meanwhile, is likely to keep manufacturers cautious about large greenfield capacity additions over the medium term.

As a result, industry capex is expected to rise only marginally, by about 5% year-on-year to around Rs 2,500 crore this fiscal. Most investments are likely to focus on improving costs and yields rather than expanding capacity.

Also read: Paper industry seeks immediate anti-dumping duty on paperboard imports from Indonesia

Companies are expected to step up investments in backward integration into wood pulp, recovery and reuse of in-process chemicals, optimisation of ash and moisture levels, and greater adoption of renewable power. These measures are aimed at improving operating efficiency and strengthening resilience in a structurally low-growth market.

“Credit profiles of W&P paper players should remain stable because the industry’s improvement is cash-accrual led. Even with marginally higher efficiency capex, incremental borrowing is expected to be limited,” said Pallavi Singh, Associate Director, Crisil Ratings.

Crisil expects debt-to-Ebitda to improve to around 1.7 times this fiscal from 1.9 times last fiscal, while interest cover is expected to strengthen to 4.6 times from 4.2 times.

The key monitorables for the sector will be any reversal in paper realisations if import costs ease and any unexpected firmness in hardwood prices, which could limit the anticipated expansion in margins.