India Ratings & Research (Ind-Ra) has maintained its outlook on
the paper industry at negative to stable driven by a
weaker-than-expected improvement in the demand supply environment and
elevated input costs. Ind-Ra expects overall sector demand to grow by
6%-8% in FY16 aided by a recovery in the overall economic environment
(GDP to grow 6.5% in FY16). However, certain segments such as copier
paper, speciality paper, paper board, could witness double digit growth
driven by higher demand for office supplies and a stronger growth in
consumer-oriented sectors such as FMCG.
Paper companies have seen inventory levels rise in FY14 and 1HFY15 which could be attributed to weaker domestic demand, addition of new paper-production capacity as well as pressures due to import. Ind-Ra expects that this would lead to short term pressures on pricing which had seen some stability in FY14. However, the pricing environment is likely to improve marginally in 2HFY16 as the demand-supply dynamic improves in the absence of large capacity addition and a gradual increase in demand.
The agency expects that EBITDA margins of these companies will improve only marginally, due to continued cost pressures and a supply overhang in 1HFY16. Paper companies have continued to suffer from rising input costs particularly in domestic wood prices. To add to their woes, rupee depreciation has also increased the cost of importing chemicals and pulp etc. That said, the import of wood chips and lower international pulp prices are likely to put a cap on the domestic wood prices, but are unlikely to relieve the cost pressures on the companies.
Ind-Ra expects rupee to stabilise at around INR63/USD by FYE16 and help paper companies withstand competitive pressures from import to an extent. However, after a decline in sector import in FY13, overall imports increased in FY14 and 1HFY15. In FY14, imports from Asian countries such as China and Indonesia increased 20% and 53% respectively. A muted demand environment globally could result in paper companies in Asia, particularly China, exporting surplus capacity to India, which could intensify the competitive pressure on the domestic paper industry.
Ind-Ra has maintained a stable outlook on most of its rated paper companies. Paper companies' financial profiles deteriorated on account of large capex programmes undertaken by them, coupled with pressure on operating profitability and has not improved up to Ind-Ra's expectations in FY15. However, with the completion of the capex cycle and a gradual absorption of the excess capacity, Ind-Ra expects the credit profiles of paper companies to improve in FY16. An improvement in the interest rate environment in FY16 is also likely to benefit these companies.
Outlook Sensitivities
Weak demand: The outlook may be revised to negative if weaker-than-expected increase in sector demand increases competition among the domestic paper companies.
Rise in input costs: Any significant rise in domestic wood prices or global pulp and coal prices could lead to the sector outlook being revised to negative.
Paper companies have seen inventory levels rise in FY14 and 1HFY15 which could be attributed to weaker domestic demand, addition of new paper-production capacity as well as pressures due to import. Ind-Ra expects that this would lead to short term pressures on pricing which had seen some stability in FY14. However, the pricing environment is likely to improve marginally in 2HFY16 as the demand-supply dynamic improves in the absence of large capacity addition and a gradual increase in demand.
The agency expects that EBITDA margins of these companies will improve only marginally, due to continued cost pressures and a supply overhang in 1HFY16. Paper companies have continued to suffer from rising input costs particularly in domestic wood prices. To add to their woes, rupee depreciation has also increased the cost of importing chemicals and pulp etc. That said, the import of wood chips and lower international pulp prices are likely to put a cap on the domestic wood prices, but are unlikely to relieve the cost pressures on the companies.
Ind-Ra expects rupee to stabilise at around INR63/USD by FYE16 and help paper companies withstand competitive pressures from import to an extent. However, after a decline in sector import in FY13, overall imports increased in FY14 and 1HFY15. In FY14, imports from Asian countries such as China and Indonesia increased 20% and 53% respectively. A muted demand environment globally could result in paper companies in Asia, particularly China, exporting surplus capacity to India, which could intensify the competitive pressure on the domestic paper industry.
Ind-Ra has maintained a stable outlook on most of its rated paper companies. Paper companies' financial profiles deteriorated on account of large capex programmes undertaken by them, coupled with pressure on operating profitability and has not improved up to Ind-Ra's expectations in FY15. However, with the completion of the capex cycle and a gradual absorption of the excess capacity, Ind-Ra expects the credit profiles of paper companies to improve in FY16. An improvement in the interest rate environment in FY16 is also likely to benefit these companies.
Outlook Sensitivities
Weak demand: The outlook may be revised to negative if weaker-than-expected increase in sector demand increases competition among the domestic paper companies.
Rise in input costs: Any significant rise in domestic wood prices or global pulp and coal prices could lead to the sector outlook being revised to negative.
