Operating margin of writing and printing (W&P) paper manufacturers is set to contract 400-500 basis points (bps) to 15-16% this fiscal - following a similar correction last fiscal from the unusually high level of fiscal 2023 - driven by costlier hardwood and softwood (key inputs to make pulp, the primary raw material) and softening realisations.

Further, revenue is projected to decline 2-3% this fiscal (on-year) - after a price-led decrease of 6-7% last fiscal - largely reined in by subdued realisations.

Volume is expected to grow a tepid 2-4% this fiscal owing to the continued shift towards digital communication, partly offset by the government’s focus on expenditure in the education sector and increased work from office.

Says Gautam Shahi, Director, Crisil Ratings, “On the profitability front, two factors will drive the compression this fiscal. One, W&P paper realisation will continue to correct from the abnormal highs of fiscal 2023, driven by low-cost imports from China and East Asia¹ amid modest demand, resulting in a decline of 5-7% in W&P prices. Two, domestic wood costs will continue to surge due to increased demand from competing wood-based industries and reduced wood output caused by lower plantation during the pandemic², while imported wood prices are expected to rise 18-20% due to international supply disruptions.”That said, the credit profiles of W&P paper makers will be able to withstand the cyclical downturn, supported by deleveraged balance sheets and moderate capital expenditure (capex).

Players will focus on routine modernisation this fiscal, rather than large-scale projects, which will preclude a surge in debt.

A Crisil Ratings analysis of 11 paper makers, accounting for a substantial portion of the organised W&P paper market, indicates as much.

Says Pranav Shandil, Associate Director, Crisil Ratings, “While a decline in operating profits will cause a slight moderation in debt metrics of W&P paper manufacturers this fiscal, they will still remain healthy due to deleveraged balance sheets and modest debt-funded capex. The ratio of debt to Ebitda (earnings before interest, tax, depreciation and amortisation) and interest cover of assessed paper makers are expected at 1.7-1.8 times and 5-5.5 times, respectively, this fiscal, compared with 1.1 times and 7.8 times, respectively, last fiscal, and will recover next fiscal.”

Operating margin is poised to recover 300-400 bps to 18-19% next fiscal, as increased plantations over the past two years will improve supply and, consequently, drive down domestic wood prices.

Meanwhile, revenue will grow a modest 2-3% amid stable paper prices, driven by moderate demand-led volume growth.

In this milieu, the pace of imports and any adverse movement in input prices, which can alter consumption patterns, will bear watching.

¹ 5-10% and 25-30% of India’s uncoated and coated paper demand, respectively, is met through imports
² Gestation period for a sapling to tree (suitable for pulp production) is 3-3.5 years