Resurgence of Paper Industry from Pandemic Blues as Packaging Sector Packs a Punch

The Indian paper industry appears to have erased the pandemic's worst blot, driving capacity utilization down from 99 percent to 77 percent between FY19 and FY21 and has begun scripting its resurgence to pre-pandemic levels.

Experts believe that the Indian virgin grade paper sector will remain near-full for the next three years due to limited capex in the W&P (writing and printing) paper segment and a healthy demand growth rate in the packaging board and tissue paper segments. Improving industry fundamentals will almost certainly result in better pricing discipline for the sector in the future.

Hikes in Price across All Product Categories

All of the mills' costs for coal, chemicals, and transportation have risen. Due to a scarcity of waste paper, the prices of recycled paper manufactured by grade B&C mills have risen significantly, much more than the hikes taken by Grade A mills.

Centrum Institutional Research discovered that wholesale prices of W&P paper have risen from Rs39-46 per kilogramme to Rs75-80 in the last year. Coated paper prices have increased by 40% to Rs 100 per kg, while craft paper and board prices have increased by 40% to Rs37-44 per kg over the same time period. Prices of newsprint paper, which is mostly made of recycled paper, have risen the most, rising from Rs37 a kilo to Rs85 a kilo.

The increase in demand and the inflationary trend has resulted in higher-than-normal demand at the distributor level. "The troika of demand normalization, higher levels of demand at channels, and favourable pricing has created a happy scenario for the likes of JK, West Coast, and Andhra Paper," Centrum Research said in a report. These factors may result in windfall profits for these companies in the coming quarters.

Paper Industry in India

The Indian paper industry is estimated to be around 20 metric tonnes per annum (MTPA), with carton boards and container boards (corrugated boards) accounting for the lion's share (55%) followed by writing and printing paper (25%) specialty paper (10%) and newsprint (5%). (10 percent).

Over the next five years, the industry is expected to grow at an annual rate of 8-9 percent, led by strong growth in packaging grades. Consumer packaging (40-50 percent of total paperboard volumes) is expected to grow at an 8.5-9.5 percent CAGR during the same period, driven by increased volumes in end-user segments such as household appliances, and FMCG products, ready-made garments, pharmaceuticals, and e-commerce.

Furthermore, the prohibition on single-use plastics is expected to increase the demand for paper-based alternatives.

Packaging Industry

According to industry sources, all major capacity expansions in the paper sector are planned for the packaging board segment, but the segment is likely to operate at nearly full capacity because it is growing at a healthy 10-12 percent rate and has seen a sharp increase in paperboard exports. Due to the high capital investment required to set up a new packaging board plant, only a few large players, such as ITC Ltd, JK Paper, and West Coast Paper Mills, are in a position to capitalize on the opportunity.

Revival of Demand Bodes Well for Packaging Industry

According to a CRISIL report, the paper packaging industry is expected to rebound with a strong revival in consumer spending now that the pandemic's impact has subsided to a large extent. It expects the industry to grow by 15% this fiscal year, after declining by 8% last year.

"A stronger-than-expected increase in e-commerce sales due to increased safety and hygiene consciousness, healthy double-digit growth in domestic pharmaceutical sales, and a revival in consumer durable sales are driving demand for packaging paper," according to a CRISIL report.

As a result, capacity utilization among paper packaging players is expected to rise to pre-pandemic levels, which, when combined with increased sales volume and 6-7 percent higher realizations, indicates that revenue growth will be healthy this fiscal.

Businesses are also expected to undertake capex programmes for capacity enhancement in FY23 and FY24 as market conditions improve.

Major Players

JK Paper recently increased its capacity through an inorganic acquisition of Sirpur Paper Mills' 136 KTPA (Kilo Tons per Annum) capacity, as well as the commissioning of a new 200 KTPA packaging board plant in January 2022. It now has a total capacity of 6.25 lakh MTPA for paper and board.

West Coast Paper increased its capacity in FY20 by acquiring Andhra Paper's 241 KTPA capacity. It currently has a capacity of 3.5 lakh MTPA.

ITC Ltd, a diversified conglomerate, is also a key player in the specialty paper and value-added paperboards markets. It is focusing heavily on providing sustainable packaging solutions to the exports market while maintaining its domestic market leadership.

It has a capacity of 9 lakh MTPA for paper/paper board and 4.5 lakh MTPA for pulp. In a recent media interview, Sanjiv Puri, Chairman and Managing Director of ITC Ltd, stated, "ITC is making significant investments in value-added segments, with a focus on sustainable packaging."

According to him, investments have been made in pulp import substitution at its Bhadrachalam unit, the development of a cost-competitive fibre chain, a sharper focus on operational efficiency through data analytics, and Industry 4.0 enabled margin expansion.

"Some new products have already been released, and others are in the planning stages." Puri stated, "We have developed a sustainable fibre value chain, which strengthens our competitiveness." The company is making concerted efforts to reduce plastic consumption across industries, including its in-house personal care, food, and hotel businesses.

ITC stated in its Q3FY22 earnings review that over 50 use cases were developed and implemented across various spheres of the business, allowing the paper & packaging business to increase margin by 230 basis points over the last two years.

In Q3FY22, ITC's paperboard, paper, and packaging division increased by 38.5 percent year on year to Rs 2,046 crore, while segment profits (before interest and tax) increased by 57% year on year to Rs 448 crore.

Paperboard volumes for ITC were at an all-time high in Q3FY22, thanks to a revival in demand across most end-user segments and exports. With its added value the paperboard segment experienced strong growth, aided by a higher realization, strategic capacity expansion, and strong export performance, while the packaging and printing businesses performed well both domestically and internationally.