Board, kraft to be paper sector stars, says Crisil

The Indian paper industry can bank on steady growth in demand in the coming years despite pressure on prices from imports on writing and printing paper and newsprint.

According to Crisil, it expects the credit quality of domestic paper companies to remain stable over the short to medium term, barring any sizeable merger or acquisition activity.

The paper industry can boast of an improved price outlook for most product categories, the credit rating agency said. It also expected steady demand growth of around 5-6 per cent per annum.

At the same time, capacity addition in the sector was likely to be limited owing to a cutback in capital spending.

Crisil felt this was partly on account of environmental considerations. In Crisil's opinion, these factors would support a gradual improvement in the financial profile of companies.

The rating agency said limited capacity additions in recent years coupled with stable demand-growth of around 5-6 per cent per annum has narrowed down the demand-supply mismatch in the domestic paper industry.

Excess capacity had become a problem for the sector some years ago.

With production no longer in excess, paper prices witnessed a firm trend particularly of paper types known as creamwove and maplitho.

The prices of industrial grades of paper like duplex board and kraft have also been firm since April 2002.

The situation was however different in the case of writing and printing

paper segments including variants like coated paper.

This category was exposed to the international market and users were dependent on imports. Nearly a third of domestic demand was met from imports, partly on account of limited domestic capacity, said Crisil.

Prices were under pressure in this category right through 2002-03 owing to falling prices in global markets.

The newsprint segment was also closely linked to international markets and price trends. The government had also reduced the tariff on imports.

This segment of the paper industry has witnessed depressed domestic prices for over two years now owing to low international prices.

Sluggish North American demand was to blame for this. Crisil said it expected these trends to continue in the near future.

Crisil commented that the domestic medium and large sized companies were likely to expand through the cost effective brownfield route where capacity additions could be done at around Rs 25,000-50,000 per tonne.

In contrast, cost of expansion through the greenfield route would be around Rs 75,000-100,000 per tonne.

Lower expansion costs along with firm prices and stable demand would permit companies to fund future projects through a judicious debt:equity mix, Crisil concluded.

This would limit pressures on the financial profile of domestic paper companies, besides enabling them to sustain future price downturns, in keeping with the cyclical nature of the industry.