The paper and paperboard industry in India is facing several challenges.
Notwithstanding a fairly rapid increase in demand for paper across most major emergingmarkets there exists substantial global excess capacity in pulp as well as printing andwriting paper. There are several reasons for this. At 158 kg in the European Union 218 kgin Japan and 224 kg in North America the annual per capita consumption of paper in thedeveloped countries has more or less topped out. Moreover the rapid growth and ubiquitoususe of digitisation across businesses and consumers alike a trend that will onlyincrease over time augurs poorly for paper demand across such economies.
To be sure there is still a healthy growth potential in the use of paper acrossemerging markets. China for instance annually consumes only 75 kg of paper per capita.And India is barely at 10 kg per person. Such economies will rapidly increase their demandfor paper in the coming years as will those in Sub-Saharan Africa and in parts of LatinAmerica. Even so there is and will be significant excess capacity across the world.
The consequence of this is extreme competition. In their effort to earn revenues tocover at least some of the production costs global paper manufacturers are selling theiroutput across all faster growing markets often at prices that barely meet variable costs.India has been hit twice over. First with the USA imposing steep countervailing duties onChinese and Indonesian paper imports producers in China and Indonesia have sought outIndia to export their surplus. Second with the free trade agreement (FTA) between Indiaand the ASEAN customs duties on most paper and paperboard manufactures have beenprogressively reduced from a base rate of 10% to zero. And as per the FTA entered intowith South Korea there has been a steady reduction in basic customs duty which will bezero in the year 2017.
Not surprisingly therefore in the past five years imports of paper and paperboardshave risen at a compounded annual growth rate of 15% in value terms.
This flood of imports has significantly disrupted the dynamics and working conditionsof India's paper industry. All manufacturers are facing conditions of excess supply; andmost have had to post unsatisfactory financial results. Though your Company is betterplaced than many
both in terms of scale value added products and diversity of types of paper
it too has suffered. The results bear this out and I need to explain these insome detail. The numbers explained below are representative of our on-going businessesand do not account for losses due to discontinuation of Sabah Forest Industries (SFI).
For the 12-month period ending on 31 March 2016 (FY2016) net sales was ahealthy Rs. 4221 crore.
On that your Company's EBIDTA was Rs. 732 crore or a healthy 17.3% on netsales. The EBIT was Rs. 468 crore or 11.1% of net sales. Even in a highly competitivemilieu these were good numbers.
However the interest cost on funds that were earlier borrowed to moderniseplants and equipment to produce greater throughput of higher grades of value addedproducts has turned out to be too much to bear vis-a-vis your Company's operating profits.In FY2016 the interest burden alone was Rs. 463 crore.
Consequently PBT was Rs. 4.55 crore; and after adding other non-operatingincome and tax write-backs PAT was Rs. 36.6 crore.
In addition your Company has suffered in recent years from its acquisition of theSFI in Malaysia. Despite considerable efforts and significant investments SFI has notbeen able to generate sufficient returns. The reason is not to do with lack of operationalefficiencies. Instead it has to do with the unrealistically strong exchange rate of theringgit which has remained such for many years and makes SFI's wood pulp internationallyuncompetitive vis-a-vis other Asian and South East Asian players. This plus the fact thatpaper producers all over the world have access to enough freely available supply of hardwood pulp necessitated a careful re-look of the rationale for SFI.
Having done so your Company decided to consider SFI as a non-core asset and search forbuyers. A share-sale agreement was signed with Pandawa Sakti (Sabah) of Malaysia for saleof its entire equity stake of 98.08% in SFI subject to certain conditions. Unfortunatelythis deal has fallen through. We are looking for other prospective buyers.
In the meanwhile we have received a nonbinding offer from JK Paper for the purchase oftwo of your Company's plants Units Ashti and Ballarpur. This is in an early stageand matters are under consideration.
Proceeds from such sales when these occur will be used to substantially deleverageyour Company and streamline its finances.
The other difficult operation was the rayon grade pulp mill at Kamalapuram inTelangana. High costs and poor rayon grade pulp prices have led to the plant not producingany output in the last two years. To make the unit viable your Company represented to theState Government for certain subsidies to restart manufacturing. Our proposals wereconsidered favourably by Government of Telangana which has issued an order to release Rs.9 crore per annum as power subsidy for seven years and Rs. 21 crore per annum as subsidyon wood for five years. A Memorandum of Understanding is being finalised between yourCompany and the Government of Telangana.
Your Company's other manufacturing operations continue to perform well.
Across many categories of paper it continues to hold the pole position of thesignificant market leader. Its products are well accepted everywhere. Its operatingefficiencies are among the best in the industry. And it has a farm forestry programme thatis second to none. Simply put it is one of the best organisations if not the best in the paper business in India.
The only overhang is the debts that have been incurred for large scale modernising andupgrading of plants and equipment. Once this is brought down to manageable levels yourCompany will again earn decent net profits and reward its shareholders. We are makingserious efforts at reducing the debt to become a more asset- and debt- light enterprisein FY2017 and thereafter.
When it happens I am sure you will see better results. BILT is a great name in theworld of paper. It will remain so with profits for its shareholders.
Thanks for your support.