THE PAPER PRODUCTS LIMITED
ANNUAL REPORT 2008
MESSAGE FROM THE MANAGING DIRECTOR & CEO
The global financial crisis, and, the consequent credit crunch and sharp
slow down in India's economic growth is well known. Our own business
experienced a series of completely unexpected events through 2008 making
our environment unusually turbulent and uncertain at the time. How did we
perform and how did these events impact 2008 Net External Sales revenues
grew 15% to Rs.6121 mn, Cash flow at Rs.650 mn was good, and debt equity
ratio strengthened to an even more solid 0.2:1 from 0.27:1 at end 2007.
However, PBT dropped by 12% to Rs.298 mn and EPS dropped to Rs.3.4 from
Rs.4.53 the previous year. So, in adverse circumstances where cash became
very scarce in the economy, we acted to make our finances even stronger,
and, achieved reasonable sales growth. However, bottom line was
stillimpacted. Why? We look at three unexpected events
1. Foreign exchange loss in 2008 of Rs.132 mn. We had hedged a substantial
portion of forecasted 2008 foreign currency inflows from export sales. This
decision was taken after steep appreciation in the Rupee in 2007 hit
margins on export sales, and after recognizing a consensus amongst experts
on further appreciation in the Rupee. Completely unexpectedly, the Rupee
actually depreciated by over 25%. However, to be competitive our export
sales prices had to be adjusted partially in line with the Rupee
depreciation. The consequent forex loss of Rs.132 mn included a book loss
of Rs.40 mn from mark to market valuation. We have learned from these
experiences and have a new forex strategy going forward.
2. Sudden surge in raw material prices, more than anticipated. In line with
the global surge in crude oil, petrochemicals and general commodities, by
mid-year some key raw materials jumped 40% in price while the average for
raw material inflation was near 20%. Consequently, in Q3 our value added
margins reduced by 2.5% compared with the first half of the year, impacting
PET in Q3 by an estimated Rs.41 mn, and with some carry over impact into Q4
3. Sales drop in Q4 as the credit crisis caused major inventory reductions
at all points in the supply chain from consumer goods manufacturer to
retailer. Till Q3, i.e. for the first 9 months of the year our sales grew
in line with our internal expectations of over 20% growth. However, Q4
sales were flat compared to previous year but were sequentially 130/ lower
than Q3 of 2008.
There was much more to the picture in 2008. We faced steep inflation in
operating costs driven by cost hikes in power, fuel, services, and salaries
& wages due to general high inflation. The overall turbulence described
earlier created anxieties and pressures amongst business partners e.g.
customers became much more demanding on price and service. Through this
period, we increased focus on cost efficiency and business excellence
programs mentioned last year including the Six Sigma initiative. As a
resultant, in 2008 we reduced our total operating expenses in the P&L by
1.1 % of sales. We pushed on innovation and our NASP (New Applications,
Structures, Products and Processes) program, and 29% of 2008 sales were
from NASP products. Cash Flow was a priority with reductions in Inventory
and Debtors by 8-9% achieved compared to previous year.
The circumstances demanded a tight control on capital expenditure to
essentials. Still, with an eye to the future we kept work going on the
Thana Plant reconstruction, with start-up beginning in phases from end
2008; and, on the company wide ERP project planned to go live in Q3 2009.
The company has a sound tradition of upholding in its actions the highest
standards of Corporate Governance. Still, we believe there is always room
for improvement, hence work continued in 2008 towards strengthening
We go forward into 2009 with care and confidence. On the one hand, the
economic environment is clearly uncertain and we have poor visibility.
However, there are positives. The Indian economy will grow, albeit at a
slower pace in the short to mid term. And, the Indian consumer's
aspirations will not be denied. There is enough anecdotal evidence that
demand for the products we package is growing, and, we are increasing the
product range steadily. The inventory correction leading to the drop in
sales momentum in Q4 of 2008 has carried over to the start of 2009, but
this is inevitably short term and should play itself out within the first
quarter of the year. And, looking at opportunities outside of India, our
exports grew 18% in US$ terms in 2008 and we can look forward to building
on this in 2009. Actions being taken within the Flexibles Global business
of Huhtamaki group to obtain increased global synergies will support the
company's export efforts, and also, innovation efforts in products and
The uncertain times need us even more to satisfy our customers through
competitiveness, reliable service and innovation. We need to continue
expanding our product applications and customer base, improving our cost
efficiency and conserving cash. 2009 will see us working under an overall
guideline formula of focus on 3Cs + 2Cs:
'Customer, Cost, Cash, backed y, Creativity and Cohesiveness'.
A key objective is for the people of PPL to become a thoroughly competent,
lean and cohesive team, which is positive, human, creative and fast moving
capable of overcoming any adversities with efficiency and effectiveness.
And, for the company to be fully 'mission ready' to exploit growth
opportunities as they will irmevitably present themselves. We look forward
to meeting the challenges and the opportunities.
I take this opportunity to warmly thank our People, our Shareholders,
Customers, Suppliers, Business Associates, our Board of Directors, and our
Huhtamaki group colleagues for their efforts, kind support and
Managing Director & CEO
The Paper Products Ltd., India.