India Ratings retain negative outlook on paper sector

India Ratings has retained negative outlook on the paper industry but with a "stable" bias for the next fiscal, citing an expected moderation in supply-side pressures and a gradual absorption of the overcapacity created during the past few years.
"Improved ability to hike prices, along with benefits from the recent capex, should help the sector in improving profitability amid moderating cost pressures leading to a rise in operating margins in FY15," India Ratings said today.
The agency has also revised the outlook on most of the rated paper manufacturers to stable for FY15 from negative, based on the completion of their capex programme in 2013 and the expected operational benefits from capex in FY15.

It expects the overall demand to grow 7-8 per cent in FY15 with some sub-segments such as those in the consumer-oriented sectors like FMCG, witnessing higher than the industry growth.
Noting that inventory levels have been stabilising in the industry, the agency said this had reduced demand-supply imbalance.
Its analysis of major sector players indicate that despite high capacity use, cumulative inventory levels grew at a meagre 2 per cent in FY13 against 31 per cent in FY12, and 14.7 per cent in FY11.

The agency also expects minimal capacity addition over the next two-three years as between FY12 and the first three quarters of FY14 has seen only new projects worth Rs 3,700 crore, which is almost one-seventh of the projects announced during FY07-FY11.

"With no significant capacity addition in the next few years and gradual absorption of past over-capacity, demand supply dynamics is likely to become favourable for paper manufactures," the report said.
The agency also said though companies are likely to log in better operating margins next fiscal, managing input costs will be the key to profitability.
While profitability has been hit due to rising domestic wood prices and forex losses due to rupee fall and the resultant higher outgoes on imports of raw material like pulp and coal, the report noted that paper companies in recent past have taken several steps to increase wood availability by focusing on farm forestry and importing wood to reduce dependence on domestic wood supplies.