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The Covid-19 pandemic has deeply affected the paper packaging industry with a decline of 8% in 2020. The report stated, a bounce back of 15% can be seen this fiscal, if there is a revival in consumer's spending.
The overall operating profitability will see a boost with an improvement in capacity utilisation and operating leverage. “With continued high realisations and almost stable raw, a growth can be foreseen for paper packaging players. The industry might also commence capital expenditure for enhancing capacity by ten percent over fiscals 2023 and 2024. A gradual recovery in apparel sales will also aid in the revenue growth. Due to better accruals, there will be credit stability.” (This can be in quotes)
Anuj Sethi, senior director of CRISIL Ratings, said, “A stronger-than-anticipated growth in eCommerce sales due to increasing safety and hygiene consciousness, healthy double-digit growth in domestic pharmaceutical sales, and revival in consumer durable sales are driving demand for packaging paper. Consequently, capacity utilisation of paper packaging players is seen rising to over 80% this fiscal from 65-70%. Increased sales volume and 6-7% higher realisations mean revenue growth will be healthy this fiscal.”
Anuj Sethi of CRISIL Ratings
The paper packaging segment comprises paperboard and kraft paper used in packing of pharmaceutical, eCommerce goods, consumer durables, fast moving consumer goods and ready-made garments. Paper packaging segment dominates the domestic paper industry by 50-55%. Around 30% of the share is taken by writing and printing paper while newsprint holds 15%; the rest is taken by specialty paper and other segments.
It stated a lower growth in pharmaceutical sales and a blow in sales of apparel and consumer durables was seen. For the preceding five fiscals the paper-packaging companies had seen healthy compound annual growth of 7-8%.
It is expected that the operating profitability of the paper packaging segment will reach 17% in the pre-pandemic level as compared with 15.5% last fiscal.
“Taking cognisance of high utilisation levels, ~1 million tonnes, equivalent to 10% of current capacity, is expected to be added by the sector’s players over the next two fiscals, ensuring healthy growth momentum. The capex will be funded prudently through a mix of debt and healthy accruals, resulting in healthy debt metrics,” Tanvi Shah, associate director, CRISIL Ratings said. “We estimate interest cover at 6.5-7 times and the ratio of debt to earnings before interest, tax, depreciation and amortisation at ~two times in the next two fiscals, compared with five times and 2.5 times, respectively, last fiscal.”.
If and when the third wave occurs, it is unlikely to materially impact recovery for the packaging paper segment. However, movement in prices of key raw materials, such as imported waste paper, will bear watching.