ICRA’s Post

Transcript

Welcome back yesterday's Tune into Halftime report. Well, one sector which is buzzing and has been buzzing off late as the paper space. Look at some of these stocks, JK paper, that stock is up 12%. There's Sasha type paper, West Coast paper, all of them surging anywhere between 4 1/2 to 12%. And this has been the trend that we've been seeing in the month of June as well. And that continues. For now, let's try and understand what's happening with the paper industry is the stock Tabarzin trade. Sri Kumar Krishnamurthy, senior vice president and Co group head, cockpit ratings at IQRA. Is joining us now. Mr. Krishnamurthy, thank you so much for joining us on CNBC TV 18. Well, you know, I was just going through 524 numbers or some of these paper names. They've not done so well. Even JK Paper has seen just 3 1/2 percent growth in their top line. What's happening with the paper industry? Do you think FY25 will be better than FY24? Is there a change in demand or is there, is it the pricing which is working in their favor? So thanks for having me. I'll I'll be wrong. Bit of a perspective in terms of what happened in the paper industry post COVID. Like everyone is aware that, you know, COVID has been, you know, tough period, most specifically for a sector like paper or the consumption obviously falls down. Of course, COVID, there has been a recovery here in the paper sector. We look at two subdivisions, like one is your printing and writing paper. The other one is the packaging setup, the printing and writing paper. Along with the new Sprint or roughly contributes around 1/3 of the overall demand, while the balance two third is largely represented by the broader packaging segment. Post COVID, the first sector within the paper industry to kind of bounce back is the packaging because of your increasing ecommerce sales, etc. But most specifically the kind of rebound that has happened in our post COVID was more pronounced starting with packaging, but then it followed with printing and writing. Paper as well as the education institutions and also the return to office culture as such, you know kind of a supported not only the volumes, even the pricing was quite favorable. I'm talking about a period like you know financially at 22 or so following that year while the volumes kind of stabilized, the realization still held high, you know it went in double digits and we did observe a all time high level of pricing. So that support that a significant growth on the top line for five. With three across the paper sector, including the packaging as well as the printing and writing coming to FY24, or more importantly, this was the period where we saw. Contraction in the pricing because of two three factors here to some extent the packaging sector is also influenced by the moment in raw material prices most specifically set up like you know craft. So as the room prices because of the global slowdown in consumption fell, it has its own demand supply unique patient through that resulted in a crash in the presence and also we did see good amount of increasing imports of paper into India which were coming at. Kind of an unfavorable pricing all these resulted in double digit reduction in the realizations for you know most of the paper sector while the volumes there either flat or you know, we saw low single digit growth for a few of the players. So that's why we observe in effect 24 across the industry, you know something like you know -3 to -5 percentage kind of growth for our sample set in the paper industry this includes. You know both printing as well as the paper segment this year FY25 what we see is that you know the prices should you know kind of stabilize and the volume growth should pick up as against the low single digit growth that we have seen on the volumes in FI 24. We expect you know the overall revenue to be roughly around 6 to 9 percentage in FY25 would be largely volume let driven now kind of growth while the. Prices will still remain at around the similar levels and will remain exposed to this vagaries of, you know, input price director. Alright, so let's talk about two things then that you spoke about. You said that this industry will grow 6 to 9% in volumes in FY25. What is your outlook or prognosis for the input costs for FY25? That's one. And secondly, you know, if you could break the six to nine percent growth down for us among the sectors of the paper industry, how much do you expect the printing guys to grow at? How much do you expect the craft paper to grow at? Alright, so here again the consumption is kind of, you know, quite varying. At a larger picture, we see that you know, the Papita usage, you know, is still very low, roughly around, you know, 15 to 16 K is as against the global standard of over 50K. So from a fundamental standpoint, you know, the capital usage remains low and will be supporting talking about PWP segment of the general generic demand and also the adoption of the policy initiative something like, you know, your new education policy will obviously support the demand for a packaging segment. We do see the. You know, the influence of the specialized and the kind of conventional packaging that we see in sectors like something like FMCG, healthcare, you know, and other pharma sectors, all these are kind of, you know, supporting the demand growth. While we we are expecting the volume growth to be higher for the packaging segment as compared to the yeah you know printing segment, largely the fact is that you know the trade activity is always will be supporting the growth over there. From our realization standpoint, while we say that it is likely to remain reinforce, this largely comes from the fact that you know the threat of imports is very much there. Between segments, one we'll have to see PWP segment has its own demand and demand supply, you know dynamics irrespective of the movement in prices to some extent the players have relatively higher organized to share and they are able to kind of command the premium, but when it comes to the packaging that kind of thing is not there. So it's largely influenced by the movement in prices. Here again should the global consumption improve, you know that's possibly one would see an improvement in the. Typical prices, but till that point of time, you know, we expect it to remain bits of youth. OK. Uh, two-part question here, Mr. Krishnamurthy Force, you spoke about draw material prizes as well and there have been some St. charter or channel checks that I would suggest. They said because of the raw material crisis, there were some pressure in FY24, but now maybe those things who could reverse. Can you give us a sense of how raw material prices are panning out right now? And with the new education policy and the demand improving, how much will capacity utilization go up from here on? Are we seeing more capacity addition in the industry itself? OK. Well from the capacity utilization standpoint to answer you first, you know what this is a substantial investments have happened most specifically in the packaging segment. This is just postpone it. Sizeable capacities are coming over there largely anticipating the sustenance of demand over a longer period of time. These capacities are currently getting absorbed. But unfortunately with the higher influx of imports, you know this capacity utilization was affected in 24. One would like to see from our channel check, what we understood was that close to 7 to 8 percentage of the sales is getting reinvested. You know, in the capacities either for upgradation of the technological requirements and also for other generic, you know, improvement in the demand. I know your first question, sorry. Yeah, that was on raw material prices. Yeah, on the raw material prices. So here, OK, here when we look at the cost structure, it is like either your wood pulp or the waste paper and the energy cost. So last year when I said the PWP realizations came down, writing paper realizations came down. Your present the other prices fell down by over 25 odd percentage. So still you know, to that extent of you know, catch up didn't happen this year. What we see is that the prices are kind of holding up. We would expect that you know the kind of activities to pick up and then go to support since it is also influenced with the global factors. It would be very difficult to comment on the movement in the RM prices on a long term basis, but at this point of time. Within the paper sector, we need to see what gets influenced significantly by the movement in the ARM prices. Once that segment is the craft paper because this is a highly relatively commoditized segment and generally remains exposed to the very sharp moment in RAM prices despite favorable demand, supply dynamics over there, one big factor that influences their margins etc, pressures which has kind of played out. OK. All right. Mr. Krishnamurthy, thank you so much for joining us today and making sense of what's happening in the paper industry. The stocks have been buzzing off late, so it's good to get some expert perspective as well. Thanks for.