India’s organised paper packaging is likely to sustain its growth momentum, with revenue printing 14-16% higher this fiscal after ~35% growth in fiscal 2022 (which, in turn, was on a low base created in fiscal 2021 by the impact of the first wave of the pandemic).

This growth, which will be volume driven, will push up utilisation levels of players to near-optimal levels, spurring capacity addition via de-bottlenecking and new plants.

Realisations may see only a nominal increase this fiscal with key input prices stabilising. This along with benefits of price hikes made last fiscal and higher operating leverage will drive up operating profitability 100-150 basis points (bps) on-year to ~17-18% in fiscal 2023. Better cash generation will support phased capacity addition plans, keeping credit profiles stable.

A CRISIL Ratings analysis covering 48 paper packaging companies with aggregate revenue of ~Rs 21,000 crore, or ~40% of the industry, indicates as much.

Paper packaging accounts for a dominating 55-60% of the paper sector’s capacity, followed by writing and printing paper (~25%), newsprint (~10%), and specialty paper and other segments. It comprises paperboard and kraft paper used in pharmaceutical, e-commerce, consumer durables, fast moving consumer goods, and apparel sectors.

Says Anuj Sethi, Senior Director, CRISIL Ratings, “Continued strong demand from the e-commerce, apparel and consumer durables segments, and the ban on single-use plastic will lead to a healthy volume growth of 10-12% this fiscal on the back of 25% notched up last fiscal. The ban on single-use plastic will have a stronger impact in certain product categories, primarily in food and beverages.”

Amid sustained healthy demand, utilisation is expected to rise past ~85% this fiscal compared with ~77% last fiscal. Companies are undertaking debottlenecking and productivity improvement measures to raise capacity in the short term. New plants will also follow, and overall industry capacity is seen rising ~10% by fiscal 2025.

The prices of the key raw material -domestic and imported wastepaper - have stabilised after peaking in March-April 2022 (refer to chart 1 in annexure). Domestic wastepaper prices rose from ~Rs 20,000 per tonne in March 2021 to Rs 28,000 in March 2022, but have since declined to ~Rs 21,000 in August 2022 with resumption in wastepaper collection activity. On the other hand, prices of imported pulp, a lesser-used raw material, have been continuously rising in the last three fiscals.

Says Aditya Jhaver, Director, CRISIL Ratings, “Three factors — stable wastepaper prices, higher realisations and better operating leverage — have offset impact of costlier power, fuel and freight. As a result, operating profitability of packaging players is expected to recover to the pre-pandemic level of 17-18% this fiscal. Healthy cash generation will ensure debt metrics remain comfortable, keeping credit profiles stable.”

We foresee interest cover of paper packaging companies in the CRISIL Ratings portfolio at ~10.3 times, and their ratio of debt to earnings before interest, tax, depreciation and amortisation at ~1 time this fiscal, compared with 10.6 times and ~1-1.1 time, respectively, last fiscal. Continued healthy prospects and cash generation along with phased capacity expansion will ensure debt metrics remain at comfortable levels over the medium term.

Inflationary headwinds and movement in the prices of key raw materials such as imported wastepaper and pulp, and currency will bear watching.