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April 02, 2019 location Mumbai

Credit quality of writing and printing paper makers to sustain despite large capacity additions

Firm realisations and rising demand to mitigate impact of capex debt

Writing and printing paper (WPP) capacity in India is set to increase by 15% -- or by one million tonne to 6.5 million tonne – by fiscal 2022, which would involve an expenditure of Rs 7,000 crore.


But these mostly debt-driven expansions will not affect the credit profiles of manufacturers because of healthy cash flows emanating from higher WPP prices.


Prices for creamwove paper, which accounts for ~40% of WPP demand, have risen around 12% in the past two years to about Rs 63,000 per tonne. Prices for other varieties, such as maplitho (at Rs 70,000 per tonne), are also close to 3-year highs. Improved WPP prices to largely sustain because of an enduring demand-supply gap


Demand for WPP will grow 100 basis points (bps) faster over the next five fiscals – compared with the ~3% compound annual growth rate seen in the past five – as urbanisation and income levels improve.


Consequently, large WPP makers1 (accounting for ~30% of domestic capacity) would continue to operate at over 90% capacity utilisation.


Says Anuj Sethi, Senior Director, CRISIL Ltd, “The good times for domestic WPP players, which started in fiscal 2018 and was marked by improved profitability and cash flows, are set to continue over the next 2-3 years. In fiscal 2019, WPP prices surged to record highs as demand tightly matched supply, and pulp prices rose amid a ban on waste paper by China. That, along with steady demand will help WPP manufacturers maintain healthy cash flows over the next 2-3 years. There is now a fair case for capacity expansion.”


New WPP capacities could take 2-3 years to come on stream, with environmental approvals alone taking around a year. This will enable sustained healthy utilisation levels in existing capacities, while new ones should ramp quickly as they are commissioned over the next three fiscals. That’s because imports are unlikely to be more than 10-12% of domestic consumption, unless trade protection measures invoked are relaxed.


Given the favourable demand-supply dynamics, large integrated WPP players with access to captive raw material sources, including wood and non-conventional material, should be able to maintain their current operating profitability of 16-20% over the medium term. Operating profitability has risen over 400 basis points (bps) in the past 18 months driven by higher prices. However, non-integrated players will remain partially exposed to forex and input price volatility.


For the sample set of large companies1, the ratio of debt to earnings before interest, tax, depreciation and amortisation improved sharply to about 2 times as of March 2018, from about 7.5 times four years earlier.


“Sweating capacities and higher cash flows have enabled WPP makers to deleverage in the recent past,” said Aparna Kirubakaran, Associate Director, CRISIL Ratings. “Healthy cash generation and steady demand will help absorb the proposed capacity expansions without any impact on Debt/EBITDA levels. This lends stability to credit profiles in the sector.


1 Companies considered include JK Paper Ltd, Tamilnadu Newsprint and Papers Ltd, International Paper APPM Ltd, West Coast Paper Mills Ltd, and Seshasayee Paper and Boards Ltd.


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