India Ratings and Research (Ind-Ra) has maintained a negative-to-stable outlook on the paper industry for FY17 on the expectations of a limited improvement in the demand-supply environment and import risks. However, cost side pressures related to wood are likely to subside further.
Ind-Ra expects major sector companies to report a marginal improvement in revenue growth in FY17 to 7%-8% driven primarily by volume growth. This will be on the back of increasing demand from the education and corporate sectors, aided by higher GDP growth (estimated FY16: 7.4%; FY17: 7.9%). The domestic surplus created by past capacity additions in the writing & printing paper (WPP) is likely to be absorbed by FYE16 as reflected in the stabilisation of aggregate inventory levels of sector companies over FY14-1HFY16. Thus, pricing in the WPP segment could improve in FY17.
Import pressures are likely to continue in FY17 and would depend upon the extent of the devaluation of competing currencies mainly Chinese Renminbi, Thai Baht in relation to the rupee. An increase in import pressures could result in continued pricing pressures in both coated paper and uncoated paper segments. Imports grew significantly in the uncoated segment (in INR value terms) at 44.5% and 30.4% in FY14 and FY15, respectively. The coated segment has also continued to see around 15% yoy growth in imports. Continuation of anti-dumping duties in the US market for Asian countries could also increase import pressures delaying price recovery in the domestic market.
Cost pressures might subside for sector companies in FY17 with softening of wood prices. Paper mills' continuous efforts on farm forestry as well as higher wood prices have led to increased availability of wood in nearby areas, thereby reducing average wood procurement costs for mills.
The credit metrics of major players are likely to improve in FY17, driven by limited capex, and an improvement in capacity utilisation and profitability leading to improvement in cash flows and continued deleveraging. The sector is unlikely to witness any significant capacity additions or announcements in FY17 particularly in the WPP segment.
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