Paper Industry Stocks - Sector Outlook From Investment Perspective

THE DOMESTIC paper industry, an underperformer till some time ago, is currently in the midst of a transformation, with improving operating efficiencies and a major capex binge. The industry has turned around in the past couple of years, as demand growth has started to outpace supply.

Paper sector stocks analysis - Investments perspectivesWith the rapid rise in demand for newsprint from the print media and for paperboard from the FMCG industry, domestic paper manufacturers are recording strong revenue growth, which is backed by improving margins. The increased focus on education by the government, an increase in the general level of literacy and continued demand from user industries will further add to the growth prospects of this sector.

The paper industry provides the basic input for most service sectors such as education, print media and packaging. With the rapid growth of the economy in the past few years, India is undergoing structural changes with greater urbanization, rise in disposable incomes leading to higher demand for high-end paper and hygiene paper products. As a result, there is a shift in demand from low-value paper products to the high-value segment. Further, a spurt in direct mailers and print media is creating an even greater demand for newsprint.

Buoyed by the growth prospects, companies in the paper industry are in the midst of massive capacity expansion. According to CMIE data, the value of all the projects, which have either been announced or are currently underimplementation, is around Rs 9,000 crore. Most of these are newsprint, writing and printing paper projects. A number of big players like Ballarpur Industries, Tamil Nadu Newsprints & Papers and West Coast Paper have announced capacity expansion plans. Ballarpur Industries, with an installed capacity of 4,80,000 tonnes, is undertaking expansion at a cost of Rs 1,600 crore over the next two years to increase paper capacity by 400,000 tonnes. Further, Tamil Nadu Newsprint and West Coast Paper are also expanding capacity at a cost of Rs 350 crore and Rs 1,100 crore, respectively, over the next two years. Most domestic paper companies are already operating at 80-90% of their capacities. Since demand is expected to remain robust, the expanded capacities are unlikely to lead to a glut situation in the industry.

Going forward, the long-term growth outlook for this sector remains positive. As per industry estimates, the domestic paper sector is expected to grow at 6.6%, which is higher than the growth rate globally. Demand is encouraging due to high consumption across segments, while the value-added segment is acting as the main driver of growth. However, the consumption growth in the rest of the world (excluding India and China) remains almost negligible, which means that Indian producers will have to continue competing with imports. The domestic paper industry has emerged as a growth sector, taking in its stride problems such as rising costs of raw materials and fuel, as well as the threat of imports. As the demand remains robust, expansion plans are likely to give companies economies of scale and volume-led growth in the coming quarters.