At the outset IPPTA organized its annual seminar in Kolkata, where distinguished members of the industry participated, discussed and everyone put forward their point of view about the industry, its challenges & opportunities and how can we overcome them.
On his way of starting the proceedings as a moderator he gave a small example about 2 schools of thought and how they perceive India as a market. Recently he saw a headline in one of the business dailies that Indian economy is crawling with a GDP growth rate of 6.1%, which is the lowest ever in almost 3 years and was a point of concern. On the other side it was written that USD 12 billion of FII investments came to India in first 2 months of 2012. Stating this he said, “what is the point of contradiction? On one side everyone in India is worried that the GDP growth rate is rated down to 6.1%. And, on the other hand people sitting outside India are investing billions of dollars here. These people are pure analysts and they don’t go by market sentiments. They feel India is a great opportunity and their perspective is long term when it comes to investments. And sitting here we are having a gloomy picture of 6.1% growth rate and panicking.”
As far as paper industry is concerned the drops are sharp with profits going down. But, at the same time investments are happening. The per capita consumption of paper in India as compared to the other countries presents a huge potential. And, going forward the growth rate of India would probably be the highest in the world. Now, given everything else depends upon what we do as an industry to keep ourselves growing. The ball is entirely in our court, if here is the market which is growing fast then it is for us to control cost and make good quality of paper at affordable price.
In my opinion the biggest challenge faced by the industry is how to make money and grow. In the current scenario our input cost is rising and selling prices are under pressure. As an economy we are now integrated with the world so there is no differentiation between the domestic or international market. Ultimately we have to become a seamless market.
Looking at the pie of paper making cost the lion share of 35 to 40% is of raw material, followed by energy, which is 25 to 30% and the balance is accounted for some packing, chemicals, manpower, metals etc. In the last 2-3 years, the raw material and energy cost have been growing at an average growth rate of 10% and 20% respectively. In comparison to the total variable cost of paper making that is growing at a CAGR of 10%, the selling price has risen only by 3% in last 3-4 years. This resulted in the decrease of EBITDA margins for the industry from 30% to 20% for integrated producers and non integrated producers are nowhere in the game now.
Another weakness in the paper industry today is the economies of scale. You can count the number of paper machines in India which are of a medium size of 150,000 tons or more. In fact in global context, whatever largest machines we have in the country is of medium size as compared to them. In India we are still bogged down by small scale equipments and the biggest problem with the small equipment is that you use the same number of manpower in 500 ton mill as you use in a million ton mill.
To give you a small example of economies of scale sometime back I visited the APRIL’s Rizhao mill in china, which is a million ton pulp mill. For making pulp they are buying chips from outside and their cost of chips is USD 400 to produce a ton of pulp and they are happily selling pulp at USD 550 and making money. Their conversion cost from chips to pulp is USD 100. But if we look in India we have raw material cost of USD 200 and on top of that our conversion cost will be at least USD 200 to 250. So this is where the economies of scale make difference in the overall cost of production.
Another major challenge in India is the cost of funds, and that is the reason we are not able to invest in technology and compete with china. Today our cost of funds is 10-12% which goes as high as 14%. If we calculate equity cost in the capital turnover ratio for an integrated mill stand out to be 0.6, which means if we invest 100 crore in a plant in paper making, our turnover will be only 60 crores. And, coupled with that, the EBITDA margins of 20%, the ROI turns out to be 12%. So how do you justify an investment where cost of capital is 14% and return of just 12%. This is where our suppliers have to play a pivotal role and understand how the cost of equipments can be brought down.
The biggest challenge that becomes the major constraints on our growth path is the availability of fibre. Every year 60,000 hectares of area is planted by the mills but this is not enough as it hardly covers only 40-50% of the wood requirement. So I think the industry at some point of time has to go off shore. We have to integrate the raw material production outside the country and paper production inside. This is a challenge for us but also an opportunity. The other countries like China and Japan have done this way in the past, as they don’t have raw material availability in the country. The industry has to look upon it seriously so as to put up the pulp mill where the trees are and a paper machine where the market is.
Now looking at the opportunities, India is a growing market. The GDP is expected to grow at a rate of 6.9% despite of the last quarter low GDP of 6.1%. Paper being heavily linked with GDP of the country is expected to grow at the same rate and industry is likely to double its capacity from 10 million tons to 20 million tons by the end of this decade. We are a country of 1.2 billion people so every increase of 1 kg in per capita consumption would mean a demand of 1.2 million tons per year coming up. I think we have the only way to go and that is upwards.
Indian printing industry being fragmented presents both challenge and opportunity to service this market. Having varied needs this become the deterrent for the import to come in and at the same time it is an opportunity for us to serve and en-cash these markets by providing good quality, better sizes and serving the remote printing presses and get premium as compared to imports. Another opportunity which is coming towards us is the substitution of paper in place of plastics for instance the supreme court ruling on gutkha packaging has opened up the big space for us. Industry need to extend this to other products like pharma, FMCG, cosmetics etc. and has to take the lead in developing new and innovative products to replace the plastics and at the same time giving good margins.
I am a great believer in the Indian growth story and these minor hiccups that we have are self inflicted. Although we are not insulated from the rest of the world but ours is the economy that is based on internal consumption rather than exports like China, which is largely dependent on overseas market.
India is on the threshold of major leap going forward. And, I don’t think unless we mess it ourselves there is anything that can stop India growing. Not too long ago, we use to talk about Indian consumption being 6 or 7 kg per person but today we stand for about 10 kg. This is due to growth in all the sectors like education, packaging, newspaper etc. For instance when Orient put up its tissue plant of 10,000 tons capacity we use to wonder where we would sell this capacity because Indian market at that time was not more than 5,000 tons. But today tissue in India is a healthy is 60,000 or 70,000 tons market and continues to grow. Similarly paperboard, writing & printing and newsprint are also bound to grow.
The challenges before us is that how can we grow profitably on a sustainable basis with our own local manufacturing. The pressure of rising cost of production which continue to go up and probably will rise further and we are restrained to increase our prices beyond certain limit. Because in an integrated market if you raise your prices too high then imports will take away the pie so you are also restricted by what you can do in the market place. Every investor who puts his money wants to know what return he will get. People talk about the threshold of at least 18% IRR and if you are very pushy may be 15% is acceptable. The question is can paper makers produce that kind of IRR to be able to sustain larger investment.
We talk about modernizations, new investment, capacity expansions but to do all these we need to tackle the constraint of raw material. Industry is doing scattered plantation through farm forestry on the marginal land of 5 acres or 10 acres. The cost of collecting the harvested pulp wood and transporting to your own place increase the logistics cost. From the past 15 years we have been trying to get degraded forestlands from the government but there is no response. Other issues like increasing cost of energy have to be looked upon in order to minimize the cost. Paper industry is not known to be a wealth creator that is why paper companies are traded at much lower PE than many other industries. Industry collectively has to find the answers of how can we do these modernization at optimum cost,what technical innovations can be brought in so the investment on the machines is lower and what steps can we take to tune our existing facilities so the returns can be justified.
The results of the last 9 months drop of the paper industry are attributable to what we did in last 3 years, which was the sign of industry doing extremely good both in terms of volume growth and general profitable level which resulted in almost indiscriminate expansions taking place. Today market condition are not bad, because of the demand going down or not expanding as per as the expectations but because of the oversupply situation which has happed in last 3 years.
Being into writing & printing sector my parameters of comment would be on this sector only. We almost added 1.5 million tons of capacity during last 3 years against, the base of 2.5 to 3 million tons, which is a massive expansion considering an average demand growth of 6-8%. This created a short-term mismatch between the demand and supply. And on top of that the sharp increase in energy prices has an immediate impact on the bottom line of the companies. But I am one of those optimists who feel that paper industry would grow over 7-8% in this decade. The growth drivers are intact and nothing has changed. Internationally we are one of the fastest growing economies in the world.
On our course to the growth path we have to invest in the technological innovations irrespective of the sizes and scale of operations. I believe that in the near future the small and medium size mills are here to stay because of geographical diversification of the market and the vast panorama of different customer groups. The machinery suppliers will have to cater them by scaling down sizes of equipment and affordability. So, these mills could take the advantage of the new technological developments. Unless you bring in the technology, you don’t know what advantages does this technology is going to bring. Your estimates will only be evaluated once you bring in the technology and then you realize that economic advantage is much higher then what you have thought while planning to install that technology.
On the sustainability aspect, the days have gone by when we were able to manage the local administration. But, today the society and the environment around us will not permit us to operate in the condition where minimum requirements are not being complied.
Being in the agro based industry I believe that availability of fibre will be a challenge where the external interventions like government or society does not bring in additional fiber. Availability of bagasse has shrunk because of the development of alternative usages like renewable energy. In case of wheat straw the collections system has to be made better in order to tackle the challenge.
In my view there are opportu-nities in all the segments of the paper industry for instance writing & printing, newsprint and packaging are growing at the rate of 7-8%, while copier paper is growing at 15%. Total demand of newsprint in our country is 2.2 million tons and 50% of this is met through imports and rest is produced indigen-ously. In spite of conti-nuous reduction in the size of newspaper in last 10-15 years, the annual growth in this segment is around at 8-10% pa. There is a ready market of 50% for the Indian manufacturers to serve and accordingly we can plan our expansions. And, if we have to replace imports we have to produce good quality paper.
For producing good quality newsprint availability of the waste paper is the challenge. Waste paper collection system in our country is not good. Because of some cultural problems in our country, we are not able to increase the specific collection systems. That’s why we have to partly depend on imports. Above all we have to develop quality manpower and for that we have to improve our image so that new talent can be attracted to the industry.
India and China are the main topics of discussion at every forum whether in India or outside. India is known to be the fastest growing economy in the world today compared with growth of other countries. So it is a very optimistic situation. Overall paper is growing at 6-7%, in which packaging sector is growing in double digits 10-14%, which is much better than other countries. I don’t endorse that problems like raw material, energy, water conversation are not there but I am sure with the efforts we are taking, we will overcome them. The challenges that were in the past I have not seen them being eliminated rather new additions are being made. Trees are being cut but instead more trees are also planted. In fact ours is one of the industries, which is most friendly to the environment. We need to tell this story to the people that we are doing right and in a correct way. Today remedies are available and we have to challenge the situations. We should not waste what we have rather take measures to conserve it. Being a supplier we depend on the paper industry and we try to develop solutions according to the conditions like when the bagasse was used as a raw material there was run-ability problem. To counter that we changed our machine configurations, this helped the industry to run the plant by using bagasse. We should come out of the fear zone and think out of the box and master those challenges.
I would like to start my views by clearing the myth which paper industry believes that the chemical suppliers have big fat bottom line. It’s a wrong perception we as suppliers also feel the pain of the industry. Being a part of the industry we are here for the partnership and to see the industry gaining. Nevertheless the challenges are there but we need to find out how new opportunities can come to us. I remember some 10 years back during our international or regional meets whenever a presentation on India used to come people try to skip it because they don’t find those figure critical for their strategy. But now the table has turned and India is now the most looked upon market in the world.
India’s GDP is growing at 6-7% which is the highest compared to the world’s average of 2% and Asia average of 4%, so opportunity is here. Let’s start with tackling the problems and bank upon the opportunities. Another area is that we also should not shy away from the fact that the technology is changing and we need to keep pace with it in order to grow. In the next 5 to 10 years there would be a de-linking of the growth rate of the writing and printing paper from the GDP which is the trend internationally already due to electronic media. But, the packaging sector will increase with the increasing demand of consumer goods. The concept of eco friendly paper will rise due to environmental concerns.
We need to look at the different uses of paper, which can be created by increasing their functional properties like label papers, security papers, medical papers etc. Earlier when we used to visit any customer they won’t entertain us thinking that using chemicals would be the waste of money. But, today the perceptions are being changed due the quality demand from the customers. Indian paper industry needs to en-cash on the capability of the chemical supplier to be able to enhance the quality of the paper. Improving on technology will not only prove incremental but sustainable too for industry as a whole.