India’s paper industry, comprising a large number of small players, is gearing towards the consolidation phase. For investors, this makes for interesting times to invest. However, it is important to understand what drives India’s paper industry before investing in it. Here is a low-down on India’s paper industry, which will help you understand their business model and the viability of investing in paper companies.
THE INDUSTRY
The first paper mill in India was set up in 1812 in Sreerampur, West Bengal. At present, there are over 850 paper mills manufacturing a wide variety of items required by consumers. Paper mills in India can be differentiated into two categories: large and small mills.
Large mills are the ones with an installed capacity of more than 100 tonnes per day. Small mills, on the other hand, are the ones with a capacity of less than 100 tonnes per day. Small units account for more than 50% production capacity, but they do not use energy efficiently.
Large mills used wood as raw material to produce paper. At present, about 60.8% of the total production is based on non-wood raw material and 39.2% on wood. Based on the usage of raw materials, the paper industry in India could be classified into three categories: wood-based, waste paper-based and agro-based.
In India, paper mills use a variety of raw materials viz. wood, bamboo, recycled fibre, bagasse, wheat straw, rice husk, etc; approximately 35% are based on chemical pulp, 44% on recycled fibre and 21% on agro-residues.
The Indian paper industry is about 1.6% of the world’s production of paper and paperboard. Globally, India stands 15th in the list of paper-producing countries with an annual production of 13.5 million tonnes and an estimated turnover of Rs. 35,000 crore (US$ 7 billion).
It is estimated that the aggregate paper demand in India is expected to grow at around 7% to 8%. Most experts point out that the industry’s turnover is expected to double and reach 20 million tonnes in the next seven years because of increasing demand for paper products. A major push for this demand will come from various government education programmes and a shift in demand from Europe and the US. The industry has been demonstrating strong growth in recent years.
Globally, pulp and paper prices have softened due to poor demand from Europe and the US. This has led to a shift in demand to Asia and South America. It is estimated that Asia now accounts for almost 40% of global consumption. India’s paper industry is highly fragmented with about 700 mills spread across the country with a capacity ranging from 5 tonnes per day to over 1,000 tonnes per day. The operating capacity of the paper industry currently stands at 12.75 million tonnes.
Capacity utilization of the industry is low at 60% since 194 paper mills, particularly small mills, are sick or shut. India’s per capita consumption of paper is about 9.21 kg as against the world average of 54.9 kg and the Asian average of 44.9 kg. The Indian paper industry uses multiple varieties of raw materials for making paper as the country does not have surplus fibre.
With changing times, raw material for the paper industry has undergone significant changes and over a period of time, besides wood and bamboo, other non-conventional raw materials have been used to produce paper. To promote the paper industry, the government has taken several initiatives, which have enhanced earnings prospects of the industry.
These include an excise rebate to small units, abolition of customs duty on the import of paper-grade pulp and wood chips, removal of statutory control over production, price and distribution of white printing paper and provision of infrastructural support by increased allocation of coal and wagons.
GOVERNMENT INITIATIVES
The government has taken further measures to improve the situation of the paper sector since 1992. While the import duty on paper in 1991-92 was as high as 140%, the government has since then gradually reduced it from 65% to 40% and further to 20% in May ’95. Import of wood pulp for the production of newsprint and newsprint products are allowed on a more flexible scale.
The government has not only relaxed the rules and regulations, but also delicensed the paper industry with effect from July ’97 to encourage investment in this sector. Foreign participation is now allowed. Some joint ventures have also been formed.
FDI up to 100% is allowed through the automatic route on all activities except those requiring industrial licenses where prior governmental approval is required. Additionally, the government has increased its focus on increasing manufacturing competitiveness in the paper industry. Apart from this, here are a few important measures taken by the government for providing a conducive business environment for the paper industry. Listed below are a few of them:
1) Light Weight Coated (LWC) Paper under zero duty.
2) The excise duty on supply of paper to Text Book Corporation/Printing Corporation has been increased from 1% to 2%.
3) The most significant change in the budget is a reduction in the import duty for import of waste paper. The duty has been reduced from 2.5% to nil. As a result, recycle-based paper industries would substantially benefit from this move.
4) The import duty is levied at 10% on printing and writing paper.
5) The excise duty has been increased from 5% to 6%.
6) The excise exemption allowed on the first 3500 MTs of printing and writing paper produced primarily out of non-conventional raw material has been removed.
Despite this, customs duties on inputs and intermediates of paper industry have not been brought down. This has increased challenges for the industry. This is despite the fact that the Indian paper industry has gone through significant changes in technological and environmental status including capacity expansion, and adoption of modern fiber line technologies. The industry continues to face import challenges particularly in coping with strong competition from imports while trying to improve profitability and productivity.
In the absence of similar enabling policies, paper mills in India have to necessarily depend upon small and scattered plantations or government-controlled forests. In the process, the cost of collection and transportation works out to be higher than the cost of the pulpwood itself. As a result, the cost of raw materials in India has been continuously going up and has become quite uncompetitive in comparison with major paper-producing countries. To deal with these problems, the paper industry in India is dependent on state-of-the-art technologies to reduce its production costs. In doing this, the paper industry is also attempting to match global standards.
GOING AHEAD
The outlook for the paper industry in the country is very optimistic. Its growth is expected to be driven by the rising demand for paper products, which is majorly supported by various government education programmes. The concern, however, is to be not only environmentally viable but also sustainable.
Adopting clean technology and practicing energy conservation measures is the need of the hour to make the Indian industry world-class and globally-competitive.
Writing and printing paper (WPP) manufacturers have reported high capacity utilization levels over the past five years on the back of high domestic paper demand. This has prompted significant capacity additions by existing WPP manufacturers and switch over to the WPP segment by other paper manufacturers such as Kraft and newsprint in recent years.
However, paper demand has not kept pace with capacity additions, creating a mismatch which may continue in the current year too. Analysts expect modest growth in demand to marginally benefit operating profitability of paper companies.