Moneycontrol
Last Updated : Jan 10, 2019 07:23 PM IST | Source: Moneycontrol.com

Quick Take | Paper sector gets largest FDI ever; should Street cheer?

With total investment of roughly Rs 24,000 crore ($3.5 billion) , Asia Pulp and Paper (APP) to set up India’s largest paper mill with a capacity of a staggering five million tonnes per annum

Neha Dave @nehadave01

Indonesian paper company Asia Pulp and Paper (APP) signed a Memorandum of Understanding (MoU) with The Andhra Pradesh Economic Development Board (APEDB) on January 9 to set up India’s largest paper mill in the state with a capacity of a staggering five million tonnes per annum. The total investment of roughly Rs 24,000 crore ($3.5 billion) makes it one of the largest foreign direct investments (FDI) in recent times. While this is definitely a big positive for the country, we try to decipher the repercussions it can have for the sector and leading paper companies.

Implications for existing players

With a market size of around 17.1 million tonnes as of end-FY18, India has been the fastest growing paper market globally, and has expanded at a compounded annual growth rate (CAGR) of 6.3 percent over 10 years.

Thanks to increased demand from FMCG and packaged food segment as well as rapidly growing e-commerce (likes of Amazon and Flipkart), domestic paper demand (especially packaging paper) remains buoyant. At the same time, supply constraints remain following the closure of stressed domestic capacities (Ballarpur Industries), benefiting large domestic players.

The paper industry has not added any significant capacities over the last three to four years. As a result, most paper companies are currently operating at around 85 - 90 percent capacity utilisation level, while the larger companies are operating close to or over 100 percent.

existing capacity of papaper

Large players like JK Paper, International Paper APPM have so far reaped benefits of the positive demand-supply scenario. While they are beneficiaries of a sector upturn, they also remain vulnerable to new capacity additions. APP’s future capacity additions obviously will have an impact on the supply-demand and competitive intensity of the industry. Though it will take few years for APP to hit the market, its production ramp-up could adversely impact prices and margins of incumbents in future.

Implication on incremental investments

Significant investments have been lined up by some of the large domestic players for capacity expansion. A bulk of these additions are in the packaging paper & board segment as high growth rate is anticipated there.

capex

A majority of the recently-announced capacity expenditure (capex) plans are scheduled for completion after April 2020. The bunching up of capacity additions if not commensurate with the demand growth could weaken the financial profile (debt servicing capability) of the players that have announced expansion plans. The lumpy capacity additions planned by APP can exert downward pressure on profitability and can result in a subdued performance for the sector in future.

We don’t see any near term impact on the sector due to the long gestation period involved in capacity addition. While impossible to comprehend at this point in time, APP’s huge capacity set up plans will certainly alter sector dynamics in future.

For more research articles, visit our Moneycontrol Research page
First Published on Jan 10, 2019 04:40 pm
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