Cost pressures in paper industry subsiding: India Ratings

India Ratings' report on paper industryIndia Ratings and Research (Ind-Ra) says that the pricing environment in the paper sector is unlikely to show a significant improvement in FY16. However, the profitability of sector companies should show an improvement in 2HFY16, with a relief on the cost front and improved cost structure. The pricing environment in the sector did not improve in 1HFY16 due to a still unfavourable domestic demand-supply balance and a high level of imports. The paper sector continues to face a muted pricing environment as the domestic overcapacity added in the past has not been fully absorbed yet. However, the pricing environment should improve by FYE16 with a gradual improvement in demand as well as a focus by sector companies on exporting surplus volumes. Input pressures, primary due to an increase in domestic wood prices, faced by paper companies over FY12-FY14 have now subsided. Wood prices, which have almost doubled during the period, started to stabilise in FY15. The continuous efforts of paper mills on farm forestry as well as higher prices have led to the increased availability of wood in nearby areas, thereby reducing average procurement costs. Sector companies have in the past been squeezed both on the pricing and cost fronts and have been focussed on improving operational efficiency. Although pricing is unlikely to improve significantly in the near term, an improved cost structure along with a relief on the cost front would help improve the profitability of sector companies, even with muted demand growth.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.