Equity Research Private & Confidential

May 9, 2016

Indian Paper Industry

India holds 15th rank among paper producing countries in the world. The total installed capacity is approximately
12.7 million tonnes. The per capita consumption of paper is around 11 kgs against the global average of 56 kgs and
the Asian average of 40 kgs. India’s share in world paper production is about 2.6%. The industry is fragmented with
over 750 paper mills, of which only 50 millls have a capacity of 50,000 TPA or more. About 70% of the total installed
capacity of paper production in India is accounted by Gujarat, West Bengal, Orissa, Andhra Pradesh, Karnataka and
Maharashtra. Uttar Pradesh, Tamil Nadu, Haryana, Kerala, Bihar and Assam together account for about 25% of the
total paper production in India. The industry is working at 89 per cent capacity utilization.

The current demand is estimated at 13.1 million tonne with domestic production of 11.4 million tonne, export of 0.5
million tonne and import of 2.2 million tonne. The demand is projected to increase to 23.5 million tonne by 2024-
25. India is the fastest growing market for paper in the world with a growth rate of about 6 per cent annually.
Increase of per capita paper consumption by one kg will increase the demand by about 1.25 million tonne per
annum.

Broadly the industry is classified into two main segments- Paper and Paperboard (comprises of writing, printing,
packaging, specialty and tissue paper) and Newsprints (comprises of newspapers, flyers and other printed material
intended for mass distribution). In terms of demand subset, Indian paper industry market (13.1 million tonne)
consisting of printing & writing paper (4.8 million tonnes), news print (2.5 million tonne), industrial paper (5.1
million tonne) and specialty paper (0.6 million tonne). The packaging board market size is estimated at 2.4 million
tonne, growing 11.6% (vs. 6% growth in printing & writing paper demand).

Production of Paper, Paperboard & Newsprint

Million Tonnes 2011-12 2012-13 2013-14 2014-15
Domestic Production 10.1 10.5 11.4 12.2
Exports 0.5 0.5 0.5 0.6
Imports 2.1 2 2.2 2.3
Domestic Market/ Consumption (Production + Imports - Exports) 11.7 12 13.1 13.9
Source: IPMA

The paper industry in India has become more promising as the domestic demand is on the rise. Increasing population
and literacy rate, growth in GDP, improvement in manufacturing sector and lifestyle of individuals are expected to
account for the growth in the paper industry of India. The focus of paper industry is now shifting towards more eco-
friendly products and technology.

Union Budget 2016-17- positives

Union budget 2016 was positive for paper industry. Basic customs duty (BCD) on wood chips or particles for
manufacture of paper, paperboard and news print being removed from 5% to NIL. This is positive news for paper
manufactures as wood chips are primary raw material for paper industry; reduction in BCD will help them to reduce
their raw material cost and lift their operating margin. Raw materials constitute 35-40% of cost of paper production.

Union Budget 2016-17- positives for education sector

 In budget 2016, the FM announced an allocation of Rs 72,394 crore compared to Rs 68,963 crore for last
year, which is 4.9 per cent increase in the education budget.
 10 public and 10 private educational institutions to be made world-class
 Rs 1,000 crore for higher education financing
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 Rs 1,700 crore for 1500 multi-skill development centres

 62 new navodaya vidyalayas to provide quality education
 Sarva Shiksha Abhiyan to increase focus on quality of education

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Paper industry bracing for consolidation

Indian paper industry could witness a round of consolidation and co-operation among various players in the next
few years to collectively leverage fast changing manufacturing technologies and smoothen backward integration for
raw materials. This in the end could leave less than 10 big players in the domestic market as against the current 28
major ones. The industry, which is highly dependent on wood pulp for manufacturing of paper and paper-based
products, is also trying to widen its raw material base to lower cost of production. This also means that there is huge
potential for the sector, which can be met through use of modern technologies.

To improve balance sheet

In the last five years, the Indian paper sector has invested about Rs 20,000 crore on capacity enhancement,
technology upgrade and acquisitions. Now, companies in the sector are seeking to improve their balance sheets. The
sector is unlikely to witness any significant capacity additions or announcements in FY17, as existing capacities have
not been fully absorbed yet. While the sector is eager to expand capacity further, decisions in this regard will
depend on how soon companies can improve their financials. The sector, which faced challenge from rising input
(wood) costs, is now better placed due to a renewed thrust on agro-forestry and softening of pulp costs. Now with
the commencement of several state-of-the-art pulp and paper machines will result in lower operating costs and
improved quality.

Aggregate Capex Trend

Source: Industry Report

Non-wood fibre new sources for paper manufacturing

According to industry experts, using agricultural residues instead of wood fibre is more sustainable for paper
manufacturing. Agricultural-based paper is a guaranteed way to reduce the stress of paper production on
endangered forests. Some agricultural residue pulps take less time to cook than wood pulps. That means
agricultural-based paper uses less energy, less water and fewer chemicals. Pulp made from wheat and flax straw has
half the ecological footprint of pulp made from forests. Non-wood fibre sources account for about 5–10 percent of
global pulp production, for a variety of reasons including seasonal availability, problems with chemical recovery,
brightness of the pulp etc. Still it is believed that agro-based paper manufacturing is extremely cost-competitive and
highly environmental-friendly than wood pulp, resulting in lower cost of production and is the sustainable
competitive advantage for companies.
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Production in Terms of Raw Material Used (FY15)

Wood /
Bamboo
Waste 31%
Paper /
Recycled
Fibre
47%
Agro
Residue
(Bagasse /
Wheat
Straw)
22%

Source: IPMA

Paper demand to rise

Despite the continued focus on digitisation, India’s demand for paper is expected to rise 53 per cent in the next six
years, primarily due to a sustained increase in the number of school-going children in rural areas. Growing
consumerism, modern retailing, rising literacy (continued government spending on education through the Sarva
Shiksha Abhiyan) and the increasing use of documentation will keep demand for writing and printing paper buoyant.
The exponential growth of e-commerce in the country has opened up a new horizon and could contribute
significantly to the demand where paper is being extensively used for packaging. Though India’s per capita
consumption is quite low compared to global peers, things are looking up and demand is set to rise from the current
13 MT to an estimated 20 MT by 2020. This indicates there is a lot of headroom for growth in India. From a demand
point of view, every one kg incremental per capita consumption results in additional demand of more than one MT a
year. Besides, policy factors also have a key role to play in the growth of the domestic paper industry in India. The
government’s sustained focus on literacy, increased consumerism and expansion in organised retail are expected to
positively affect paper consumption and demand in India.

Industry Composition & Structure (2014-15)

Installed Capacity 13.0 million tonnes
Production of Paper, Paperboard & Newsprint 12.2 million tonnes
Domestic Consumption / Market Size 13.9 million tonnes
Domestic Production (12.2)— Exports (0.6) + Imports (2.3) = Consumption (13.9)
Source: IPMA

Projected Production & Consumption (2024-25)

22.0 million tonnes (baseline scenario)
Production of Paper, Paperboard & Newsprint
33.4 million tonnes (optimistic scenario)
23.5 million tonnes (baseline scenario)
Domestic Consumption
36.9 million tonnes (optimistic scenario)
Source: IPMA

Marginal Improvement in Revenue Growth in FY17

Ind-Ra expects major sector companies to report a marginal improvement in revenue growth in FY17 to 7%-8%,
driven primarily by volume growth. The marginal growth will be on the back of increasing demand from the
education and corporate sectors, aided by higher GDP growth. Sub segments such as packaging boards are likely to
grow on the back of increasing penetration of e-commerce as well as growth in the FMCG segment. Pricing
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environment is expected to moderately improve in FY17 on the back of an increase in demand and moderating
domestic demand-supply imbalance.

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Exports Have Seen Steady Growth

Source: Industry Report

Import stress to prolong

Import pressures are likely to continue in FY17 and would depend upon the extent of the devaluation of competing
currencies, mainly Chinese Renminbi, Thai Baht in relation to the rupee. An increase in import pressures could result
in continued pricing pressures in both coated paper and uncoated paper segments. Free trade agreements with
ASEAN, Korea and Japan also led to an increase in imports over FY14-FY15. Imports grew significantly in the
uncoated segment in rupee value terms at 44.5 per cent and 30.4 per cent in FY14 and FY15, respectively, the report
said. The coated segment has also continued to see around 15 per cent y-o-y growth in imports. Continuation of
antidumping duties in the US market for Asian countries could also increase import pressures, which may delay price
recovery in the domestic market. Cost pressures might subside for paper sector companies in FY17 with softening of
wood prices. Paper mills' continuous efforts on farm forestry as well as higher wood prices have led to increased
availability of wood in nearby areas, thereby reducing average wood procurement costs for mills.

Trend in Imports

Source: Industry Report

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Country-wise Paper Imports

Source: Industry Report

Outlook
The domestic paper sector is likely to see marginal improvement in demand in FY17 from education and corporate
sectors, aided by expected higher GDP growth of the country. India Ratings and Research (Ind-Ra) expects major
sector companies to report a marginal improvement in revenue growth in FY17 to 7-8% driven primarily by volume
growth. This will be on the back of increasing demand from the education and corporate sectors, aided by higher
GDP growth estimated at 7.4% in FY16. Import pressures are likely to continue in FY17 and would depend upon the
extent of the devaluation of competing currencies, mainly Chinese Renminbi, Thai Baht in relation to the rupee. An
increase in import pressures could result in continued pricing pressures in both coated paper and uncoated paper
segments. Cost pressures might subside for paper sector companies in FY17 with softening of wood prices. Paper
mills' continuous efforts on farm forestry as well as higher wood prices have led to increased availability of wood in
nearby areas, thereby reducing average wood procurement costs for mills. It is believed that high capacity
utilization, strong demand outlook, moving into environmental friendly & value-added products and capacity
expansion are key signs for attractiveness of the industry over the medium to long term.
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May 9, 2016

Name Designation Email ID Contact No.

Paras Bothra VP Equity Research paras@ashikagroup.com +91 22 6611 1704
Krishna Kumar Agarwal Equity Research Analyst krishna.a@ashikagroup.com +91 33 4036 0646
Partha Mazumder Equity Research Analyst partha.m@ashikagroup.com +91 33 4036 0647
Chanchal Bachhawat Equity Research Analyst chanchal.bachhawat @ashikagroup.com +91 22 6611 1712
Tirthankar Das Technical & Derivative Analyst tirthankar.d@ashikagroup.com +91 33 4036 0645

SEBI Registration No. INH000000206

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