A strong revival in consumer spending amid waning impact of the Covid-19 pandemic will help the paper packaging industry bounce back with a revenue growth of 15% this fiscal, after a decline of ~8% in the last.

Capacity utilisation and operating leverage will also improve and, together with continued high realisations and almost stable raw material prices (mainly waste paper), will help in improving the operating profitability of packaging paper players this fiscal.

With capacity utilisation improving, players are also likely to commence capital expenditure for enhancing capacity by ~10% over fiscals 2023 and 2024. Despite this, credit profiles of players will remain ‘stable’, given better accruals due to improving operating performance, and well-managed balance sheets.

A CRISIL Ratings analysis covering 43 paper packaging companies with aggregate revenue of ~Rs 16,000 crore, or ~40% of the organised segment revenue, indicates as much.

As things stand, the domestic paper industry is dominated by the paper packaging segment — accounting for 50-55% of the sector’s capacity — followed by writing and printing paper (~30%), newsprint (~15%), and specialty paper and other segments. The paper packaging segment comprises paperboard and kraft paper used in packing of pharmaceutical, e-commerce goods, consumer durables, fast moving consumer goods and ready-made garments.

Says Anuj Sethi, Senior Director, CRISIL Ratings, “A stronger-than-anticipated growth in e-commerce sales due to increasing safety and hygiene consciousness, healthy double-digit growth in domestic pharmaceutical sales, and revival in consumer durable sales are driving demand for packaging paper. Consequently, capacity utilisation of paper packaging players is seen rising to over 80% this fiscal from 65-70% in the last. Increased sales volume and 6-7% higher realisations mean revenue growth will be healthy this fiscal.”

A gradual recovery in apparel sales, too, will support revenue growth. The nationwide lockdown to contain the pandemic had hit sales of apparel and consumer durables last fiscal. This and the lower growth in domestic pharmaceutical sales had impacted revenue of paper-packaging companies, which had seen healthy compound annual growth of 7-8% in the preceding five fiscals.

CRISIL Ratings expects operating profitability of packaging paper players to reach the pre-pandemic level of over 17% this fiscal, compared with 15.5% last fiscal, backed by better operating leverage and higher realisations. Also, the costs of key inputs such as waste paper, which saw a sharp rise last fiscal, have now stabilised, which will help improve operating profitability.

Says Tanvi Shah, Associate Director, CRISIL Ratings, “Taking cognisance of high utilisation levels, ~1 million tonne, equivalent to ~10% of current capacity, is expected to be added by the sector’s players over the next two fiscals, ensuring healthy growth momentum. The capex will be funded prudently through a mix of debt and healthy accruals, resulting in healthy debt metrics. We estimate interest cover at 6.5-7 times and the ratio of debt to earnings before interest, tax, depreciation and amortisation at ~2 times in the next two fiscals, compared with 5 times and 2.5 times, respectively, last fiscal.”

A moderate third wave, if it occurs, is unlikely to materially impact recovery for the packaging paper segment. However, movement in prices of key raw materials, such as imported wastepaper, will bear watching.