Paper packaging volume to grow, but profitability to plummet: Crisil

Crisil Ratings analysed 72 paper packaging companies, accounting for about half of the sector’s volume.

According to the release, realisations on the other hand, may not keep pace with raw material prices, driving down paper packaging companies’ operating margins by around 100 basis points to their lowest level of ~8% this fiscal, as compared to a decadal average of 11-13% and ~9% last fiscal.

That said, capital expenditure (capex) is expected to remain modest and will be largely for debottlenecking and modernisation, given the adequate capacity. This will keep debt under control, aiding the overall credit risk profile.

Packaging paper, mainly comprising kraft paper and duplex board, is used to pack pharmaceuticals, eCommerce goods, consumer durables, fast-moving consumer goods (FMCG) and readymade garments.

Aditya Jhaver, director, Crisil Ratings, said, “We believe the volume growth this fiscal will be led by increased consumption in the FMCG, pharmaceuticals and consumer durables segments, which together comprise 55-60% of the demand for paper packaging. Demand is expected to improve from both, rural consumers, as a better monsoon benefits agricultural output and incomes, and urban markets, because of higher disposable income.”

Kraft paper prices have increased by only ~10% between October 2023 and July 2024, while the industry has witnessed a significant ~25% (compared to April-September’23 prices) increase in the international wastepaper (the key raw material) price to ~USD 230 per tonne due to higher freight costs and supply delays amid geopolitical uncertainties.

Gaurav Arora, associate director, Crisil Ratings, added, “Paper packaging companies may pass on these higher wastepaper prices only gradually to end-user industries, given the modest recovery in demand and high competition from cheaper imports. However, moderation in coking coal price (~15% of total cost), will offer some respite, thus limiting the extent of profitability decline to ~100 bps this fiscal.”

Amidst the weakening of profit margins, players have opted not to scale up capacities, as a result, utilisation is expected to improve to ~90% this fiscal from ~85% last year. Thus, the leverage of paper makers rated by CRISIL Ratings as denoted by the debt to EBITDA (earnings before interest, taxes, depreciation and amortisation) ratio will likely remain comfortable below two times (similar to last fiscal).

That said, delayed recovery in end-user consumption or adverse movement in input prices could pose downside risks and will bear watching.