Is Digitisation Helping the Paper Industry?

My dad’s day starts with a newspaper in one hand and tea in the other while mine starts with take-out coffee, the paper cup wrapped in tissues. He takes care of business accounts in those heavy cardboard-covered notebooks, bahi-khaata as it’s called and I make my to-do lists and notes in my daily planner. No, this is not a lifestyle blog and I have a good reason for discussing these daily routines. It’s the significance of paper. Look around yourself and spot paper or paper products. To name a few, I’ve got a diary, post-its, and tissues. Paper and the paper industry seem to be hiding in plain sight despite the prominence. Stay with me as we discuss the paper industry this week. 

Sketching Out the Paper Industry

As digitization gained the limelight, we thought paper might just be swept off from the face of the earth. However, contrary to this common assumption, the demand for paper has only been rising. It’s small steps, but only forward steps. Unlike IT, infra, metals, etc., paper is never in discussion. This month, however, movement in paper stocks caught our attention and we went on to take a deep dive in. Let me start by talking about some industry basics.

The paper and pulp industry is worth 80,000 Crore rupees, just in India. We have over 900 mills in our country with a production capacity of 30 million tons. In terms of volume, we are not global leaders. We are only the fifteenth largest paper producer but growth prospects are great for the industry in India. While demand for paper is decreasing across the globe owing to the economic slowdown, in India there are numerous tailwinds. I’ll get to them soon enough, but first, let’s talk about the impact of the world going digital. 

Digitisation – Is It Tearing Paper Apart?

Yes, we have gone from keeping books physically and issuing paper invoices, and books stacked in cabinets to online accounting and cloud storage. However, e-commerce has shot up the demand for packaging products multi-folds. The way we use paper has definitely changed, but not for the worse. Technology, in fact, is optimizing paper production by reducing costs and increasing margins. Manufacturing logistics have been significantly improved. And, contrary to the common belief, digitalization is helping the paper industry grow. It is estimated to save 20 billion dollars for the industry worldwide by 2025. 

Dive into Data: Indians are the largest newspaper readers keeping demand steady. 

What’s happening in India?

Paper prices range around 90,000 rupees per metric ton. However, the last few months haven’t been very steady for the paper industry. In August, paper prices rose by 1000-3000 rupees per tonne. Before that, the prices fell by 3000 and 4000 rupees per metric tonne in June and July respectively. While the increase in price last month gained traction, it’s not a bad indicator. This happened because demand in the US and Europe decreased, and so did the prices of paper in China. The paper industry in India has shown good recovery since COVID-19 lows, unlike other economies. 

However, in India, we are on a positive trajectory with several tailwinds. Here they are:

• Festive Season – The upcoming festive season is keeping the demand for paper steady. Prices have been increased by paper companies which will be borne by the end consumers but it’s not a negative factor because the festive season will keep demand robust despite the prices. 
• Seasonal Demand – Yearly new education sessions around March is the season for the paper and pulp industry as textbooks as a product have a large market share. Companies are heavy on production currently as the festive season is immediately followed by seasonal demand. 
• New Economic Policy – Government initiatives towards improving literacy levels are major drivers for the industry as demand for printing and writing paper is already increasing. 

India has been recording good numbers in the industry. We saw a sales CAGR of 8% during the last five years. Our exports exceeded the imports for the first time in FY21 as paper and pulp are in demand in FMCG and packaging as the world is trying to cut down the use of plastic. A growth of 8% – 10% annually is expected from here.

Dive into Data: See how India’s exports of paper and paperboard have been increasing. It almost doubled up from FY21 to FY22. 

Now that we’ve discussed the industry. Let’s move on to the second part where I discuss a company Green Portfolio is invested in. 

Stock Specifics: Orient Paper and Industries Ltd.

I have talked enough about the industry, so now let’s skip to the numbers of a company that will verify the facts. This week, I have Orient Paper and Industries Ltd., part of the Indian conglomerate CK Birla group. I’ll start with some information about the company before we jump to its numbers. Here are some quick pointers:

• The company manufactures mainly two grades of paper viz. Writing and printing for Notebooks and publishing segment, and Tissue papers as hygienic products. It also manufactures Caustic soda. 
• Orient Paper has two manufacturing units based in Madhya Pradesh and Orissa with a production capacity of 1,10,000 per annum. This is split equally between writing and tissue paper. 
• The company has 100% in-house pulp availability and partly uses captive power. 

Let’s now move on to data. I’ll break the numbers down but first, have a look at these figures.

The margins are right here and we see multifold growth YoY. Let me talk about some important things that have driven these numbers. 

• The company enhanced pulp capacity and set up a new recovery boiler in Q3, which reduced the Power and Fuel cost as a % of the top line. 
• It recommended a dividend of 1 rupee per equity share, giving a dividend Yield of 2.32%.
• PAT this quarter was high but it’s not comparable as the numbers are attributed to other income. 

Talking about future growth, the company will do a capex of Rs. 475 crores towards modernization/debottlenecking of the manufacturing facility at Amlai, Madhya Pradesh. The project will improve the operating capacity of the Paper mill to 400 tons per day and is likely to be completed in 24 months. Once the above capex is commissioned, capacity will increase by 29% i.e. 32,400 tonnes p.a. 

Q4 for the company was a turnaround quarter. We’ve seen good results for the first quarter of FY24 and given the industry tailwinds, Orient Paper is on a positive trajectory. 

Market Moments with Divam Sharma | Episode 5

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Green Portfolio is a SEBI Registered (SEBI Registration No. INH100008513) Research Analyst Firm. The research and reports express our opinions which we have based upon generally available public information, field research, inferences and deductions through are due diligence and analytical process. To the best our ability and belief, all information contained here is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. This report does not represent an investment advice or a recommendation or a solicitation to buy any securities.