Paper manufacturers' revenue may dip 2-3 pc in FY25: Crisil report

Mumbai: Paper manufacturers’ revenue is likely to decline 2-3 per cent in the current fiscal mainly due to subdued realisations, rating agency Crisil said in a report on Friday.

The agency, in its report, projected a 2-3 per cent year-on-year decline in revenue this fiscal, after a price-led decrease of 6-7 per cent last fiscal, primarily due to subdued realisations.

The operating margin of Writing and Printing (W&P) paper manufacturers is set to contract by 400-500 basis points (bps) to 15-16 per cent this fiscal, following a similar correction last fiscal from the unusually high levels of fiscal 2023. The contraction is driven by costlier hardwood and softwood (key inputs to make pulp, the primary raw material) and softening realisations, said the report.

Volume is expected to be tepid with 2-4 per cent this fiscal owing to the continued shift towards digital communication. However, this impact may be partly offset by the government's focus on expenditure in the education sector and increased office-based work.

"On the profitability front, two factors will drive the compression this fiscal. One, W&P paper realisation will continue to correct from the abnormal highs of fiscal 2023, driven by low-cost imports from China and East Asia1 amid modest demand, resulting in a decline of 5-7 per cent in W&P prices.

“Two, domestic wood costs will continue to surge due to increased demand from competing wood-based industries and reduced wood output caused by lower plantation during the pandemic, while imported wood prices are expected to rise 18-20 per cent due to international supply disruptions," Crisil Ratings Director Gautam Shahi said.

However, the credit profiles of W&P paper makers will be able to withstand the cyclical downturn, supported by deleverage balance sheets and moderate capital expenditure, the report said.

Players, it said, will focus on routine modernisation this fiscal, rather than large-scale projects, which will preclude a surge in debt.

"While a decline in operating profits will cause a slight moderation in debt metrics of W&P paper manufacturers this fiscal, they will still remain healthy due to deleverage balance sheets and modest debt-funded capex. The ratio of debt to Ebitda (earnings before interest, tax, depreciation and amortisation) and interest cover of assessed paper makers are expected at 1.7-1.8 times and 5-5.5 times, respectively, this fiscal, compared with 1.1 times and 7.8 times, respectively, last fiscal, and will recover next fiscal," Crisil Ratings Associate Director Pranav Shandil said.

Operating margin is poised to recover 300-400 bps to 18-19 per cent next fiscal, as increased plantations over the past two years will improve supply and, consequently, drive down domestic wood prices.

In this milieu, the pace of imports and any adverse movement in input prices, which can alter consumption patterns, will need to be watched.