Outlook for India's paper industry improves with projection of lower capital investment and slower production capacity growth, in addition to possible price increases, says research firm

NEW DELHI , January 7, 2014 () – Paper stocks haven't done too well from a long-term perspective. Stocks of Ballarpur Industries Ltd, JK Paper Ltd, Seshasayee Paper and Boards Ltd and West Coast Paper Mills Ltd have all underperformed the benchmark S&P BSE Sensex index considerably in the past three years. The main reasons: higher capacity additions and increasing costs have hurt investor sentiment for these stocks.

The Indian paper sector has been adding capacities in the past few years. According to Emkay Research, the aggregate capacity of the peer set of paper producers analysed by it increased by 11% compounded annual growth rate (CAGR) between FY09 and FY14, far higher than the 3.6% CAGR recorded between FY03 and FY08. The peer set includes Ballarpur Industries, JK Paper, Tamil Nadu Newsprint and Papers Ltd, Andhra Pradesh Paper Mills Ltd, Seshasayee Paper and Boards, and West Coast Paper Mills.

The capacity additions were funded through a combination of debt and internal cash generation. Naturally, as debt increased, finance costs rose. "Interest as a percentage of EBITDA increased from 23% in FY08 to 36% in FY13. It further remained elevated even in Q2FY14 inching higher to 51% in Q2FY14 due to negative EBITDA reported by JK Paper and AP Paper," Emkay Research said in a recent note. Ebitda refers to earnings before interest, tax, depreciation and amortization.

The Indian paper sector also struggled with higher input costs and lower price realizations, putting profitability under duress. Fortunately for investors, the situation could change for the better in the near future. That's because capex plans are expected to slow down and that means incremental supply will be less in the market. Moreover, price hikes are expected to help. Published by HT Syndication with permission from MINT. For any query with respect to this article or any other content requirement, please contact Editor at htsyndication@hindustantimes.com

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