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The Pulp and Paper Times Magazine : Volume 6, Issue 1
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Efficiency-focused capex and healthy accruals to keep credit profiles stable
The Pulp and Paper Times
Domestic packaging paper manufacturers are set for another year of double-digit growth this fiscal, supported by 6-7% volume growth and 3-4% realisation gains. Demand from consumption-linked sectors, increasing adoption of recyclable packaging and a richer product mix will support growth, while efficiency-focused investments should expand operating margins by 40-50 basis points to around 9%. With capex largely funded through internal accruals, credit profiles are expected to remain stable.
A Crisil Ratings study of 47 packaging paper companies, accounting for around 40% of industry volumes, underpins these expectations.
This growth is reshaping the domestic paper industry. Packaging paper — comprising kraft paper, duplex board and virgin board — is expected to account for nearly two-thirds of domestic paper volumes this fiscal, up from just over half in fiscal 2022, as paper-based formats gain penetration across consumption-linked sectors and the shift towards sustainable packaging gathers pace.
Says Nitin Kansal, Director, Crisil Ratings, “Two forces will drive the sector’s 10-11% revenue growth this fiscal: first, volume growth as consumption-linked sectors such as e-commerce, FMCG1, food and pharmaceuticals increase their use of packaging paper, and second, realisation gains as the product mix shifts towards higher value grades. The share of duplex and virgin board has risen by over 500 basis points to nearly 45% of packaging paper volumes in recent years, strengthening both growth visibility and realisations.”
With wastepaper prices — the largest cost component — largely outside manufacturers’ control, investments are increasingly targeting controllable costs such as energy, labour and logistics. Waste-to-energy boilers, renewable power, agro-residue processing and debottlenecking, together with higher realisations, should partly offset input-cost pressures and lift operating profitability by 40-50 bps this fiscal.
This focus is evident in recent investment patterns: 60-65% of the approximately Rs 1100 crore of incremental capex undertaken by companies rated by Crisil Ratings over the past couple of fiscals went towards efficiency-led projects rather than capacity creation. As manufacturers prioritise margin resilience and balance-sheet strength over aggressive expansion, efficiency focused investments are expected to remain central to their capex strategy.
Says Gaurav Arora, Associate Director, Crisil Ratings, “The sector’s capex cycle is turning more defensive than expansionary. Nearly three-fourths of the sector's incremental spending will target process efficiency, energy optimisation and debottlenecking, helping protect margins without materially stretching balance sheets. With annual capex of Rs 500-600 crore expected to be funded largely through internal accruals, gearing should remain below 0.5 times and interest coverage around 4.5 times, supporting stable credit profiles.”
That said, downside risks remain. A rise in cheaper imports could pressure domestic realisations, while supply-chain disruptions and geopolitical tensions could raise wastepaper, energy and logistics costs. The extent to which efficiency gains offset these pressures will therefore remain a key monitorable.
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