Investment and consolidation among the Indian monocarton printers

Consolidation creates a crisis for mid-level carton suppliers

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monocarton
Packaged food products in monocartons on display at the Modern Bazaar outlet in Green Park in New Delhi. Photo PSA

In monocarton production, a gap is developing between the Indian mid-level converters (broadly with an annual turnover between Rs 45 crore and Rs 125 crore) and the few larger converters who have established multiple production locations across the country to be closer to the multiple production and packaging plants of the large consumer product companies. The large converters are quick to acknowledge, however, that there are many smaller monocarton companies that are doing excellent work and retain their own profitability and growth trajectory as long as they stay away from high debt.

It is the slightly larger mid-level carton converters who have taken on debt that are facing challenges in taking what they had earlier thought were their natural or logical next steps to growth – even though the industry as a whole is growing. The problems seem to arise when these mid-level players acquire bits and pieces of high technology at premium prices because they do not understand the many other components of the production and marketing equation to make the project fly. Sometimes it is because they try to do too many things at once or because they get into areas where they are not able to control the entire process and become too dependent on outsourcing a critical aspect of their process. This makes them relatively unresponsive, inefficient, and uncompetitive in pricing.   

For one thing, the challenges to them are coming from the several large multi-location players, who simply because of size and better management, have much better access to equity investment and public financing at a time when the banks lack confidence in smaller companies. At the same time, volatile and rising raw material prices in short supply have driven up the cost of working capital. The mid-level converters can neither negotiate the price of paperboard nor buy and warehouse sufficient quantities to meet future commitments at a given price to their customers. Thus the bigger brands prefer the bigger converters. Big likes big.

Secondly, the large converters have been upgrading their technology and have opened up a gap in the efficiency of their production with less wastage. Their capacity building has also compelled them to make their professional sales operations more aggressively competitive in smaller cities and towns and new segments and brands. They are far more amenable to producing smaller volumes than ever before as long as their capacities are utilized. They are able to absorb and balance some of the asymmetrical demand and price differences across segments and geographies since their plants are located across the country. 

Thirdly, reliable industry experts tell us that for at least 15 to 20 of the global private equity investments companies active in India, a stake in the packaging industry has become a mandate. Knowing that investors are on the prowl has led to some of the medium-sized companies taking steps to upgrade their performance or bulking up their balance sheets to attract potential suitors. Lastly, the awareness of the large monocarton players that banks, investors, and shareholders are ready to support them, has meant that they also need to grow quickly enough to keep up with their peers. And to grow quickly enough to satisfy investors means that inorganic growth or acquisitions can save time in comparison to establishing a greenfield project. The problem is that they are choosy and will only acquire a company if they can quickly add a missing packaging segment or a location in which they are not yet present.

However, not all carton converters are viable targets for acquisition. This has now become an organized activity with professionals tasked with this function among the larger companies in which private equity already has a stake. The professionals look beyond reputation, profitability, and fixed assets. They are keen to acquire or invest in those converters who bring something extra to the table such as rapid growth, a strong client list, and high technology that can be easily integrated with their existing workflows and standards of operation and efficiency. 

This means that the investment deals are likely to be lean and mean with valuations not including fixed assets unless there is unlocked value and room to grow in these. Ironically, the most attractive and likely to be acquired converters are those who are on the verge of successful growth on their own. For the rest, another type of consolidation could possibly work – this might be a restructuring of the management and a total overhaul of the production and marketing processes together with refinancing. This too is happening but it is a more difficult type of consolidation and it will take some time to understand if the type of investors and professionals needed for this more complex solution are available in the country to make it a success. 

The Covid-19 pandemic led to the country-wide lockdown on 25 March 2020. It will be two years tomorrow as I write this. What have we learned in this time? Maybe the meaning of resilience since small companies like us have had to rely on our resources and the forbearance of our employees as we have struggled to produce our trade platforms.

The print and packaging industries have been fortunate, although the commercial printing industry is still to recover. We have learned more about the digital transformation that affects commercial printing and packaging. Ultimately digital will help print grow in a country where we are still far behind in our paper and print consumption and where digital is a leapfrog technology that will only increase the demand for print in the foreseeable future.

Web analytics show that we now have readership in North America and Europe amongst the 90 countries where our five platforms reach. Our traffic which more than doubled in 2020, has at times gone up by another 50% in 2021. And advertising which had fallen to pieces in 2020 and 2021, has started its return since January 2022.

As the economy approaches real growth with unevenness and shortages a given, we are looking forward to the PrintPack India exhibition in Greater Noida. We are again appointed to produce the Show Daily on all five days of the show from 26 to 30 May 2022.

It is the right time to support our high-impact reporting and authoritative and technical information with some of the best correspondents in the industry. Readers can power Packaging South Asia’s balanced industry journalism and help sustain us by subscribing.

– Naresh Khanna

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Editor of Indian Printer and Publisher since 1979 and Packaging South Asia since 2007. Trained as an offset printer and IBM 360 computer programmer. Active in the movement to implement Indian scripts for computer-aided typesetting. Worked as a consultant and trainer to the Indian print and newspaper industry. Visiting faculty of IDC at IIT Powai in the 1990s. Also founder of IPP Services, Training and Research and has worked as its principal industry researcher since 1999. Author of book: Miracle of Indian Democracy.

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