Indian paper packaging companies are expected to see sales volumes grow by 5-7% year-on-year in the 2024-25 fiscal, up from around 3% last year, due to rising demand from key end-user industries, according to a Crisil Ratings report. This growth, however, will be gradual and more pronounced in the second half of the fiscal year.
Despite this volume increase, realizations may not keep pace with rising raw material costs, which are set to squeeze operating margins by around 100 basis points to 8% — the lowest level in a decade, the report stated. This compares to a decadal average of 11-13% and approximately 9% last fiscal.
Capital expenditure (capex) is anticipated to remain modest, focusing mainly on debottlenecking and modernization due to sufficient capacity. This will help keep debt under control, aiding the overall credit risk profile, according to Crisil’s analysis of 72 paper packaging companies, which represent about half of the sector’s volume.
Packaging paper, primarily kraft paper and duplex board, is used across industries such as pharmaceuticals, eCommerce, consumer durables, FMCG, and ready-made garments.
“Volume growth this fiscal will be driven by increased consumption in the FMCG, pharmaceuticals, and consumer durables segments, which account for 55-60% of paper packaging demand,” said Aditya Jhaver, director at Crisil Ratings. He said both rural and urban demand are expected to rise due to better agricultural output and higher disposable incomes.
While kraft paper prices have increased by about 10% between October 2023 and July 2024, the industry has faced a significant 25% rise in international wastepaper prices, the primary raw material, due to higher freight costs and geopolitical disruptions.
“These higher raw material costs will only be gradually passed on to end-users, given modest demand recovery and competition from cheaper imports,” said Gaurav Arora, associate director at Crisil Ratings. A 15% moderation in coking coal prices will provide some relief, limiting the decline in profitability to around 100 basis points.
In response to shrinking margins, companies are refraining from capacity expansions, with utilization expected to rise to about 90% this fiscal from 85% last year. Consequently, leverage, as measured by the debt-to-EBITDA ratio, is projected to remain comfortable at below 2 times, consistent with last year.
However, risks remain. A slower-than-expected recovery in end-user consumption or further volatility in input prices could negatively impact the sector’s outlook.
