Snipped profits for Indian paper producers

Why the glum forecast from Fitch when a demand boom is imminent in 2012?

Staggering costs of materials and labor will squeeze out the bottom line despite healthy revenues and stable paper prices, said Fitch in its latest industry outlook.

"The Indian paper sector is likely to register volume growth in 2012, but higher operating costs will lead to lower profitability despite firm paper prices," it said.

"Growth in writing and printing paper (WPP) is linked to economic growth, which, in Fitch's view, will moderate slightly in 2012. However, lower per capita consumption in India compared with the world average will drive the domestic demand for paper over the medium term. Growth in newsprint volumes is likely to be met from imports as domestic production has almost been static for the past four years," it added.

"Operating profitability of Indian paper companies will remain under pressure due to the high input costs such as power, chemicals and manual labour, though raw material costs could moderate to some extent. However, depreciating INR is likely to keep even raw material costs high in import-dependent sub-segments such as newsprint and coated paper," it said further.

Paper companies might have also been too optimistic with future demand, which could lead to under-utilitized capacity.

"Indian WPP manufacturers have witnessed high capacity utilisation levels over the past four years due to significant demand growth in this segment. This led to large capacity additions in recent years and will drive more additions over the next 18-24 months. Though the growth in paper demand is likely to sustain in 2012, it may not be adequate to absorb all new capacities, and would create a short-term surplus supply," Fitch said.

"Furthermore, domestic paper manufacturers have outlined capex for increasing control over input supplies to meet pulp and energy needs in-house and plug the slide in profitability over the longer term. Fitch believes that weaker profitability as expected would lead to stretched credit metrics for domestic paper manufacturers during 2012, with growth in sales volume providing only a little respite. However, these would likely remain within Fitch's current estimates for most of its rated paper manufacturers," it added.