As per Crisil Ratings which pioneered the concept of credit rating in India in 1987, India’s organised paper packaging is likely to sustain its growth momentum, with revenue printing 14-16% higher this fiscal after 35% growth in the fiscal 2022. The research group attributed this to a low base created in fiscal 2021 by the impact of the first wave of the pandemic.

This packaging growth, which will be volume driven, will push up utilisation levels of players to near-optimal levels, spurring capacity addition via de-bottlenecking and new plants. Realisations may see only a nominal increase this fiscal with key input prices stabilising. The Crisil Ratings says, "This along with benefits of price hikes made last fiscal and higher operating leverage will drive up operating profitability 100-150 basis points (bps) on-year to ~17-18% in fiscal 2023. Better cash generation will support phased capacity addition plans, keeping credit profiles stable.

The Crisil Ratings analysis covers 48 paper packaging companies with aggregate revenue of Rs 21,000 crore. This translates into 40% of the industry.

Paper packaging accounts for a dominating 55-60% of the paper sector’s capacity, followed by writing and printing paper (25%), newsprint (10%), and specialty paper and other segments. It comprises paperboard and kraft paper used in pharmaceutical, e-commerce, consumer durables, fast moving consumer goods, and apparel sectors.

Anuj Sethi, the senior director of Crisil Ratings said, "Continued strong demand from the e-commerce, apparel and consumer durables segments, and the ban on single-use plastic will lead to a healthy volume growth of 10-12% this fiscal on the back of 25% notched up last fiscal." Anuj Sethi added, "The ban on single-use plastic will have a stronger impact in certain product categories, primarily in food and beverages."

Amid sustained healthy demand, utilisation is expected to rise past 85% this fiscal as compared to 77% last fiscal. Paper packaging companies are undertaking debottlenecking and productivity improvement measures to raise capacity in the short term. New plants will also follow, and overall industry capacity is seen rising 10% by fiscal 2025.

The prices of the key raw material domestic and imported waste paper have stabilised after peaking in March-April 2022. Domestic waste paper prices rose from Rs 20,000 per tonne in March 2021 to Rs 28,000 in March 2022, but have since declined to Rs 21,000 in August 2022 with resumption in waste paper collection activity. On the other hand, prices of imported pulp, a lesser-used raw material, have been continuously rising in the last three fiscals.

Aditya Jhaver, director of Crisil Ratings said, "Three factors — stable waste paper prices, higher realisations and better operating leverage — have offset the impact of costlier power, fuel and freight. As a result, operating profitability of packaging players is expected to recover to the pre-pandemic level of 17-18% this fiscal."  Aditya Jhaver added, "Healthy cash generation will ensure debt metrics remain comfortable, keeping credit profiles stable."

Crisil Ratings sees interest cover of paper packaging companies at "10.3 times, and their ratio of debt to earnings before interest, tax, depreciation and amortisation at 1 time this fiscal, compared with 10.6 times and 1-1.1 time, respectively, last fiscal."

Continued healthy prospects and cash generation along with phased capacity expansion will ensure debt metrics remain at comfortable levels over the medium term. Inflationary headwinds and movement in the prices of key raw materials such as imported waste paper and pulp, and currency will bear watching.