Paper companies may look up in FY15 on ability to hike prices

Indian paper manufacturers, which have been able to pass on price increases in recent months to consumers, are expected to perform better in the next financial year beginning April.

"Improved ability to hike prices along with benefits from the recent capital expenditure should help improving profitability amid moderating cost pressures," research agency India Ratings and Research noted in a February report.

The agency also said it had revised its outlook on the sector from negative in the current financial year to negative-to-stable for 2014/15.

The new capacities that were added in recent years are getting absorbed gradually, leading to moderation of supply-side pressures. The agency expects overall sector demand to grow at around 7 to 8 per cent in 2014/15, and with no significant capacity addition, the pricing environment should improve during the year.

"We have taken a price increase of six to seven per cent in last three or four months," says V. Kumaraswamy, Chief Financial Officer at JK Paper. "The last hike of December is getting absorbed slowly, though there is some resistance. The price increases are sufficient to take care of the raw material increase."

Raw material costs - especially pulp and coal - have risen because of rupee depreciation. Overall demand growth is looking better, according to Kumaraswamy. Currently, companies are realising around Rs 55,000 per tonne of uncoated paper.

India Ratings expects input cost pressure to continue in 2014/15, although some moderation could be expected. In the past, the profitability of paper manufacturers suffered primarily on a significant rise in domestic wood prices, while a weakening rupee also increased import costs for raw materials such as pulp and coal.

However, major paper mills have started importing wood to reduce dependence on domestic wood sources. In addition, with increased farm forestry efforts and lower incremental demand, raw material availability in the domestic market should improve.

K.L. Chandak, Executive Director at West Coast Paper, says price increases are necessary to offset the impact of rising raw material costs. "Demand is stable," he says.