Paper manufacturers' FY25 revenue projected to dip 2-3% amid rising wood cost: Crisil

Indian paper manufacturers are projected to witness a 2 to 3% decline in their revenue in the 2024-25 fiscal on subdued realisations, Crisil Ratings said on Friday.

The credit rating agency highlighted that the operating margin of Writing and Printing (W&P) paper manufacturers is expected to shrink by 400 to 500 basis points (bps), bringing it down to 15-16%. This contraction will be driven by costlier hardwood and softwood (key raw materials used in manufacturing) along with softening realisations.

Further, it will be in line with a similar contraction in FY24 from the high levels of FY23.

Commenting on the two main reasons behind the contraction, Crisil Ratings’ Director Gautam Shahi said, “One, W&P paper realisation will continue to correct from the abnormal highs of fiscal 2023, driven by low-cost imports from China and East Asia amid modest demand, resulting in a decline of 5-7% in W&P prices.”

“Two, domestic wood costs will continue to surge due to increased demand from competing wood-based industries and reduced wood output caused by lower plantation during the pandemic, while imported wood prices are expected to rise 18-20% due to international supply disruptions. That said, the credit profiles of W&P paper makers will be able to withstand the cyclical downturn, supported by deleveraged balance sheets and moderate capital expenditure (capex),” he added.

It said that firms will focus on routine modernisation this fiscal, rather than large-scale projects, which will preclude a surge in debt.

"While a decline in operating profits will cause a slight moderation in debt metrics of W&P paper manufacturers this fiscal, they will still remain healthy due to deleveraging balance sheets and modest debt-funded capex. The ratio of debt to EBITDA (earnings before interest, tax, depreciation and amortisation) and interest cover of assessed paper makers are expected at 1.7-1.8 times and 5-5.5 times, respectively, this fiscal, compared with 1.1 times and 7.8 times, respectively, last fiscal, and will recover next fiscal," Crisil Ratings’ Associate Director Pranav Shandil said.

The operating margin is poised to recover 300-400 bps to 18-19% and consequently, drive down domestic wood prices.

In this milieu, the pace of imports and any adverse movement in input prices, which can alter consumption patterns, will need to be watched, the report underlined.