JK Paper expects input costs to keep margins under pressure this year
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
AS Mehta, President & Director, JK Paper expects raw material situation to ease start easing next year (FY26) and normalising the year after.
AS Mehta, President & Director, JK Paper says material cost increased by over 30% last year and the situation is unlikely to ease this year, keeping margin under pressure.
“The drop in profit margin was bound to happen, because 32% or 33% operating margin, I don’t consider as a sustainable margin for a long run,” he told CNBC-TV18 in a post-earnings interview.
Shares of the Delhi-based paper and packaging board company rallied 6% on May 17.
This is the verbatim transcript of the interview.
Q: In your press release, you say and I quote, “Significant increase in raw material cost and lower realisation across all categories of impacted performance during the quarter and the year as a whole, the selling prices continue to remain under pressure due to increase in imports”. Tell us about the backdrop as you begin FY25. What could it be in terms of volumes, value, margins across the various categories?
A: When I was talking last quarter and last to last quarter results, also I said that 23-24 year is a challenging year, in the backdrop of 22-23 fiscal year, which was the outlier year for the paper industry, domestic as well as the global paper sector. The drop in profit margin was bound to happen, because 32% or 33% operating margin, I don’t consider as a sustainable margin for a long run.
In the given situation, when the raw material cost has gone up closely 30% or over 30% and net sales realisation (NSR) dropped in the different categories like packaging board it has dropped by almost 16 to 18% compared to the last year. The Maplitho prices have also come down by 7 to 8%, and coated paper it has come down by almost 15%. So in view of this operating profit, the JK paper could maintain this at 27%, that also credible I would say.
Going forward I would say for writing, printing paper the demand is likely to grow at 2 to 4%. The copier category also we are expecting the same kind of growth, but the packaging board which we expanded our capacity and now operating almost at 100% and will do better, is growing at 9 to 10% which is a very healthy scenario.
But in view of the global price trend, the prices of packaging board remains under pressure. And I hope we could recover to some extent but we will have to see what kind of import continues. In fact, we have filed the anti-dumping petition so hope the government acts fast and take some action on this front. If that happens, we will have some advantages.
Read Here | JK Paper declares final dividend of ₹5, quarterly net profit dips slightly, revenue flat
Q: Assuming there is no action on the anti-dumping on imports, give or take all the factors that you have maintained, what do you think margins could be in FY25? Will it be better than FY24? Can it in chop back to levels of 20-25% and even on the top line?
A: Because of the raw material scenario, I would think that it will continue to be the same more or less for the year 24-25. Because the plantation whatever we have done in last two years and current year 23-24 and also whatever we do in 24-25, that will give a result only after two years. So I am expecting 25-26 the raw material scenario would be better and 26-27 it should be much better or back to normal.
The prices I would say that if the government does not take any action, only saviour can be because the global pulp prices have already started moving. It has already touched $750. So if the pulp prices remain high at a global level, there would be better price scenario globally and that would also reflect or it will be replica in the domestic market also. So that will depend on the global demand supply as well as the prices.
Q: What’s causing this sluggishness in demand for printing paper, you are seeing that it’s about to grow at only 2 to 4% the printing paper, I am just reading a report which is saying that India is likely to contribute almost 20% to the overall growth of paper demand globally, what’s leading this demand sluggishness? Is it just the excessive imports or there are other factors as well?
A: When we are talking about the demand, it is not whether it is import or it is domestic, demand is demand whether it is made out of domestic production or import. So, the demand contraction it is bound to happen because of the digitalisation and digitisation. We factored this in our own demand projection and in fact, it is bound to happen because in the Western world, writing printing paper that demand is de-growing by close to 15%. So, when the Western world is degrowing, it is only Asia and Africa that is growing.
India, I would say that we should grow at 2 to 4% depending on the year and depending on the category, because like the years 24-25 and 25-26, the growth may be slightly better in view of the new education policy, printing, and publication of the new textbooks. But that is going to be only a year or two. Thereafter the growth would be 2 to 3%.
Q: But then digitalisation is happening even in school curriculums, but now, you are saying that 2 two to 4% if you expect that digitalisation as a trend to continue, do you see that demand growth number from 2 to 4% going further lower?
A: I would say next five to seven years it should not go down, it will remain at 2 to 4% and maybe 0.5%-1% higher also because it is seen that the digital and the online is impacting the eyesight of the children, the memory of the children, retention power of the children, nutrition of the children so that impact is also happening. In fact the globally the online or the virtual books, e-books it has degrown by 10% and the physical books is growing back.
The company, which has a market capitalisation of ₹ 6,378.85 crore, has seen its shares gain 3% over the last year.
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