Outlook For Steel, Textiles And Paper...
It is usually the high-profile sectors of the economy like realty and IT that are in the spotlight for various reasons. But the other sectors of the economy though low-key are just as important. And here too the economic slowdown that is pervading the country and the globe are at play. So for segments like textiles, paper and steel the outlook at best ranges from stable to in some cases outright negative, says Manik Kumar Malakar analysing Fitch ratings latest reports on the sectors.
Rupee Worsens Metrics For Paper...
Fitch Ratings’ switch to a negative outlook for the Indian paper sector is likely to be sustained through the remainder of 2012. This follows a turbulent H112, when operating profitability suffered from higher input costs and a weaker Indian rupee which further increased the costs of two key inputs – pulp and coal. Moreover, the subdued economic environment is not conducive for the full pass-through of higher costs to end-customers.
Fitch believes the weaker operating profitability has impaired internal cash generation for most Indian paper manufacturers, and this will have a bearing on debt levels throughout 2012. Many manufacturers are undertaking significant capex toward enhancing capacity or operating efficiency through backward integration.
Most of this capex is being funded through borrowings and internal accruals, owing to subdued equity markets.
The fall in operating profitability of most Indian paper companies was much sharper in H112 than in the last four years. The rupee depreciation has pushed up the prices of coal and pulp by more than the agency had expected at the beginning of 2012 – apart from the direct impact of rising input prices such as labour costs, chemicals and power.
The credit metrics of most of the paper mills have consequently stretched beyond the agency’s expectation, and are likely to remain weak over the short- to medium-term in the wake of the current exchange-rate scenario. The rupee depreciation has struck the Indian paper companies on two counts – first, by hitting operating profitability, and, second, by increasing the rupee equivalent amount of their foreign currency-denominated debt used for funding capex plans.
Fitch expects that stability in input prices amid stability in the rupee at around current (July 2012) levels would help domestic companies to price products competitively against imports during H212. This could bring about some improvement in profitability as well, but may not be adequate for credit metrics to fall within the agency’s comfort levels. The volume growth in the writing and printing paper segment remained muted during H112 because of an increase in imports – particularly for coated paper from China.
What Could Change the Outlook?
Rupee Appreciation: The strengthening of the rupee could alleviate some pressure from operating profitability and the servicing of foreign currency-denominated debt, both of which could improve the internal cash generation/retention and help to de-leverage.
Commissioning of Capex Projects: Timely commissioning of capex plans, many of which are aimed at efficiency improvements, could help domestic paper manufacturers to improve and/or stabilise operating profitability, despite the adverse impact of overcapacity on pricing power. However, the impact would likely become evident in the medium term only if these are commissioned on schedule during H212.
“We are negative on the paper industry,” says Sarkar of LSI Financial Services.
This is since this industry uses a lot of pull that is expensive. Also a lot of the machinery like looms is also imported and this is now even more expensive now that the dollar is appreciating vis-à-vis the rupee. “On the paper industry we have a sell recommendation,” he said. As far as Paper stocks go ‘Sell’ says, Clifton Desilva, Director Altina securities.