Financial Daily from THE HINDU group of publications
Monday, Mar 18, 2002
Seshasayee Paper: Marketing without undue pressure
Mr N. Gopala Ratnam
CHENNAI, March 17
FOLLOWING a major expansion programme in 2000-01, Seshasayee Paper and Boards Ltd, doubled its production capacity, and the current financial year has been one of consolidation.
The turnover is expected to increase by more than 30 per cent during the current year, according to Mr N. Gopala Ratnam, Chairman and Managing Director, of the company. He told Business Line the coming year would see the company on a growth path. In 2002-03 the economies are expected to improve with higher production targets, introduction of new grades of paper and a recovery in the market.
How has 2001-02 been for Seshasayee Paper and Boards Ltd?
The year was both challenging and rewarding. It brought forth several issues. Market turned weak. Prices kept falling every quarter. Most paper grades lost Rs 2000 - Rs 3000 per tonne during the year. In addition, we had to operate our expanded capacity without the excise duty support on production from unconventional raw materials (SPB uses bagasse as raw material). Our expansion was conceived on the support of availability of such concession. The task of making the project viable became difficult.
The year, however, was not without rewards. We could stabilise our new paper machine in terms of production and quality. We could operate our Pulp Mill at enhanced rates. We introduced new products which found immediate acceptance. We gained the Golden Export House Status. Thus, 2001-02 has been a productive and eventful year for SPB.
The company has completed the first full year of operations with the expanded production capacity. What has it meant for the company?
With the newly added paper machine settling down nicely and producing quality papers at high speeds, the company will produce more than 1,00,000 tonnes this year, a landmark in its history. The turnover will cross Rs 350 crore, an increase of Rs 88 crore (34 per cent) over the previous year. Our exports will cross 20,000 tonnes, this year. Exports now account for 20 per cent of our production. This has been a year of consolidation paving way for enhanced operating rates and improved economies in the coming year.
With the production capacity nearly doubled, what are the marketing opportunities available? Has the market fully absorbed the production?
We have a wide range of products and a well knit marketing team. Our finished goods inventories have always been at comfortable levels. With the commissioning of our new machine, we have introduced new products for the printing industry. These products have been well received both internationally and in India. We exported 30 per cent of our production out of the new machine and 11 per cent from the existing machines. We thus find that our production has been fully absorbed. We now export paper to more than 25 countries, including such well-known paper making countries like Indonesia and South Korea.
Considerable improvements in quality, introduction of new grades, and good customer focus have helped us to market our products without undue pressure. By the end of March 2002, we may not carry more than 2 to 3 days stock. With some luck, we may, even be able to achieve `Zero' stock.
The expansion coincides with the flat trend in the paper prices. What impact has it had on the company?
As I mentioned earlier, paper prices fell by Rs 2,000 - Rs 3,000 per tonne. This did affect the bottom line of the industry significantly. All attempts were, therefore, made to improve our operating efficiencies, reduce input costs, minimise wastages, with a view to achieve reduction in cost. We placed greater emphasis on supply chain management. We could achieve success in this area.
What are the prospects?
Prices of pulp and paper are soft all around the globe. Industry expects a pick-up in demand by the second half of the next financial year. With this, prices of both paper and pulp will move up. At SPB, we are targeting a production of over 1,10,000 tonnes for the coming year. New grades of paper will also be introduced. I expect that in 2002-03, the company will show significant improvements in its operations.
With the interest cost mounting after the Rs 190 crore expansion, are you looking at lowering costs?
SPB borrowed Rupee term loans for the project from IDBI and from banks such as State Bank of India, UCO Bank and Central Bank of India. While the rate of interest charged by IDBI is a fixed rate, the rates of commercial banks are floating rates. The banks' rates factor the current market trend of falling interest rates, because of its floating nature. However, the rate of IDBI is fixed and the loan was borrowed when the rate of interest was high. The company is exploring avenues to swap the high cost fixed interest loan with low cost floating rate loans of commercial banks. Once it is achieved, there will be substantial reduction in interest cost.
The import duty on lightweight coated paper being low, and LWC being a major product line at SPB, how competitive is it when compared to imports?
Discriminatory and multiplicity of tariffs have encouraged malpractices in importation. There is, currently, a wide tariff differential between paper and newsprint. LWC has been bracketed with newsprint and attracts duty only at 5 per cent. This gives rise to lot of direct imports and disguised imports. On the other hand, LWC produced domestically, attracts excise duty at 16 per cent as against newsprint attracting nil excise duty. There seems to be no parity between domestic manufacture and imports. This makes LWC an unattractive product, as of now. Our focus on this product will only be peripheral.
What are the constraints facing the paper industry in tackling imports?
Low import tariff (5 per cent) for newsprint continues to attract import of paper in the guise of newsprint. Availability of cheap newsprint for non-newsprint applications, where paper was being used traditionally, also causes grave concern to the industry. Despite the fact that the Government has enlarged the list of newsprint manufacturers under Schedule 1, import of newsprint has not slowed down. With no prospects of prices hardening in the near future for newsprint, all domestic manufacturers are obliged to curtail production of newsprint and divert their capacity to printing and writing paper production. This causes marketing pressure, leading to unhealthy competition and softening of prices.
What are the major issues confronting the paper industry?
The major issue that is confronting the industry, as of now, is `international competitiveness'. The industry is well aware that its survival would depend on becoming competitive within India and globally. Import tariffs are likely to be lowered to 20 per cent level, soon. All the major players in the industry are exercised on this aspect and are taking steps. However, issues like high cost of funds, inadequate availability and high cost of raw materials and poor economies of scale will continue to haunt the industry for some more time. Another unfavourable factor is the poor per capita consumption of paper in India, which is currently hovering around 5 kg. China's per capita consumption is 29 kg. Several East Asian countries have per capita consumption in excess of 15 kg. The issue before us is how do we trigger growth in domestic paper consumption.
How is the policy environment relating to paper industry? Is it conducive to enable the domestic industry tackle international competition?
Paper Industry continues to get low priority from policy makers. The environment, though not negative, is certainly not conducive to promoting growth. Creation of robust raw material base for the paper industry, creation of technology upgradation funds, which can help the industry to move up in the technology scale, fiscal incentives for assimilation of eco-friendly technologies and introduction of policy framework for substitution of plastics/wood by paper and paper boards --all these issues require Government's urgent attention. The Government, however, seems to be quite aware of the constraints faced by the industry in becoming globally competitive. They have engaged the services of an international consulting firm and have entrusted them with the task of assessing the competitiveness of the Indian paper industry and suggesting ways and means to improve the same to global levels. This is a welcome step. I do hope that as and when the study is completed, the Government would initiate quick follow-up steps for implementation of the recommendations of the consulting firm.
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