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S. Vaidya Nathan

The threat of increasing imports is real and may get enhanced when India's efforts to woo the Asean economies bear fruit. Some of these countries are significantly low-cost producers of paper and India will offer a huge market for them.

With a doubling of capacity and completion of modernisation over the past year-and-a-half, Seshasayee Paper & Boards has entrenched itself as a major player in the Indian market. It has also started tapping the export markets aggressively. The company's Chairman and Managing Director, Mr N. Gopalaratnam, shares his views with Business Line in a wide-ranging interview.

Excerpts from the interview:

Prices of pulp and varieties of paper have moved in a narrow range between August 2001 and now, with modest increases, of about $75 per tonne, in pulp. How do you view the outlook for prices over the next 6-12 months?

While paper prices did move in a narrow range during the past two years, pulp priceswitnessed volatility. The general expectation is that pulp prices would move up in Q1 and Q2 of 2004, fuelled by increasing demand from China and a weak US dollar (against Canadian dollar and the euro). Paper prices may also follow this trend, especially with most of the economies reporting a pick-up in demand. A strong rebound by the US economy is on cards, and if this happens, paper prices will move up.

Unlike in the previous bullish phases, the gradual uptrend in prices since early 2002 has been driven by higher demand in China and the Asian economies, and to a lesser extent, by demand in Europe. North American prices have remained stagnant. Is such a price improvement healthy and sustainable?

North American and European markets are close to saturation. They are also impacted by the increasing imports from Asia, which is where the growth is. This will continue for some more years and pulp/paper prices will be influenced by the growth in Asian demand. However, the North American market is big enough to influence the pricing worldwide.

What are the factors that drive price trends in the Indian market?

Price hikes in the Indian market are influenced either by the demand-supply gap or significant increases in input costs ( with manufacturers passing on at least a part of the increase). Also, attractive prices abroad trigger an export surge and consequently demand/supply imbalances in the domestic market. . These result in paper prices going up. So far, 2003 has been a sedate.

Have producers in India met with resistance in pushing through price hikes?

While the number of price increases effected in 2002 were three, in 2003 prices have remained constant since April. In 2002, the prices of imported pulp rose sharply in April forcing Indian manufacturers to look at hiking paper prices. Also, international markets were offering better prices for paper and Indian companies were exporting more. This created a temporary imbalance in the demand/supply situation. In 2003, though, there have been no such developments. One must also remember that, prior to 2002, prices remained at lower levels for long and there was a need for manufacturers to effect increases.

What are the downside risks?

High price of imported fibre, and poor availability and high price of domestic raw materials

Has the Indian paper industry become too dependent on price increases to boost profitability?

All of us in the domestic industry are aware that we are such small players and cannot influence paper prices at all times. We, therefore look inwards and attempt cost compression to protect and improve the bottomline.

We look to productivity gains and reduced energy costs for our sustenance. Another area which is being aggressively tackled is the interest costs. Cost management is, and will remain, an area of focus for sustaining and improving profitability.

At the international level, the big-ticket consolidation by the top three or four players has not lead to dramatic improvement in producer pricing power. Will there be long-term benefits from consolidation?

It may not be correct to say that the industry had not reaped any benefits out of consolidation. For example, the newsprint industry has managed to raise prices (though after much time) despite not very favourable market conditions . Similarly, supply-side management has been in vogue in the West for long. Price stability is ensured when volumes are under control. In an industry where greenfield investments are drying out, the only avenue for growth is through consolidation.

Do you see further consolidation through acquisitions in the Indian industry? Are there capacities of attractive size that could lure would-be buyers?

Indian units are small in size and, in most of the cases, the quality of assets, doubtful. Consolidation may not bring with it the classical benefits that one could see in the international markets Privatisation moves by the Central and State governments may provide opportunities for acquisition of mills with significant capacities.

How do you view the possible threat from imports, especially in the wake of rupee appreciation?

The threat of increasing imports is real. Import tariffs are being brought down year after year. The threat may get enhanced when India's efforts to woo the Asean economies bears fruit. Some of them are significantly low-cost producers of paper and India will offer a huge market for them.

Barring the packaging segment, which has registered double-digit volume growth in some years, growth in the other segments appears to be stuck at lower levels. Do you see room for improvement in the growth rate of demand and, if so, what are the factors that could drive demand levels to a higher orbit?

The printing and writing paper segment, along with packaging grades, is expected to lead the demand growth. Within the printing and writing sector, copier grades are growing at over 12 per cent per annum. Coated grades have registered a growth of 10 per cent per annum.

GDP growth, improvements in standard of living, growth in the export-oriented industrial sector, demographic factors, such as population growth and increase in literacy levels, growth of the service sector, growth /developments in information technology, and so on, are the growth drivers.

What has been effect on demand for paper, if any, of the growing use of electronic medium?

The industry has in fact been a beneficiary of the IT revolution. It is true that certain grades such as envelopes, catalogues, book paper, newsprint, and magazines have registered negative growth in North America and Japan.

On the other hand, use of PCs have pushed up paper usage and helped in offsetting losses in these segments. Demand for `cut-pack' is expected to double in 2003 due to proliferation of SOHO (Small Office Home Office)

How do you view the outlook on the raw materials front for Indian producers?

The raw-material mix of the Indian paper industry is wood/bamboo 35 per cent, bagasse/straw 30 per cent and waste paper 35 per cent.

The industry has been successful in raising wood in private lands with the cooperation of the landowners. This, however, is not adequate to support and sustain future growth. India has enough degraded forestlands to launch a major industrial plantation initiative. Hopefully the Government will relent on this long-pending issue, soon.

As for agro residues, the withdrawal of excise concessions is a major setback. Growth in the use of agro residues may not reflect past trends. Of late, the prices of these agro materials have also gone up steadily. There are other claimants for these materials now. For instance, sugar mills are being encouraged to set up cogeneration plants using bagasse as fuel.

The recovery rate of waste paper remains low at about 20 per cent in India. We need a well-defined and aggressive collection system for waste paper. But fibre remains the industry's major concern and is a definite impediment for growth.

Do you see the possibility of MNCs showing interest in the Indian paper industry in the way they have done in industries such as cement and oil?

Given India's poor raw-material base and high energy and raw material costs, it is very unlikely that MNCs will rush in, ignoring many other advantageous destinations.

What are Seshasayee Paper's plans over the next 2-3 years? Any further expansion in capacity?

Recently, the company, besides modernising some existing facilities, completed a major expansion costing around Rs 190 crore to almost double the production capacity from 60,000 to 115000 tonnes per annum, .

Our current thrust is on cost reduction. On this front, the company is putting up a 20-MW coal-based captive power plant to meet all its energy needs in-house. The implementation of the project has already commenced and is expected to be completed by end-December 2004. Once in operation, the captive power plant will improve the bottomline.

We are also studying the possibilities of undertaking a major modernisation of our pulping operations.

What would be your guidance for Seshasayee Paper in FY 04?

The business outlook for the company for the financial year 2003-2004 is positive. Production is expected to surpass capacity. The company, as in the earlier years, hopes to achieve nil closing stock of finished goods. Exports are expected to be about 20 per cent of production.

In view of good financial performance, the company plans to accelerate the repayment of instalments of term loans. It is also negotiating with IDBI for conversion of a part of its term loan into a foreign currency loan to have the benefit of reduced interest rates.

The year has, so far, witnessed stability in paper prices. The price increase effected in April 2003 was absorbed quickly though sentiments weakened at the close of the half year. It is expected that the markets will improve shortly. During the current year, we do hope to improve on our performance of last year on all fronts.

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