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Covid-19 crumples paper industry, says CRISIL

Our Bureau Hyderabad | Updated on May 20, 2020

40-45% of paper mills are in Covid-19 red zones

The extended lockdown to check the spread of the Covid-19 pandemic has dealt a nasty blow to the highly fragmented paper industry in the country, according to rating agency CRISIL.

Around 80 per cent of the nation’s paper capacity of 25 million tonnes (mt) (750-800 mills) is clustered around six States that account for half of India’s gross domestic product. They are also major consumption hubs.

The problem, according to the note, is that 40-45 per cent of these mills are in Covid-19 red zones and another 40-45 per cent in orange zones.

Low demand

The industry is grappling with weak demand, shortage of raw material and limited availability of labour, which are affecting capacity utilisation. CRISIL Research expects demand for paper and cardboards to contract 10-15 per cent on-year, affecting all categories of products.

The shutdown of schools, colleges and majority of offices has crimped demand for writing and printing (W&P) paper. Industrial paper usage has also rumpled because of weakness in the FMCG, consumer durables and apparel segments, which account for 50-60 per cent of such demand. To boot, exports have fallen.

Consequently, the financials of paper-makers, especially the small- and mid-sized ones (because of high fragmentation), will be materially affected.

In the financial dispersion analysis for a set of 125 companies that account for 35-40 per cent of the total installed capacity and had a total debt of ₹20,370 crore as of FY2019, 25 firms with ₹10,777-crore debt burden have an interest coverage ratio of 2, and so are at high risk. The debt/Ebitda ratio is 3 for almost half of the sample set, and almost a quarter of the sample set might face issues in meeting short-term obligations as the current ratio is less than 1.

In the report, titled ‘Covid Corollaries’, CRSIL stated that the bulk of the capacity in the top six States are at risk. Almost half of the installed capacity of paper mills is in the red zones in the top six States which account for 80 per cent of installed capacity.

Published on May 20, 2020

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