According to a report released on Friday by the rating agency Crisil, paper manufacturers are expected to see a revenue drop of 2-3 percent in the current fiscal year primarily because of weak realizations. In its report, the agency anticipated a 2-3 percent year-on-year revenue drop this fiscal, following a price-driven decline of 6-7 percent in the previous fiscal, mainly due to weak realisations.

The operating margin for Writing and Printing (W&P) paper manufacturers is expected to decrease by 400-500 basis points (bps) to 15-16 percent this fiscal year, after a comparable adjustment last fiscal from the exceptionally elevated levels of fiscal 2023. The report stated that the contraction is influenced by more expensive hardwood and softwood (essential components for producing pulp, the main raw material) and decreasing revenues.

Volume is anticipated to be modest at 2-4 percent this fiscal year due to the ongoing transition to digital communication. However, this impact could be somewhat mitigated by the government's emphasis on spending in the education field and a rise in office-based work.

"On the profitability front, two factors will drive the compression this fiscal. One, W&P paper realisation will continue to correct from the abnormal highs of fiscal 2023, driven by low-cost imports from China and East Asia1 amid modest demand, resulting in a decline of 5-7 percent in W&P prices. "Two, domestic wood costs will continue to surge due to increased demand from competing wood-based industries and reduced wood output caused by lower plantation during the pandemic, while imported wood prices are expected to rise 18-20 percent due to international supply disruptions," Crisil Ratings Director Gautam Shahi said.

The report stated that the credit profiles of W&P paper manufacturers will endure the cyclical decline, supported by reduced leverage and controlled capital spending.

The operating margin is set to rebound by 300-400 basis points to 18-19 percent in the next fiscal year, as heightened plantations over the last two years will enhance supply and turn reduce domestic wood prices.

"While a decline in operating profits will cause a slight moderation in debt metrics of W&P paper manufacturers this fiscal, they will remain healthy due to deleveraging balance sheets and modest debt-funded capex. The ratio of debt to Ebitda (earnings before interest, tax, depreciation, and amortisation) and interest cover of assessed paper makers are expected at 1.7-1.8 times and 5-5.5 times, respectively, this fiscal, compared with 1.1 times and 7.8 times, respectively, last fiscal, and will recover next fiscal," Crisil Ratings Associate Director Pranav Shandil said.

In this environment, the speed of imports and any negative fluctuations in input costs, which can change consumption patterns, will need to be monitored.