MANAGEMENT DISCUSSION & ANALYSIS

1. An overview of the Economy and Business Environment

The global economy in FY 2014-15 witnessed divergent trends among major economies and stress on major oil producing countries as a direct result of sharp decline in energy prices, especially in the second half of the year. But the sharp decline in oil prices since mid 2014 is expected to support global activity and help offset some of the headwinds to growth in oil-importing economies including that of India.

Global growth forecast is at 3.5 percent in 2015 and 3.8 percent in 2016, with uneven prospects across the main countries and regions. Growth in emerging market economies is softening, reflecting an adjustment to diminished medium-term growth expectations and lower revenues from commodity exports, as well as country-specific factors. The outlook for advanced economies is showing signs of improvement, owing to the boost to disposable income from lower oil prices, continued support from accommodative monetary policy stances, and more moderate fiscal adjustments.

Indian economy growth picked up in 2014, inflation markedly declined and the external position was comfortable, helped by positive policies and lower oil prices. The outlook for the country is for economic strengthening through higher infrastructure spending, increased fiscal devolution to states and continued reform to financial and monetary policy.

With the new Government at Centre, the Indian economy is steadily reviving helped by positive policy actions, lower global oil prices and 'make-in-India' campaign driven by the Govt. and there is an environment of optimism in the corporate sector. The economy revival is also supported by multiple factors including attractive demographics and the propensity to spend, India is becoming one of the fastest growing market economies. The growth forecast is projected at 7.5% in 2015-16 driven by stronger investments following improvements in the business confidence and climate, aided by policy interventions. Besides, the proposed implementation of Goods and Service Tax (GST) in the financial year beginning 1 April 2016 is expected to lead in a new indirect tax regime, simplifying the movement of the goods and services across the country, shrinking delivery times and widening the product markets.

2. Industry structure and Development

Global W&P paper demand as per CRISIL Research, to fall by 0.5-1.0 per cent CAGR to 95-100 million tonnes between 2014­19. Demand from Japan will continue to decline due to substitution from online media. In US and Europe, W&P paper demand will also decrease albeit at a slower pace of about 6 per cent CAGR and 4 per cent CAGR, respectively. Coated paper is largely being impacted by digital substitutions, which is a structural shift; consequently, demand in the segment will continue to decline. However, uncoated paper, which, in addition to being used in education is also used in business as well as commercial print media, is more influenced by economic cycles rather than behavioural change or digital substitution. Consequently, with better economic growth in US and Europe, growth in the uncoated paper segment is expected to support W&P paper demand. W&P paper demand in Asia and Middle East will continue to drive overall demand and is expected to grow by about 2 per cent CAGR between 2014 and 2019. In China, demand for school books, which account for about 25-30 per cent of W&P demand, will continue to grow at a steady pace driven by increase in government spending on education as well as rising literacy in lower tier cities and rural areas.

India is the fastest growing market for paper globally. Despite the continued focus on digitization, India's demand for paper is expected to rise manifolds in the next few years, primarily due to a sustained increase in the number of school going children in the rural areas. Growing consumerism, modern retailing, rising literacy and continued Govt.'s spending on education through the Sarva Shiksha Abhiyan as well as the increasing use of documentation will keep demand for writing and printing paper buoyant.

The Indian paper industry accounts for about 2.6% of the World's production of paper. The estimated turnover of the Industry is INR 50,000 crore approximately and its contribution to the exchequer is around INR 4,500 crore. The operating capacity of the industry currently stands at 12.75 million MT. As per industry estimates, over all paper consumption has now touched 13.10 million MT. Demand of paper has been hovering around 7% for some time. So far, the growth in paper industry has mirrored the growth in GDP. India is the fastest growing market for paper globally and it brsents an exciting scenario; paper consumption is poised for a big leap forward in sync with the economic growth and is estimated to touch 13.95 million tonnes by 2015-16 and about 18.50 million tonnes by 2020 primarily due to continued increase in the number of school going children in the rural areas and an overall faster economic growth. The futuristic view is that growth in paper consumption would be in multiples of GDP and hence an increase in consumption by one kg per capita, would lead to an increase in demand of 1 million tonnes of paper.

Policy factors have a key role to play in the growth of the domestic paper industry. The government's committed focus on literacy and expansion of organized retails distribution network have a positive impact on the consumption and demand of paper in India. In the last five years, the paper industry has invested over Rs. 20,000 crores on capacity enhancement and technology upgradation and is now waiting to reap the benefits of these investments.

Writing & printing paper segment have witnessed optimum capacity utilizations levels over the past few years due to steady demand growth. This led to large capacity additions in recent years and demand is taking its time to absorb these capacity accretions and leading to the sluggish sales realizations.

As per CRISIL Research, in 2014-15, paper demand slowed down on account of muted industrial activity as well as lower corporate spending on office stationery and advertisements as corporate sector continued to reduce overheads to support profitability by cutting down spending on office stationery and advertisement. However, CRISIL expect demand to grow by 5.5-6.0 per cent in 2015-16 due to economic recovery. Over the long run, CRISIL Research expects demand for paper to grow at about 6.5 per cent CAGR (2014-15 to 2019-20) to 18.5 million tonnes in 2019-20. Demand for W&P will be driven by government spending on education, corporate spending on stationery and healthy growth in services sector.

On the supply front, capacity additions are expected to slow down over the next 5 years on account of aggressive expansions in the last 5 years. CRISIL expect capacity additions of about 2.0-2.5 million tonnes over the next 5 years (as compared to 3.0 million tonnes in the last 5 years) of which brmium segments such as coated paper and boards will account for a major proportion. CRISIL Research expects profitability of W&P and paperboard players to improve in 2015-16 on account of lower raw material cost and improving demand scenario.

As per CRISIL research, demand for W&P paper is projected to grow at a CAGR of about 5.7 per cent to 5.4 million tonnes in 2019-20 from 4.1 million tonnes in 2014-15; the segment wise growth is detailed below:

• Within the W&P segment, copier paper is expected to grow at the fastest pace of 12 per cent CAGR (as compared to nearly 11 per cent CAGR over the last 5 years) on account of a rise in corporate spending on stationery.

• During the same period, demand growth for coated paper is expected to remain healthy at 7.5 per cent CAGR led by an increase in circulation of magazines coupled with increasing use of higher quality paper in print media.

• Demand for creamwove and maplitho paper, which is linked to growth in the education sector, is expected to grow at a steady pace of about 3.0 per cent CAGR in the next 5 years as more new educational institutions are likely to come up in the country, as an outcome of the Indian Government's Right to Education (RTE) initiative. Creamwove continues to the largest contributor to the W &P demand. Additionally, initiatives like Rashtriya Madhyamik Shiksha Abhiyan and Sarva Shiksha Abhiyan will continue to boost the paper demand.

• Gross enrollment ratio in elementary schools to reach nearly 91 per cent in 2019-20 from about 84 per cent in 2014-15.

Demand for Creamwove Paper (the most widely-used variety in Indian school textbooks) is expected to grow at a steady pace as more new educational institutions are likely to come up in the country due to the outcome of the Indian Government's Right to Education (RTE) initiative. Although maplitho, coated paper and copier paper have higher realizations, the volume of creamwove makes it the largest segment in paper. Creamwove continues to be the largest contributor to the W &P demand. Additionally, initiatives like Rashtriya Madhyamik Shiksha Abhiyan and Sarva Shiksha Abhiyan will continue to boost the paper demand.

The growth and development of education in the country and strong economic growth are driving demand for writing & printing paper. Coupled with this increasing emphasis on education in the country, corporate spending on stationery and advertisements, GDP growth and the increasing brsence of modern retail formats and convenience stores is also driving the demand for writing & printing paper.

However, there has been a gradual shift in demand from the traditional creamwove and maplitho to higher varieties such as copier and coated paper. Despite a gradual decline in share to 43 per cent from 50 per cent in 2007-08, creamwove continues to be the largest contributor to the total W&P demand. On the other hand, demand for coated paper and branded copier has been increasing over the years to 35 per cent in 2013-14 from 27 per cent in 2007-08. Creamwove is the lowest value segment, while maplitho, copier and coated paper are higher-value segments.

Office printing continues to be the next biggest end-use segment after education. Demand for office stationery and printing will further increase as the performance of the Indian economy improves.

Within W&P paper, demand for copier paper is likely to record the strongest growth. With rise in urbanisation and office spaces, there is a greater demand for good quality copier paper from the office printing segment.

CRISIL Research expects demand for specialty paper to grow at about 9 per cent CAGR between 2014-15 and 2019-20 as compared to 8.4 per cent CAGR in the last 5 years; demand will reach 0.9 million tonnes in 2019-20 from 0.6 million tonnes in 2014-15. The main varieties of specialty paper are tissue paper, decor paper, thermal paper, cigarette paper and business card paper. Their usage has been growing in line with growth in the economy, rise in organised retail penetration and increase in urbanisation.

The high prices of specialty paper products links their consumption to the standard of living and per capita income of consumers. For certain varieties of specialty paper (such as quality decor and electrical grade paper) increased infrastructure spending and growth in construction will be the growth drivers.

Of the total paper and paper board demand, writing & printing paper accounts for about 31 per cent, industrial paper accounts for about 46 per cent, newsprint accounts for about 19 per cent, and speciality paper accounts for the balance 4 per cent.

In other segments, the growth is primarily driven by the GDP growth in the overall economy. Writing & printing paper consumption has been growing steadily over the years. While India accounts for nearly 17 per cent of the world's population, it consumes only 5 per cent of the global paper production. In India the per capita consumption of paper is low at about 11 kg as compared to about 22 kg in Indonesia, 42 kg in China and world average of around 58 kgs; but it is gradually improving in line with the economic growth, industrial production, print media expenditure, population growth, Govt. spending and continuous thrust on education, decline in dropout rates in educational institutions and increased literacy levels.

3. Opportunities and Threats

The Indian paper industry is expected to grow at about 6.5 per cent CAGR between 2014-15 and 2019-20. Inspite of advancement in technology, like the usage of iPads, Galaxy Tabs, Smart Phones, the increased brference for online storage and dissemination of data, the paper industry is poised for a consistent growth in the demand for paper in next few years. Despite the higher level of technology being used in the corporate sector, there has been no decline in the paper consumption, but infact the paper demand continues to rise at a modest pace. The envisaged growth in the value-added printing & writing paper segment in India brsents an invaluable opportunity, and your company plans to leverage it by tapping its institutional strength in distribution supply chain, cost competitiveness and brmium quality paper alongwith its branding image.

Growth in the writing and printing paper is linked to the economic growth. However, lower per capita consumption in India compared with the world average will drive the domestic demand for paper over the medium to long term.

The company has been one of the most cost competitive paper mill as also a large player in the writing and printing segment. The continuous efforts of the company towards cost reduction and technology upgradation has led to improved product quality, enhanced product range, increased production capacity, higher operational efficiencies coupled with economies of scale. Further these initiatives have also enabled the company in the manufacture of brmium quality paper, including coated paper, maplitho paper and brmium copier paper, which is placed in the higher value segment, competing with quality specifications of other large paper mills.

The company has further continued its initiatives to optimize capacity utilization; optimization of operational cost; innovation on specialty products, copier paper; modification and up-gradation of equipments and paper machines for further improving the product quality.

Raw material costs account for around 60 per cent of the operating income of mills in the paper industry. Wood and wood based pulp are the main raw materials required for manufacturing W & P paper, especially in the higher end of value chain such as maplitho and coated paper. India's wood resources are limited; therefore, cost of wood is much higher in global comparison. Since there is conspicuous absence of Government's enabling policies favouring industrial/production plantation, securing future wood supplies will be Industry's biggest challenge. However, in line with this increase in production, demand for raw materials will also go up. The different raw materials used to produce paper are - agri-residues, wood/ bamboo pulp, imported pulp and wastepaper (domestic and imported).

India has a total land area of 3.3 million sq km with forests covering only 0.7 million sq km. About 78 per cent of the total land area is non-forest area. With diminishing forest resources and limitations on enlarging man-made forests, there is scarcity of raw material for paper mills. Moreover, the limited raw material can be put to many alternative uses.

Over the last few years, imported pulp has accounted for around 10 per cent of domestic production. With increase in capacity and growing demand for paper, demand for wood is expected to grow in the next few years. With domestic wood supply being inadequate for this growing need, the mills will have to import wood in larger quantities.

The alternative source of raw material is wastepaper/recycled paper - domestic and imported. Both together accounted for nearly 40 per cent of the total paper production. However, in India, the system of wastepaper collection is not very well developed in the domestic wastepaper segment. Hence, the recovery rate is low and consequently there is lower availability. This leads to domestic mills relying increasingly on imports to meet their demand.

The third alternative source of raw material for the paper industry is agri-residues such as bagasse, wheat and rice straw, wild grass and other such agricultural wastes. Bagasse is the most widely-used agri-residue in the paper industry. However, availability of bagasse has been declining due to its increased use in power generation by sugar companies. Despite agri- residues being seasonal in nature, this is the segment of raw material which your company has mastered processing of, and has therefore gained an edge in the industry.

Paper manufacturers are finding it difficult to pass on the increase in raw material cost to end users. The operating profitably of Indian paper companies will remain under challenge due to the high input costs such as power, chemicals and manual labour. The imported raw material will also now cost dearer because of high volatility in US $ and consequent high debrciation in the Indian currency.

Further, the changes in the government policies and the paperless initiatives taken by the Govt. of India, coupled with Green initiatives in Corporate Governance leading to paperless compliances by the companies, is indicative of a slight threat area to the paper industry.

4. Risks and Management Perception

The paper industry is labour intensive, power intensive as well as capital intensive and is exposed to several risks i.e. changes in the government policies, environment policies, duties and taxes, technological obsolescence and external economic factors. The operating profitability of the paper companies will remain under brssure due to high input costs such as power, chemicals and manual labour. However, debrciation in the Indian currency is likely to keep raw material costs high in import dependent operations. High financial costs coupled with lower margins will significantly affect the cash flows.

Your company adopts a combrhensive and integrated risk appraisal and mitigation process thereof as part of the process in risk management.

The company uses agro waste materials, mainly Kanagrass and Wheat straw, as the basic raw materials to manufacture paper. The availability of these raw materials is seasonal and is mainly dependent on good monsoon. The agro residue material does exist on the ground, but the adequate availability is a constraint as free accessibility is getting limited due to increased capacities of the other paper mills in and around the region. This may not be able to sustain the future material requirements taking into account the needs of brmium quality paper. The continuous increase in prices of raw material, imported pulp and other inputs continues to be a matter of great concern for the industry. However, locational advantage of your company's paper mill provides an added access to the major raw material sources and insulates it, to some extent on this front. We have exclusive sources of suppliers connected to your company for supply of Agro raw materials, by way of long term contract arrangements.

The paper industry consumes a large amount of energy and water. Energy costs account for about 15-17 per cent of costs. Energy costs vary depending on the fuel used for generating power. The cost of power has increased as a result of inadequate supply and increase in tariff for industrial consumers. The prospect of availability of good quality fuel is diminishing. However, the company has got itself registered with Coal India Limited and has been meeting part of its requirements in co-generation plant through procurement of coal, thus mitigating the cost affect to some extent.

India's wood resources are limited; therefore cost of wood is much higher in global comparison. In the absence of Government's enabling policies favoring industrial/production plantation, securing future wood supplies is Industry's biggest challenge. To this end, your company had initiated a social Agro-forestry process by creation of a Nursery at the Mill to grow brmium quality clonal plants which has been doing very well. At the Nursery, clonal varieties of fast growing hard wood trees are grown and distributed to farmers for them to plant the hard wood trees in the farmer's land and get the hardwood post the harvest. We are also continuing our efforts for growing of plantations by touching base with the farming community and making them aware of the financial benefits attached to social farm forestry.

Cost of raw materials forms the largest cost component in the paper industry, accounting for about 60 per cent of the total cost. Hence, even a slight increase in raw material price distorts the cost structure of the mill.

The company continued its efforts at proper raw material mix, cost reductions and product mix optimization. The chemical recovery, co-generation plant and other cost reduction measures coupled with variety of distinctive products manufactured with better operational efficiencies has significantly increased its cost competitiveness.

Your company has also framed a 'Risk Management Policy' to identify and assess the key risk areas, monitor and report compliance and effectiveness of the policy and procedure. A Risk Management Committee as per the regulatory requirements has also been constituted to oversee the risk management process in the Company.

5. Outlook

Paper plays a key role in the communication and as a packaging material. Demand for the paper is closely linked to the brvalent economy conditions. Paper industry continues to have reasonably bright prospect in India during next 5 years as the demand of paper and paper products grow in line with the GDP growth. Paper continues to enjoy a relatively healthy demand on account of (i) lifecycle of a paper product from manufacture to consumption and disposal is short, as paper is used  more in the nature of consumption good and not as a durable (ii) Wide usage, right from an individual to a corporate entity and (iii) no real low cost substitute for paper.

The Indian paper and paperboard industry has the potential and the capabilities to service the demand in domestic and international market; and also to create huge employment avenues in rural India through agro production and forestry; which will only strengthen if the competitiveness of the value chain is encouraged by the government.

The initiatives taken by your company in the recent years for technology up-gradation, improving operating parameters, optimising operational costs, wider product mix, and value added products for its customers will enable the company to face challenges in coming years.

The level of substitution has not escalated anywhere near threatening levels. While W&P paper does not face any major threat from substitutes, the increased brference for online storage and dissemination of data and information could marginally affect demand. However, despite the higher level of technology being used in the corporate sector, there has been no decline in the paper demand.

Availability of adequate good quality agro raw materials at cost effective prices, higher capital outlay, high interest costs, long gestation period and stringent environment regulations are the major entry barriers for the Greenfield projects.

6. Company's Financial Performance & Analysis

The production of paper during the year under review was 99,550 metric tonnes as against 97,572 metric tonnes in the brvious year. The quantitative figure for the sale of paper was 99,189 metric tonnes this year, leaving closing stock of 399 metric tonnes, as against the sale of 97,534 metric tonnes in the brvious year.

The figures given in the Financial Highlights for the current year under review show the following trends over the brvious year;

For the year under review, the company has recorded satisfactory performance in its working results even in the midst of adverse circumstances emerging from import of paper and stagnancy in the sales prices. This performance is due to the improved operational efficiencies, productivity, quality and higher volumes of brmium quality paper products like copier and surface sized paper and despite the increase in input prices of agri- materials. The high volatility in US $ and consequent high debrciation in the Indian currency and high interest costs have led to the higher costs of imported pulp and other materials which led to the squeezed margins.

The company recorded gross sales turnover and other income at Rs.53,086.75 lacs, up by 4.35%; operating profit at Rs. 6,480.67 lacs, down by 16.32%, Profit before Tax at Rs. 3,169.28 lacs, down by 15.07%. Net profit after tax is down by 25.6% and stands at Rs. 2,503.79 lacs.

The initiatives taken by your company in the recent years in improving productivity and efficiency have led to achieving of the above operational performance. The results of cost reduction initiatives and operational efficiencies will be more visible in the current financial year 2015-16 as your company has continued the initiatives to optimize capacity utilization, cost reduction initiatives, innovation of new products and is further undertaking modification and up-gradation of the paper machines for improving the product quality vis-a-vis cost reduction initiatives.

The Mill Expansion Plan implemented in the brvious years, has made your company, not only, one of the most cost competitive paper mills, but also as one of the large paper player in the writing and printing segment. Further continuous innovative initiatives have enabled the company to manufacture papers of distinctive prime quality, which is competing with the brmium quality of other large paper mills.

7. Internal Control Systems

Your Company implements internal control systems to provide reasonable assurance that the assets are safeguarded and transactions are properly authorized, recorded and correctly reported. It is a common practice to lay down a well thought business plan for each year. From the annual business plan, detailed budgets for revenue and capital for each quarter is determined. The actual performance is reviewed in comparison with the budget and deviations, if any, are addressed adequately. The internal control mechanism is well established. The internal control system is supplemented by regular management reviews and periodical reviews by the independent firm of chartered accountants, which evaluate the functioning and quality of internal controls and checks; and provides assurance of its adequacy and effectiveness. The scope of internal audit covers a wide variety of operational methods and ensures compliance with specified standards with regard to availability and suitability of policies, practices and procedures, extent of adherence, reliability of management information system and authorization procedures including steps for safeguarding of assets. The Reports of internal audit are placed before Audit Committee for review.

8. Human Resources

Your company enjoys the support of committed and well satisfied human capital. Human resources are invaluable assets of the company and the Company's endeavor has always been to retain the best professional and technical talent. The company lays great emphasis on proper management of human resources and skill developments and believes that the human resource is the most important ingredient for achieving excellence in performance and sustainable growth of the business of the company. These practices enable the company to keep the attrition rate well below the industry average. The management has a process driven approach that invests in training and skill development needs of the employees on a regular basis through succession planning, on the job training and training workshops.

9. Cautionary Statement

Statements in this "Management's Discussions and Analysis" are describing the Company's "forward looking statements" within the meaning of applicable laws and regulations. Actual results could differ materially from those exbrssed or implied. Important factors that could make a difference to the Company's operations include global and Indian demand supply conditions, finished goods prices, raw material availability and prices, cyclical demand, changes in Government regulations, environmental laws, tax regimes, economic developments within India and abroad and other factors such as litigation, industrial relations and other unforeseen events.