Revenue growth at CRISIL-rated medium, small and micro enterprises (MSMEs) in the paper and paperboard packaging sector is expected to decline 300-500 basis points (bps) to 10-12 per cent on sluggish demand following the implementation of the goods and services tax and weak pricing power. The sector, which is highly fragmented with over 5,000 units dotting the country, had clocked 15-18 per cent growth in fiscal years 2015 and 2016.
The price of kraft paper, which accounts for about 60 per cent of input cost, has surged 12 per cent this fiscal on supply constraints. Consequently, CRISIL expects aggregate operating profit margin to plunge 200-300 bps to about seven per cent this fiscal compared with the past three fiscals.
In the short term, lower demand for paper packaging and limited pricing flexibility (because of weakened bargaining power with paper mills, and lack of pricing power with customers) will hit units in the unorganised sector harder — so much so, that it may very well be the hour of reckoning for many.
CRISIL SME Ratings believes investment in modernisation and moving up the value chain are crucial to sustainable revenue and profit growth in the road ahead. In the medium term, the demand drivers would be the rise in the population of middle-class, and increasing environmental awareness leading to lesser use of plastics in packaging.