Weak rupee worsens credit metrics of Indian paper companies: fitch

The negative outlook for the Indian paper sector is likely to be sustained through the remainder of 2012, considering the continued subdued economic environment which is not conducive for the full pass-through of costs to end-customers ratings agency Fitch today said in a new paper, 2012 Mid-Year Outlook: Indian Paper.

The fall in operating profitability of most Indian paper companies was much sharper in H112 than in the last four years.

This is attributed to the falling rupee which has increased the prices of coal and pulp to higher-than-expected levels, along with the direct impact of rising input prices such as labour costs, chemicals and power. The weaker operating profitability has also impaired internal cash generation for most Indian paper manufacturers, and this will have a bearing on debt levels throughout 2012.

The rupee depreciation has also increased the rupee equivalent amount of the foreign currency debt of Indian paper companies, which is used for funding capex plans. As a result, the credit metrics of most of the paper mills have stretched beyond Fitch's expectations, and are likely to remain weak over the short- to medium-term in the wake of the current exchange-rate scenario.

Fitch expects that some moderation in input prices amid stability in the rupee at around current (July 2012) levels would help domestic companies to price products competitively against imports during H212. This could bring about some improvement in profitability as well; however, it may not be adequate for credit metrics to fall within the agency's comfort levels.

Fitch has revised its 'outlooks' to 'negative' from 'stable' for some of its rated paper companies during 2012. These include Ballarpur Industries Limited ('Fitch AA-(ind)'/Negative), Sripathi Paper & Boards Private Limited ('Fitch BBB(ind)'/Negative) and Shree Shyam Pulp and Board Mills Limited ('Fitch BBB+(ind)'/Negative).