Expert Analysis of the Global Macro Events & News affecting the Indian Markets

WEEKLY MARKET SYNOPSIS 

Monsoon in India – Comes with much more than just rains

Monsoon in India is more than just a season. It has since decades been a time of rejoice or misery depending on the rains. India is a tropical country with 18% of world population but only 4% of water resources. This makes India highly dependent on monsoon for all its water needs, from agriculture to households. For the past few years, India has been experiencing deficit rainfall due to climatic conditions. This makes things difficult for the economy, as the amount of rainfall received severely affects the agricultural sector, construction, oil sales and most importantly, inflation rates.

Monsoon 2023 Forecast

While a private company, Skymet, anticipated a delayed monsoon and the arrival of a strong cyclone named Fabien that is also limiting the monsoon streams, the Indian Meteorological Department projected a typical monsoon. El Nino, which is the unusual warmth of Pacific Ocean surface waters, is predicted to occur in May–July 2023 with a 60% chance. This would result in India receiving less rainfall than usual and possibly experiencing drought in many regions. 

Monsoon in Kerala arrived a week late on June 8, but a normal monsoon is expected hereon. 

Increased rates of Inflation

The amount and timing of monsoon directly affects the crop harvest of the season. Food inflation rates are significantly affected. A light or heavy monsoon disrupts the production of crops creating a shortage of food and thus inflation. It also affects production of numerous industrial raw materials shooting up their prices. During drought years, it has been seen that CFPI particularly is very volatile and often crosses RBI benchmarks too.

How is the economy affected? 

• Agricultural output is decreased if a timely and normal amount of rainfall is not received. It additionally impacts many others like FMCG, rural industries, banking institutions and more. 
• As borrowers struggle to repay loans, financial institutions like Rural Development Banks, Co-operative Banks, Non-Banking Financial Institutions, and Individual Lenders are badly impacted and their NPA rates rise.
• Government has to step in and introduce subsidies, regulate Minimum Support Prices and waive off farmer loans. It incurs huge costs as food products have to be imported in case of shortage while the exports go down.
• In drought and flood like situations, unemployment rates go up as agriculture employs almost half of the country’s working population.

Monsoon greys also bring blues to some sectors

• The sales of petrol and diesel go down as monsoon arrives. Consumption in trucks and tractors goes down, fuel requirement for irrigation gensets decreases and vehicle movement reduces. Hence the demand decreases as the temperature comes down. 
• Operations of the whole construction sector come to a halt as rains pour. Important time is lost and in case of a long heavy monsoon, projects often get delayed which is why Q2 for construction and paints industries is the slowest.

Cyclones and their Impact   

India is a cyclone prone country where about 9 cyclones occur every year. These mostly affect the western, southern and eastern parts of the country. Cyclones, like Biparjoy, directly impact the climatic conditions like the arrival and intensity of monsoon season. Monsoon cyclones are the worst for the economy as they can shift backwinds to different directions while causing severe harm to livelihood and property. 

This is how different parts of the country are affected by cyclones

Stock Story of the Week – Orient Paper and Industries Limited

“Please give me the paperback copy of this novel as I want to take my eyes off the screen for a while”. This has become a new normal ever since Covid started and everything shifted online, be it studies or work from home culture. Why are we talking about this? Let’s discuss. 

Today we will discuss Orient Paper and Industries Limited, a stock which has been recently added to our smallcase portfolio. In this era of growing digitalisation, it might seem that the use of paper has been losing its glimmer. From e-newspapers to annual budgets being presented digitally, the physical existence of paper is on the verge of becoming extinct. But is it, really?

For a matter of fact, the paper industry in India has been witnessing one of the fastest growths than anywhere else in the world. It has shown robust recovery post Covid-19 has crossed the pre pandemic levels. Have a look at the chart given below. In FY 22 alone, there was a 4x growth in exports of paper and paperboards. (Chart Source- Times of India). In another chart, it can be observed that 54% of Indians still like to have their morning dose of news in print form. 

Let us now quickly jump to the company whose numbers back up these facts. We have Orient Paper and Industries Limited, part of the prominent C.K. Birla group. The Company manufactures the following products: – 1) Writing & Printing grades 2) Tissue papers 3) Caustic soda and its derivatives. The paper products are sold under the brand names “Diamond Touch”, “Orient” and “First Choice”.

As far as manufacturing capacity is concerned, it has 2 facilities based in Madhya Pradesh and Orissa with capacity of 1,10,000 tons per annum, with an equal split between writing and tissue paper. 

Company has continued its revival in performance in Q4, as envisioned, on the back of Pulp Capacity Enhancement and New Recovery Boiler, done in Q3, thereby reducing the Power and Fuel cost as a % to Topline. This has also helped by increase in realisation and reduction in input raw material cost. On QoQ basis, PAT not comparable due to increase in Other Income to 19.03 crores coming from disposal of PPE from 3.41 crores YoY on basis and on QoQ basis Finance Cost and Depreciation has also increased, with increase in PPE and Borrowings, which should be the future run-rate. 

If we talk about the future growth, BOD approved capital expenditure aggregating to Rs. 475 crores towards modernization/debottlenecking of the Company’s manufacturing facility at Amlai, Madhya Pradesh. The project will improve the operating capacity of the Paper mill to 400 tons per day and is likely to be completed in 24 months.

Company’s current capacity is 1,10,000 tonnes p.a. (printing and writing paper 55,000 tpa and tissue paper 55,000 tpa), now after the above capex is commissioned capacity will increase by 32,400 tonnes p.a., an increase of 29% in capacity.

Coming back to the outlook for the  paper industry, it is trading at 16.4x. In the last five to seven years, an amount of over Rs 25,000 crore has been invested in new efficient capacities and induction of clean and green technologies. It is growing, improving and its growth will sustain in coming years. 

CURRENT ECONOMIC EVENTS

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Green Portfolio is a SEBI Registered (SEBI Registration No. INH100008513) Research Analyst Firm. The research and reports express our opinions which we have based upon generally available public information, field research, inferences and deductions through are due diligence and analytical process. To the best our ability and belief, all information contained here is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. This report does not represent an investment advice or a recommendation or a solicitation to buy any securities.