Role of financial institutions in developing the paper industry

1. Role of financial institutions in developing the paper industry DECEMBER 14, 2012 IPX INDIA, MUMBAI

2. PRESENTATION OUTLINE PRESENTATION OUTLINE Sector Overview Present Lending Scenario Key Issues & Risks Key Financing Parameters Modes of funding assistance by Banks/FIs

3. SECTOR OVERVIEW

4. INDUSTRY STRUCTURE SECTOR OVERVIEW

5. OUTLOOK • The Indian paper industry is estimated to grow to ~ Rs 52,600 crs in size by 2014-15. • Paper and paperboard demand is likely to grow at 8.1% CAGR from 8.7 million tonnes in 2010-11 to 12.8 million tonnes in 2015-16. Paper packaging demand is expected to rise by CAGR 7.1% during 2011-15 • Focus on education will drive demand for writing and printing paper, which is expected to grow at ~ 7.6% CAGR. • Paperboard demand to be led by growth in organised retail and industrial production and is expected to grow at ~ 8.1%. • With the growing environmental concerns and expected restrictions by Govt. on use of plastic products and pouches, Kraft paper with aluminium lining is likely to emerge as a strong substitute. • While traditional varieties of paper will continue to grow at a steady pace, value-added products and higher value specialty paper will grow at a faster pace, especially in urban areas. SECTOR OVERVIEW

6. PRESENT LENDING SCENARIO

7. PRESENT LENDING SCENARIO • Creditexposure of banking sector to the Paper industry Rate of growth of credit to Paper industry was around 17% on compounded basis.

8. KEY ISSUES/RISKS

9. INDUSTRY PERSPECTIVE FINANCING ISSUES Capacity & Scale • Industry is highly fragmented with many small mills ; Top 5 players account for around 23% capacity • Nearly 45% small units ; 40% medium scale ; 15% large – Large units account for ~ 57% of capacity and 40% production, with medium & small units accounting for 34% and 9% capacity • Even in large mills, capacity often spread over relatively smaller machines • Viability of smaller mills is an area of concern Availability of Raw Material • Shrinking forest areas and restrictions in sourcing of wood • Competing demand for wood from construction and other wood-based industry Low domestic availability of alternate raw materials • Absence of well developed system for recycling of waste paper • Competing demand from other industries (e.g. : Biomass based power generating units) for other agricultural waste based raw materials • Quality issues in respect of domestic waste paper for usage as raw material • Dependence on expensive imports for quality raw material

10. INDUSTRY PERSPECTIVE …contd FINANCING ISSUES Competitive Imports The industry, particularly the newsprint segment, faces threat from imports, resulting in lower capacity utilization and excess supply, leading to lower returns Environmental concerns Availability of Government clearances for pollution control ; compliance with norms for effluent disposal Substitution by electronic medium Fast growing electronic media and new technology e.g., E-book, e-Paper, may partially replace the need for paper (W&P)

11. PROJECT FINANCING PERSPECTIVE FINANCING ISSUES Capital Intensive Industry • Paper manufacturing units are very capital intensive ; particularly those based on an all-new machinery • Long gestation period : 2-3 years • Relatively low capital output ; longer period for break-even Use of second hand machinery • Difficulty in benchmarking of costs • Issues related to renovation and reinstallation in new location Banks prefer Chartered Engineers’ reports required to determine value, condition and residual life In case of pre-used machinery.

12. KEY FINANCING PARAMETERS

13. FINANCING OF PAPER PROJECTS BY FI/BANKS • Institutional financing of Paper projects, like in other sectors has seen DFIs meeting long-term financing needs till 1990s, while Banks traditionally met the working capital requirements • Late 1990s onwards, Banks have besides funding working capital requirements, taken a larger role in project financing also • Parameters for financing Paper projects are much the same as for most manufacturing industry projects • As a part of process followed by Banks/FIs to fund projects, appraisal is undertaken to examine the bankability of the project, covering various aspects FINANCING PARAMETERS

14. KEY EVALUATION CRITERIA FINANCING PARAMETERS • Promoters • Experience & Resourcefulness • Technical • Location and site characteristics • Plant configuration & technology - flexibility • Technical arrangements, • Availability of utilities, etc. • Banks prefer DPR/TEVS report from reputed technical agencies for this purpose • Market • Linkages for raw materials • Demand-supply for products & selling arrangements. • Banks prefer market study reports from reputed agencies for this purpose • SWOT & Risk : Mitigation structure to meet project risks and potential threats • Financial parameters : Leverage, Profitability & Debt Servicing ability

15. FINANCING PARAMETERS KEY FINANCING PARAMETERS

16. OTHER FINANCING CONSIDERATIONS Banks are selective in funding paper projects due to past experience. In light of the same, key considerations in financing projects presently are :- • Banks are more comfortable with brown field expansions than green field projects • Preference for projects in value added segments • Tie-ups for sourcing of raw material • Selling & distribution arrangements for off-take of products • Mitigation of environmental concerns KEY FINANCING PARAMETERS

17. MODES OF FUNDING ASSISTANCE BY BANKS/FIS

18. Funding options & characteristics Rupee Term Loans – Senior Debt • Tenor : Long term finance ; Banks prefer Door-to-Door tenors around 7-8 years • Interest rates : • Linked to Base Rates (Currently ranging between 9.75%-10.75% p.a. for most PSU Banks) • Risk premium (based on rating of the company) and term premium added by banks to their Base Rate to arrive at pricing for term loans • Security : Term loans for projects generally secured by way of :- • First charge on fixed assets of the project • Second charge on current assets • Guarantees from promoters (additional) • Moratorium period : 6 – 12 months of moratorium for principal repayment post COD • Repayment schedule : Repayment could be symmetrical/structured to suit cash flows MODES OF FUNDING

19. MODES OF FUNDING Funding options & characteristics Rupee Term Loans – Senior Debt • Upfront fees : Fee as a percentage (%) of the aggregate amount of the Facility being provided by the Lenders at the time of signing of loan agreement. • Commitment charges : Applicable on undrawn amount of loan. Some flexibility allowed by way of revision in draw-down schedule with prior notice • Pre-payment : Pre-payment is allowed on payment of pre-payment premium. Flexibility provided to make pre-payments without premium if the same is from internal generations, or in case of reset of interest rate • Financial Covenants : Financial covenants are stipulated and generally tested on annual basis :- • Fixed asset coverage ratio • Total debt gearing (TOL/TNW) • Interest coverage ratio 19

20. Funding options & characteristics … contd Rupee Term Loans – Subordinate/Mezzanine Debt • Subordinated loan ranks lower than senior debt with regard to priority in principal repayment and security • Repayable after substantial senior debt obligations have been met • Security : Second charge on assets of company. As a result, subordinated debts are considered to be more risky for the lenders • Generally treated as quasi-equity and allows promoters to reduce their equity infusion requirements while retaining the same level of management control • Interest rates : Interest rates linked to Bank Base Rates with higher spread than in case of senior debt in view of higher risk • Could carry option for conversion into equity MODES OF FUNDING

21. MODES OF FUNDING Funding options & characteristics … contd Foreign Currency Debt Options Foreign currency debt sources include ECBs, External Credit Agency (ECA) backed credits, FC loans from domestic FIs having overseas lines of credit. Denomination usually in USD, Euro and Yen Specific end uses ECBs can be availed for capital expenditure on new projects and for, modernization/expansion of existing production units as also for overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing RBI guidelines ECAs provide long term credit facilities for export of capital equipment from their respective countries Foreign currency loans are also provided by some domestic FIs like EXIM Bank for import of capital equipment. Preference for companies engaged in exports. 21

22. THANK YOU Sanjay Behari Assistant Vice PresidentProject Advisory & Structured FinanceSBI Capital Markets Limited5th Floor, World Trade Tower, Barakhamba Lane, New Delhi - 110 001 Phone: +91 11 2341 7782; Mobile: +91 9958298641; Fax: +91 11 2341 7782email: sanjay.behari@sbicaps.com