Packaging is Where The Profit Lies
It is now widely known that the pandemic has given a boost to the IT and pharmaceutical sectors. But what can be added to the story is that even the packaging sector has emerged a winner during this critical period. Benefitting from the pandemic, the sector has reported a strong upward trend. In this article, Geyatee Deshpande puts forth her opinion about the sector’s growth potential
Prominent sectors have all seen a boost in recent times with the markets and overall economic conditions posting quick recovery post the pandemic. But while sectors such as automotive, FMCG, chemicals, pharmaceuticals, realty, etc. always grab investors’ attention, the packaging sector is yet to catch the serious attention of investors. In fact, away from the spotlight, the true potential of the sector is yet to be realised by investors. As regular investor M Shah says: “Amongst investors, the packaging sector is not yet as popular as the other sectors in terms of parking funds but surely the sector is one of the strongest and fastest growing in the domestic industry.”
Owing to the rising population, changes in lifestyle, increasing income levels, increase in demand for packaged goods, etc. the packaging sector has witnessed a tremendous boost. If we closely look at each and every product used in our daily essentials, it is the packaging which is primarily the most important. Further, special packaging is used for luxurious goods. Also, most people prefer to judge a product and the company’s attitude towards its consumers on the basis of the company’s efficient and attractive product packaging. The packaging industry in India is expected to register a CAGR of approximately 26.7 per cent from 2021 to 2026.
According to prominent ratings agencies, including Care Ratings, more than 49 per cent of the paper produced in the country is used for packaging purposes. This indicates strong growth potential for the sector. The rapid growth in the packaging sector is primarily driven by the pharmaceuticals, foods and beverages segments. Large investments in food processing, personal care and pharmaceuticals and other such industries create a strong base for the expansion and growth of the packaging sector. Additionally, rise in the spending capacity of the domestic population, growth and expansion of the organised retail sector and e-commerce, and an increase in exports has also brought the packaging sector into the limelight.
End-User Industries
Packaging can broadly be classified on the basis of the type of material being used for it. Table 1 highlights the types of packaging and the materials used. Considering the end-user industries of packaging it can be easily deduced that any demand growth in the end-user industries positively correlates to business growth in the packaging sector as well as a demand for the corresponding raw material.
Post-pandemic the food packaging industry has gained significant importance. Various market leaders such as Amul, Parag Milk Foods, Mother Dairy, etc. consider using packaging materials that reduce the chances of adulterating their products as well as increasing the shelf life. Food delivery and services’ market further fosters growth for the packaging industry.
E-commerce players such as Amazon Pantry, BigBasket, Groffers, Swiggy, Zomato, etc. have seen a rapid surge in their sales. With these e-commerce players emphasising additional importance on safe packaging, packing companies have seen a higher demand for their products. For home deliveries, metal, glass or plastic bottles are preferred by many gourmet outlets.
In terms of plastic packaging, items such as plastic bottles, tubes and jars are primarily used in food and beverage, cosmetics and personal care as well as the pharmaceutical industries. Additionally, in India, plastic bags are commonly used as packaging solutions by small food grain stores and other shops. Paper packing is quite commonly used by manufacturers of printing inks to store cartridges. Paper packaging also accounts for the use of paper bags for delivery or gifting purposes.
Products such as apparel do not require rigid boxes for protection and hence e-commerce offers possibilities for flexible packaging having advantages such as light in weight, energy saving due to less energy consumption of package production, possibilities to adjust it for different products, small pack size and ease of storage and disposal as compared to rigid packaging. On the contrary, e-commerce has also boosted the demand for rigid packaging like that of cartons or corrugated boxes which are especially used in the packaging of electronics, glassware and products that require firm packaging for protection.
Lesser Pandemic Impact
The packaging industries around the world have not extensively been affected by the pandemic. This is irrespective of the fact that the nationwide lockdown had brought the entire packaging supply chain to a halt. Mainly because of the growing demand for essentials, governments across the globe continue to make efforts to continue the steady supply of essential commodities. Therefore, the production of essential commodities has increased and these require good packaging which has in turn helped the packaging industry to sustain even during the tough times of the pandemic. Due to the pandemic, consumption trends have witnessed a shift and flexible packaging has gained much more importance, especially because of the hazards attached to non-packaged products. This has resulted in many packaging companies enjoying higher production and sales volume.
Q3FY21 Performance
Packaging companies can be seen reviving from lower sales volumes and profit margins. The opening up of the economy and increased movement in goods boosted the financials for packaging companies in Q3FY21. Table 2 shows the financial performance of a few of the companies belonging to the packaging sector.
Compared to the previous year, profits have remained subdued for a few companies. But on the contrary, the Q3FY21 results of companies such as Uflex, Jindal Poly Films, Oricon Enterprises, etc. were effective in building investors’ confidence in the sector. The better-than-expected results for Q3FY21 not only have cheered investors but also point towards the higher growth potential of the companies. Table 3 highlights the encouraging performance of packaging stocks. Overall, the average gains of the following list of stocks come to 22 per cent for the last three months while it is 56 per cent in the last one year. As can be seen in the table, Flexituff Ventures International and Xpro India have outperformed, thus giving investors whopping returns.
Over a period of one year, Uflex and Jindal Poly Films have performed exceptionally well, giving returns of around 62 per cent and 85 per cent respectively. Shares of Tinplate Company of India Limited (TCIL) gained around 19.02 per cent in the last one year. TCIL is one of the industry leaders in India, providing metal packaging solutions for a wide variety of food and non-food applications through the manufacturing and marketing of tinplate (ETP) and tin-free steel (TFS).
Conclusion
Packaging can be considered to be a never-ending business and will continue to grow on the scale of demand and consumption by consumers. The pandemic gave a strong boost to packaging with majority of items being delivered in special packing to
The logistics division, under the Commerce Ministry, has started an exercise to formulate a national packaging initiative, which will be part of the proposed logistics policy.
avoid the product’s contact with human touch as well as exposure to bacteria and virus. Supporting the packaging industry’s growth are four key trends – economic and demographic growth, packaging technology, consumer trends and brand owner trends. A boost in the global economy as well as increasing urban population in less developed and developing countries who wish to adopt westernised lifestyle is expected to boost the packaging industry overall.
Packaging technologies and varieties will lead to expansion of the sector as it witnesses demand growth for sustainable packaging. Brands seem to be increasingly keen for packaging materials and designs that demonstrate their commitment to the environment. In order to further maximise the potential of the packaging sector in India, the government has been continuously consulting industry experts.
Recently the packaging industry has seen increasing inflow in investments in terms of foreign funds as well. Considering the positives, the packaging sector is expected to grab investors’ attention. In recent times, shares of packaging companies gained on strong Q3FY21 results, thereby pointing towards a positive growth trend for the future. For investors this is a good time to consider including packaging companies in their portfolio at a time when the sector still remains shy from the spotlight. Considering its growth potential, increasing demand in the sector will give investors a good opportunity to earn solid profits.
Even then, it is advised to select powerful stocks of companies having good valuations and positive financial performance. Such companies can sustain through risky times, giving good returns to its customers. Packaging is now seen as a key bridge between consumers and brands to effectively communicate that hygiene is maintained, safety is prioritised and product or service quality is not being compromised. And hence, packaging continues to play a pivotal role in consumer buying experience in the e-commerce world. Going forward, this sector will continue to ride the e-commerce wave long into the future.