Although there is no clear trend among the packaging stocks, the financially sound companies have started showing signs of accumulation. Essel Packaging, the market leader in the laminated tubes segment, has moved up from Rs 236 to Rs 279 in the last three trading sessions. However, the rise has been attributed mainly to the buy-back offer from the company.

Another company which is likely to hog the limelight in coming sessions is ITW Signode. Although the scrip has fallen from Rs 91.6 on June 2 to its current level of Rs 78.6 (mainly on account of the Rs 26 crore loss in FY 1999), the counter hasstarted witnessing heavy volumes of 1.3 lakh shares.

Paper Products has zoomed from Rs 190.2 on June 15 to Rs 250.5 on June 28, although technical correction has seen the stock falling to Rs 238.7 in the last two trading sessions. Although the packaging industry as a whole has gained significance, it is the flexible packaging industry which has been in the limelight. While the packaging industry has been growing at an average rate of 10 per cent, the flexible packaging has been growing at 30 per cent.

Growth is likely to accelerate as the industry has better prospects ahead. With FMCGs penetrating rural areas with branded goods and increased sale of products in smaller packs/ sachets, packaging companies may register a growth in volumes in the coming year too.

As FMCGs and food producers are the major customers with an expected growth of 10 per cent, the future seems encouraging for flexible packaging in particular. The Edible Oil Packaging (Regulation) Order, 1998, will also boost the industry's salessubstantially. Another factor that goes in favour of the industry is the slowdown in capacity expansion, which is likely to reduce the demand-supply disparity and improve capacity utilisation.

In the area of industrial goods, too, the packaging scene looks set for a complete revamp. This is because international logistics firms targeting the Indian market require packaging to be of global standard ensuring optimum space utilisation, easier handling, protection of products and attractive looks and information.

However, the industry continues to suffer from plenty of problems. One of the major problem plaguing the industry is that of overcapacity, which started in 1993. Another problem is major competition from the unorganised sector (70 per cent of the manufacturers fall in the unorganised sector).

Another factor which has been responsible for the poor financial condition is constant need for funding to upgrade manufacturing facilities in tune with technology advancements. To top it, increasing costs ofthe important raw materials have been shrinking the already low margins.

Although there is stiff competition today, in the future, competition will reduce once a number of players fall by the wayside in the high cost-low profit margin industry. The high debts of companies will force them into dangerous liquidity positions which will, in turn, make them easy targets for takeovers.

In fact, takeovers and acquisitions will be the buzzwords for the industry in the future. Foreign companies are likely to enter the industry in the coming days. The trend has already been started with the acquisition of Paper Products by Dutch packaging major Van Leer. The companies in the sector will have to undertake cost-reduction exercises, product innovation and strong financial discipline in order to succeed.

A few companies have been suffering because they have not been able to manage their financials properly. Take for instance, Flex Industries, which despite a bright industry scenario, is trading at Rs 10.05. Thecompany opted for backward and forward integration, which lead to a constant need for funds resulting in high leverages and financial charges.

Although the industry is looking up, analysts feel investment in the sector should be made only for the long-term and should be restricted to market leaders. Paper Products with its strong fundamentals, technical and financial backing from its new parent Van Leer could be considered for investment. The scrip is currently trading at Rs 238.7 enjoying a PE of 18.6 times.

Although ITW Signode is suffering from poor offtake due to a slowdown in major user industries, with the economy on the revival path, the company's fortunes can change. Essel Packaging, whose dominant position in the laminated tubes segment and growing exports are likely to translate into higher volumes in the future, is a good bet. However, the stock at current levels is fully-priced, entry can be considered at declines.