Detailed Rationale

Crisil Ratings has upgraded its ratings on the bank facilities of Genus Paper & Boards Limited (GPBL; part of Kailash group) to ‘Crisil BBB/Positive/Crisil A3+’ from ‘Crisil BBB-/Stable/Crisil A3’.

 

The rating action factors strong support from the group along with improving scale of operations and reducing annual debt repayment obligations, especially from fiscal 2026, which should support improved operating cash flow and liquidity profile for the company.

 

Crisil Ratings has factored in group support for GPBL, given its high significance for the Kailash group (owner of Genus brand and has Genus Power Infrastructures Ltd as flagship company of the group, rated ‘Crisil AA-/Stable/Crisil A1+'), as GPBL is one of the largest companies in the group. GPBL has been receiving regular support from the group in the form of operational, managerial and financial support (unsecured loans) from the promoter and other group companies, as and when needed, over the years. Further, Crisil Ratings has taken note of the articulation provided by the promoters highlighting the high significance of GPBL to the group and that the group support will be provided to the company in a full and timely manner.

 

The positive outlook factors in the likelihood of continued improvement in operating performance with increasing scale of operations and healthy operating margins (Earnings Before Interest Depreciation and Amortisation {Ebitda}) of more than 8-9% over the medium term. This, along with well managed working capital cycle should support improving operating cash accruals, resulting in improved liquidity profile with ratio of net cash accruals (NCA) to debt repayments of more than 1.2 times in fiscal 2026 and thereafter. This will be a key rating sensitivity factor.

 

The ratings reflect the stable business risk profile of the group supported by expected revenue of more than Rs 800 crores in fiscal 2025 against Rs 714 crore in fiscal 2024, with an expected operating margin of ~ 8-9%. Going forward, the group is expected to achieve a healthy revenue growth of 15-20% in fiscal 2026 supported by volumetric expansion from existing product lines as well as from new product lines like writing and printing paper and food grade paper. Expected improvement in revenue driven by volumetric growth along with sustenance of operating margin at or above 9% will remain key monitorable.

 

Further, range bound operating profitability, working capital intensive operations and high repayment obligations over the past few years had resulted in the net cash accruals being insufficient against repayment obligations for fiscal 2024and the same were met through infusion of USLs by its group companies. However, with expected improvement in operating profitability from fiscal 2025, the NCA is likely to be sufficient for debt repayments in fiscal 2025 and the same should further improve going forward. This should result in improved liquidity profile with positive free operating cash flow and the same will be a key rating sensitivity factor.

 

Further, Crisil Ratings has taken note of the capital expenditure (capex) being undertaken by the company for establishing a de-inking unit (a backward integration plan) at its existing facility in Muzaffarnagar, Uttar Pradesh. The capex is spread over fiscals 2025 and 2026. The total project cost of Rs 135 crore is expected to be 70% funded through bank and rest through promoters’ contribution in the form of unsecured loans and recalling investments/loans and advances from group company. The said capex (~ 30% of company’s networth) is expected to be completed by the fourth quarter of fiscal 2026. Through this backward integration, GPBL is expected to produce its own pulp, which will support better cost efficiencies and in turn, operating margins. The group expects a gradual improvement in operating margin to above 10% over the medium term. As the project is under-construction, its timely completion without any cost overrun shall remain key monitorable over the medium term.

 

The ratings continue to reflect GPBL’s established presence in kraft paper manufacturing and the extensive industry experience of its promoters, moderate working capital cycle and above average financial profile. These strengths are partially offset by exposure to intense competition and cyclicality in the industrial paper industry, susceptibility to volatility in raw material prices and project related risks.

Analytical Approach

Crisil Ratings has combined the business and financial risk profiles of GPBL with its wholly owned subsidiary, Genus Paper & Coke Ltd (GPCL). Further Crisil Rating has applied its group notch-up criteria factoring in the support that is available by being a part of the Kailash Group.

 

The analytical approach has witnessed a change from earlier, wherein the group notch up has now been factored. This is on account of high significance of the company to the group along with track record of financial support received by GPBL from the group companies as well as the articulation provided by the promoters to provide the necessary support to GPBL from the group, in a full and timely manner.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Established presence and extensive industry experience of the promoters: The promoters have experience of over a decade in the industrial paper industry. The group benefits from the promoters’ extensive experience in the industry, which has helped it to build a strong distribution network and approved supplier status with reputable clients from diverse end-user industries. The same is expected to continue to support the business.

 

Moderate working capital cycle: Gross current assets (GCAs) were 120-140 days over the three fiscals ended March 31, 2024. Its moderate working capital management is reflected in GCAs of 141 days as on March 31, 2024, marked by debtors of 29 days and inventory of 102 days. It is required to extend credit in line with industry standards as the customers include small and medium-sized players with weak credit profiles. Furthermore, as the company imports wastepaper wherein the transit period is generally between 70-80 days inventory holding is sizeable. Hence, the working capital cycle is expected to remain along similar lines over the medium term.

 

Above average financial risk profile: Networth was healthy at Rs 481 crore while limited reliance on external funds yielded a gearing of 0.69 time as on March 31, 2024. Networth is expected to improve and remain above Rs 500 crore and gearing less than 0.9 time as on March 31, 2025, backed by accretions to reserve. The company is undertaking capex of Rs 135 crore in fiscals 2025 and 2026, which will be debt funded to the tune of 70% and rest through promoters’ contribution in the form of unsecured loans and recalling investments/loans and advances from group company. Despite the debt funded capex plan, gearing is expected to remain comfortable below 1 time over the medium term. Debt protection metrics have been moderate marked by the interest coverage and net cash accrual to total debt (NCATD) ratios of around 1.9 times and 0.09 times, respectively, for fiscal 2024. For fiscal 2025, these numbers are expected to remain at similar levels. With the expected improvement in operating margin, interest coverage should remain at 2.4-2.5 times and NCATD at 0.1-0.2 time going forward. Any stretch in the financial risk profile shall remain monitorable over the medium term.

 

Weaknesses:

Susceptibility to intense competition and cyclicality in the industrial paper industry: The Indian paper industry is highly fragmented with several organised and unorganised players. The level of fragmentation is even higher in the industrial paper segment (which accounts for a major portion of the total paper industry) where unorganised players hold the majority of the market share. Rapid growth in the number of small mills has been because of the low entry barriers (the cost of setting up an industrial paper plant is relatively low as most smaller capacities are waste-paper-based and involve minimal investment in technology) and government policies (several excise concessions and other benefits to small paper mills granted from time-to-time). This has resulted in moderately low-capacity utilization levels of 45-50% for GPBL over the past couple of years.

 

Intense competition in the kraft paper segment also limits the pricing flexibility of players. Moreover, end users of packaging paper are also price sensitive. This situation is expected to continue over the medium-to-long term, as consolidation is unlikely because of unviable capacities. Industry is also cyclical in nature, with small players shutting down capacities during downturns and resuming operations when the economy revives. This prevents established players from generating large profits even during periods of good economic growth. The business risk profile may remain constrained by these factors over the medium term.

 

Reliance on group companies and promoter infusion for debt servicing and capex due to negative free cash flow: During fiscal 2025 and fiscal 2024, the net cash accruals (NCA) were insufficient to meet the debt repayment obligations and capex requirements. Hence, GPBL had to rely on infusions from the group companies and promoters to service the same. Though the situation is expected to improve going forward with expected reduction in annual debt repayment obligations from fiscal 2026, timely completion of ongoing capex without any material time and cost overrun and expected improvement in operating cash accruals to result in positive free cash flow will be a key monitorable.

 

Susceptibility to volatility in raw material prices: As 60-70% of the raw material requirement is imported, prices are subject to volatility in international prices and foreign exchange (forex) rates. Furthermore, intense competition limits the pricing power and ability to pass on input price increases to customers on time. The same led to a decline in operating margin to 4.47% in fiscal 2023 from 8.85% in fiscal 2022. In fiscal 2024, the group reported an operating margin of 8.5%. The margins are expected to be similar levels in FY25 as well. Going forward the margins are expected to improve provided successful execution of de-inking plant by the end fiscal 2026, stable raw material prices and sale of value-added products where margins are high.

Liquidity: Adequate

Bank limit utilisation averaged 82% over the 12 months ended January 2025. Net cash accrual of Rs 29 crore in fiscal 2024 was insufficient against repayment obligation of Rs 36.8 crore and the same was met through unsecured loans from group company. Similarly, for FY25 as well, the expected NCA of ~Rs. 35-40 crores are expected to be lower than the debt repayments of Rs 41.5 crore. However, the expected annual net cash accrual of Rs 55-60 crore should cover yearly repayment obligation of ~Rs 50 crores from fiscal 2026 onwards, leaving some cushion to cover working capital requirement. The current ratio was modest at 1.06 times as on March 31, 2024. Over the medium term the current ratio is expected to remain comfortable at around these levels. Need-based support from the group is expected to continue and should support liquidity profile for the company.

Outlook: Positive

Crisil Ratings believes that the credit profile of GPBL would benefit from continued improvement in operating performance with increasing scale of operations and healthy operating margins (Earnings Before Interest Depreciation and Amortisation {Ebitda}) of more than 8-9% over the medium term.

Rating sensitivity factors

Upward factors

• Growth in revenue and sustenance of operating margin at 9.0-9.5%, leading to healthy cushion between net cash accrual and repayment obligation of above 1.3 times.
• Improvement in the financial risk profile with an interest coverage ratio of more than 2.5 times.
• Reduction in loans and advances extended to group company aiding the financial and liquidity profiles.

 

Downward factors

• Lower than expected growth in revenue along with operating profitability below 7% leading to continued shortfall in net cash accruals against repayment obligations
• Any substantial increase in investment or loans and advances to group company or any stretch in the working capital cycle, weakening the financial and liquidity profiles.
• Any delay in ramping up of the capex or cost overrun leading to stretch in liquidity profile.

About the Group

Incorporated in 2012, GPBL is engaged in the manufacturing of kraft paper, duplex paper, and writing and printing paper at its two facilities in Moradabad and Muzaffarnagar in Uttar Pradesh, with installed capacity of 2,18,000 MTPA (metric tonne per annum) for kraft paper, 1,00,000 MTPA for duplex paper, and 48,000 MTPA for writing and printing paper. The registered office of the company is located at Moradabad. GPBL’s shares are listed on the National Stock Exchange of India Ltd (NSE) and Bombay Stock Exchange Ltd (BSE).

 

GPBL is promoted by Mr Ishwar Chand Agarwal, his son Mr. Kailash Chandra Agarwal and other family members.

 

GPCL (formerly known as Kailash Paper & Coke Ltd) is a wholly owned subsidiary of GPBL. Incorporated in 2020, GPCL is engaged in the manufacture of met coke with total installed capacity of 96,000 MTPA at its facility in Chopadava, Bhachau, Gujarat.

Any other information: Not Applicable