Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA-/Stable’ rating to the Rs 260 crore Non-convertible debentures (NCD) of JK Paper Limited (JKPL) while reaffirming its ‘CRISIL AA-/FAA/Stable/CRISIL A1+’ ratings on the bank facilities, fixed deposit programme and other debt instruments. The NCDs will be raised to increase liquidity and other general purposes.

 

The reaffirmation reflects continuing improvement in volumes and operating profitability (earnings before interest, taxes, depreciation, and amortisation {EBITDA}) of the company, post easing of Covid-19 related lockdown restrictions since May 2020. The reaffirmation also factors in healthy liquidity in the form of cash and equivalents and undrawn bank limit. The company is likely to maintain minimum liquidity of Rs 200 crore in the form of cash balance and undrawn working capital limit to meet any contingency.

 

Operating performance is expected to moderate in the current fiscal on account of the impact of the pandemic on demand and realisations (net sales realisation {NSR}) for the writing and printing paper (WPP) industry. JKPL’s capacity utilisation was impacted during the first quarter of the fiscal as utilisation rate dipped to 79% due to the lockdowns imposed to contain Covid-19 as against 112% achieved in fiscal 2020.

 

However, with subsequent easing of lockdown restrictions, utilisation rates have witnessed continuous improvement (more than 100% reached during the third quarter of fiscal 2021). This has been supported by improving domestic demand and higher export sales. That said, domestic demand for paper is yet to reach pre-pandemic levels, while export sales are at a discount to domestic realisations. This has resulted in a fall in realisation (blended NSR of Rs 54,377 per tonne during the first nine months of fiscal 2021 against Rs 59,214 per tonne for fiscal 2020). During the first nine months of fiscal 2021, EBITDA was Rs 408 crore (21.1% EBITDA margin) against Rs 767 crore (31.9% margin) in the corresponding period of the previous fiscal.

 

Packaging board segment, contributing to around 20% of capacity and volumes for JKPL, has witnessed limited impact of the pandemic on account of robust demand from pharma, fast moving consumer goods and e-commerce sectors. However, demand for WPP will improve gradually and is expected to reach pre-pandemic levels by the first quarter of fiscal 2022, leading to improvement in EBITDA over the medium term.

 

Decline in profitability along with increased debt towards planned capital expenditure (capex) are expected to moderate debt protection metrics in fiscal 2021, with net leverage (net debt to EBITDA ratio) expected to be higher as on March 31, 2021, against  the earlier expectations of 2.5 times. However, with likely improvement in EBITDA and cash accrual, net leverage should reduce sustainably to below 2.5 times in fiscal 2022.

 

The company's acquisition of The Sirpur Paper Mills Ltd (SPM), along with its expansion plan in the virgin-based packaging board segment, should help consolidate its leading market position, while also driving margin improvement due to higher pulp integration for the central pulp mills (CPM) plant in Gujarat over the medium term.

 

The ratings continue to reflect JKPL's superior position in the domestic WPP market, cost efficient operations and healthy product and geographical diversification. These strengths are partially offset by exposure to inherent cyclicality in the industry and to project execution risks related to ramp-up of SPM and the packaging board capex.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of JKPL with SPM, which it acquired in fiscal 2019.

 

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:

• Leading position in the WPP market: JKPL is one of the largest players in the domestic WPP and paper board space, with installed capacity of 591,000 tonne per annum (including SPM). The company’s sustained market position is backed by its leadership in the copier segment, well-established brands offering premium products, a diversified product portfolio and clientele, and a robust distribution network. Acquisition of SPM and packaging board expansion should continue to aid its leadership position.

 

• Strong and improved operating efficiency: Cost benefits accrue from the company's unit in Rayagada (commissioned in fiscal 2014), Odisha, which operates at over 100% capacity utilisation. Consequently, operating margin has steadily increased over the last few fiscals (26.6% EBITDA margin in fiscal 2020 against less than 15% in fiscal 2016). Improvement in margin should sustain over the medium term as it is driven by underlying process efficiency that economises on inputs used per tonne of production. Also, JKPL has made efforts to ensure enhanced raw material security of hardwood (key input) through increased sourcing from nearby catchment areas as well as improved yield by developing short-rotation clones. 100% of the total plantation is currently under catchment areas of less than 200 kilometre on average, up from 49% in fiscal 2017.

 

• Healthy financial risk profile, temporary moderation expected in fiscal 2021: Financial risk profile remained strong, with comfortable interest coverage ratio of 7.5 times in fiscal 2020 (7.4 times in fiscal 2019); gearing was healthy at 0.7 time as on March 31, 2020 (0.8 time a year earlier). Financial risk profile is also supported by refinancing with a longer tenure debt and efficient working capital management. Liquidity remains robust, with cash and liquid investments of Rs 440 crore as on December 31, 2020, and undrawn credit limit.

 

However, credit metrics are to be impacted in fiscal 2021 due to reduced profitability and increased net debt to over Rs 2,000 crore on account of planned expansion towards SPM and packaging board. The ratio of net debt to EBITDA is expected to peak at over 3.5 times in fiscal 2021 before correcting to below 2.5 times in fiscal 2022, backed by increased production and improved profitability. While SPM is expected to contribute to operating profit from the last quarter of fiscal 2021, the packaging board capex is likely to contribute only from the second half of fiscal 2022, thus exposing the company to moderately higher leverage in the interim. 

 

Weaknesses:

• Exposure to implementation risk in capex and turnaround of SPM:

SPM is a sick unit, whose timely turnaround and ramp-up in operations could pose implementation risks. SPM resumed its operations from November 2020 post planned maintenance capex undertaken at the unit. SPM turned EBITDA positive in January 2021 with utilisation rates improving from 26% in November 2020 to 65% in January 2021. However, it is expected to incur EBITDA losses in the current fiscal. Additionally, JKPL's virgin-based packaging board capacity expansion is non-modular and a fairly large capex given the size of its balance sheet. However, the brownfield nature of the capex and the company's execution track record mitigate these risks.

 

• Exposure to cyclicality inherent in the industry

Long gestation period in capacity addition and lead time in raw material generation, among other factors, make the paper industry inherently cyclical. During the cyclical downturn in the industry in fiscal 2014, scarcity of raw material had negatively affected margin. While the company has improved availability of hardwood near its plants through its farm forestry programme, it remains exposed to any sharp increase in hardwood prices due to higher minimum support prices of agricultural commodities. Further, efficiency-related technology improvements in the space require periodic capacity upgrades, leading to high capital intensity over time.

Liquidity: Strong

Expected net cash accrual of around Rs 250 crore and Rs 430 crore is likely to adequately cover debt repayments of Rs 237 crore each in fiscals 2021 and 2022, respectively. Cash and liquid investments were Rs 440 crore as on December 31, 2020. Capex is expected to be largely funded through debt. The company is expected to maintain minimum liquidity of Rs 200 crore in the form of cash and undrawn bank limit as contingency reserve. As on December 31, 2020, the company has undrawn working capital bank limits of around Rs 130 crore. Further, the company is likely to build in more liquidity cushion through issuance of NCDs.

Outlook: Stable

CRISIL Ratings believes JKPL's credit risk profile will remain stable over the medium term, backed by healthy margin and debt protection metrics. While pandemic-related disruptions may cause a temporary blip, performance is expected to recover over the medium term.

Rating Sensitivity Factors

Upward Factors:

• Improvement in scale and healthy accrual due to continued operating efficiency, and
• Faster-than-expected deleveraging resulting in sustained net debt to EBITDA of less than 1.25 times

 

Downward Factors:

• Lower-than-expected profitability and accrual or delay in the implementation of capex leading to net debt to EBITDA sustaining above 2.5 times 
• Sizeable debt-funded acquisition resulting in material increase in leverage and weakening of debt protection metrics

About the Company

Incorporated in 1960, JKPL has two manufacturing plants, one each in Songadh, Gujarat; and Rayagada. The Songadh plant produces copier paper and paper boards, and the Rayagada unit produces copier and coated paper. The company has annual capacity of 455,000 tonne of paper and paper boards.

 

In July 2018, JKPL acquired SPM with a capacity of 136 kilo tonne through the National Company Law Tribunal process for an enterprise consideration of Rs 750 crore, including incremental capex and working capital investments.

Key Financial Indicators

Particulars	Unit	2020	2019
Revenue	Rs crore	3,258	3,469
PAT	Rs crore	468	425
PAT margin	%	14	12
Adjusted gearing	Times	0.7	0.7
Interest coverage	Times	7.4	7.4
Current ratio	Times	1.1	1.0

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity Level	Rating assigned With outlook
INE789E07183	Debenture	27-Nov-18	NA	15-Jul-28	335	Simple	CRISIL AA-/Stable
NA	Debenture%	NA	NA	NA	260	Simple	CRISIL AA-/Stable
NA	Fixed deposits programme	NA	NA	NA	100	NA	FAA/Stable
NA	Commercial paper	NA	NA	7-365 days	150	NA	CRISIL A1+
NA	Working capital facility	NA	NA	NA	770	NA	CRISIL AA-/Stable
NA	Rupee term loan	NA	NA	31-Mar-24	206.07	NA	CRISIL AA-/Stable
NA	Rupee term loan	NA	NA	31-Mar-24	101.35	NA	CRISIL AA-/Stable
NA	Rupee term loan	NA	NA	15-Mar-23	30.78	NA	CRISIL AA-/Stable
NA	Rupee term loan	NA	NA	31-Mar-24	27.20	NA	CRISIL AA-/Stable
NA	Rupee term loan	NA	NA	31-May-22	8.4	NA	CRISIL AA-/Stable
NA	Rupee term loan	NA	NA	31-Mar-24	98.20	NA	CRISIL AA-/Stable
NA	Rupee term loan	NA	NA	30-Sep-27	128	NA	CRISIL AA-/Stable
NA	Rupee term loan	NA	NA	01-Sep-21	54.0	NA	CRISIL AA-/Stable
NA	Rupee term loan	NA	NA	31-Dec-31	300.0	NA	CRISIL AA-/Stable
NA	Rupee term loan	NA	NA	30-Sep-31	300.0	NA	CRISIL AA-/Stable
NA	Rupee term loan	NA	NA	30-Sep-31	150.0	NA	CRISIL AA-/Stable
NA	Rupee term loan	NA	NA	30-Jun-32	125.0	NA	CRISIL AA-/Stable
NA	External commercial borrowings	NA	NA	31-Jan-32	400.0	NA	CRISIL AA-/Stable

%Yet to be placed

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Sirpur Paper Mills Ltd	Full	Majority ownership and strong operational and financial linkages