Rating Rationale
October 18, 2022 | Mumbai
JK Paper Limited
Long-term rating upgraded to 'CRISIL AA/Stable'; Short-term rating reaffirmed at 'CRISIL A1+'
 
Rating Action
Total Bank Loan Facilities RatedRs.2576.5 Crore (Reduced from Rs.2699 Crore)
Long Term RatingCRISIL AA/Stable (Upgraded from 'CRISIL AA-/Stable')
 
Rs.100 Crore Fixed DepositsCRISIL AA/Stable (Upgraded from 'CRISIL AA-/Stable')
Rs.50 Crore Non Convertible DebenturesCRISIL AA/Stable (Upgraded from 'CRISIL AA-/Stable')
Rs.285 Crore Non Convertible DebenturesCRISIL AA/Stable (Upgraded from 'CRISIL AA-/Stable')
Rs.260 Crore Non Convertible DebenturesCRISIL AA/Stable (Upgraded from 'CRISIL AA-/Stable')
Rs.150 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
Note: None of the Directors on Crisil Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities, non-convertible debentures, and fixed deposit of JK Paper Limited (JKPL) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Stable’ and reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programmes of the entity. Further, CRISIL Ratings has withdrawn its rating on the bank facilities amounting to Rs 122.5 crore based on the request from the client and after receiving lenders no due certificate; this rating action is in line with the withdrawal policy of CRISIL Ratings. 

 

The upgrade reflects faster-than-anticipated improvement in scale of operations due to significant ramp up in utilisation of the new central pulp mill (CPM) packaging board plant, which commenced commercial production just on January 14, 2022. Consequently, cash accrual is projected at a healthy Rs 700-800 crore during fiscal 2023. Operating performance improved in fiscal 2022, with revenue growing strongly at 39% year on year (with 13% improvement in volume and ~26% in value) to Rs 4,236 crore from Rs 3,046 crore in fiscal 2021. Revenue is likely to rise by around 38% in fiscal 2023, being the first full year of operations, supported by the enhanced capacity. Earnings before interest, taxes, depreciation and amortisation (EBITDA) margin rose to 23.8% in fiscal 2022 from 20.0% in fiscal 2021; leverage (net debt to EBITDA ratio) also improved to 2.45 times from 3.64 times.

 

Revenue and EBITDA should strongly increase over the medium term, driven by robust growth in the packaging board segment and continued demand in the writing and printing paper segment. Net debt to EBITDA ratio may improve to nearly 1.25 times by fiscal 2023 owing to low capital expenditure (capex) and sustain below that level going forward.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of JKPL with Sirpur Paper Mills Ltd (SPM), which was 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 writing and printing paper market: JKPL is one of the largest players in the domestic writing and printing paper and paper board space, with installed capacity of 761,000 tonne per annum (including SPM and the new packaging board unit). The sustained market position is backed by its leadership in the copier segment, well-established brands offering premium products, diversified product portfolio and clientele, and robust distribution network. Ramp up of SPM and packaging board capacities should continue to aid the leadership position.

 

  • Strong operating efficiency: Cost benefits accrue from the unit in Rayagada (Odisha; commissioned in fiscal 2014), which operates at over 100% capacity utilisation. Consequently, operating margin steadily increased over the past few fiscals (EBITDA margin rose to 23.8% in fiscal 2022 from 19.2% in fiscal 2018). The EBITDA margin should sustain at more than 20% over the medium term, driven by underlying process efficiency and sourcing raw material domestically, thus reducing inputs cost per tonne of production. Also, JKPL 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. Procurement of wood resource within 200 kilometre radius improved to 77% in fiscal 2022, up from 49% in fiscal 2017.

 

  • Robust financial risk profile: Financial risk profile has strengthened in fiscal 2022, with net debt of Rs 2,468 crore and adjusted net gearing improving to 0.84 time as on March 31, 2022 from 0.89 time a year ago. The net debt to EBITDA ratio enhanced to 2.45 times from 3.64 times, despite the limited operating track record of the new CPM packaging board plant (from January 14, 2022). Net debt should reduce, with the new CPM packaging board plant operating for the first full year and capex expected to moderate in the near term, translating into robust growth in the EBITDA margin and cash accrual. Net debt to EBITDA ratio is expected to consistently improve to 1.25 times by March 31, 2023 and 1.00 time by March 31, 2024.

 

Weakness:

  • 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 constrained profitability. 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. Furthermore, efficiency-related technology improvements in the space require periodic capacity upgrades, leading to high capital intensity over time.

Liquidity: Strong

Unencumbered cash and bank balance were healthy at Rs 910 crore as on June 30, 2022, with unutilised fund-based limit of around Rs 95 crore (~38% of the total Rs 250 crore). Cash accrual is projected at Rs 700-800 crore each during fiscals 2023 and 2024, against annual debt obligation of Rs 350-450 crore. Capex is expected to moderate in the near term and will be funded by cash accrual.

Outlook: Stable

JKPL will continue to benefit from healthy profitability and debt protection metrics.

Rating Sensitivity factors

Upward factors

  • Significant strengthening of market share across all paper segments with continued operating efficiency
  • Net debt to EBITDA ratio steady at below 0.75 time, driven by faster-than-expected deleveraging

 

Downward factors

  • Net debt to EBITDA ratio deteriorating to more than 2.0 times owing to lower-than-expected profitability and cash accrual
  • Sizeable, debt-funded acquisition or capex, 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 recently expanded its manufacturing capacity by 170,000 tonne per annum, taking its total capacity to 625,000 tonne per annum.

 

In July 2018, JKPL acquired SPM (having capacity of 136,000 tonne) through the National Company Law Tribunal process for an enterprise consideration of around Rs 750 crore, including incremental capex and working capital investment.

Key Financial Indicators

Particulars

Unit

2022

2021

Revenue

Rs crore

4,236

3,046

Profit after tax (PAT)

Rs crore

544

237

PAT margin

%

12.8

7.8

Adjusted gearing

Times

1.1

1.1

Interest coverage

Times

7.9

5.1

Current ratio

Times

1.5

1.3

Any other information: Not applicable

Note on complexity levels of the rated instrument:
Crisil Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

Crisil Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the Crisil Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

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 Non Convertible Debentures 27-Nov-18 Variable-Others Mibor Linked 15-Jul-28 335 Highly Complex CRISIL AA/Stable
INE789E07191 Non Convertible Debentures 13-Dec-21 MIBOR LINKED 15-May-29 125 Highly Complex CRISIL AA/Stable
NA Non Convertible Debentures % NA NA NA 135 Simple CRISIL AA/Stable
NA Fixed Deposits NA NA NA 100 Simple CRISIL AA/Stable
NA Commercial Paper NA NA 7-365 days 150 Simple CRISIL A1+
NA Working Capital Facility NA NA NA 870 NA CRISIL AA/Stable
NA Rupee Term Loan NA NA 31-Mar-24 80.5 NA CRISIL AA/Stable
NA Rupee Term Loan NA NA 31-Mar-24 46 NA CRISIL AA/Stable
NA Rupee Term Loan NA NA 15-Mar-23 10 NA CRISIL AA/Stable
NA Rupee Term Loan NA NA 31-Mar-24 13.56 NA Withdrawal
NA Rupee Term Loan NA NA 31-May-22 2 NA Withdrawal
NA Rupee Term Loan NA NA 31-Mar-24 56.12 NA Withdrawal
NA Rupee Term Loan NA NA 31-Dec-31 300 NA CRISIL AA/Stable
NA Rupee Term Loan NA NA 30-Sep-31 300 NA CRISIL AA/Stable
NA Rupee Term Loan NA NA 30-Sep-31 95 NA CRISIL AA/Stable
NA Rupee Term Loan NA NA 30-Jun-32 125 NA CRISIL AA/Stable
NA Foreign Currency Term Loan NA NA 31-Jan-32 400 NA CRISIL AA/Stable
NA Proposed Fund-Based Bank Limits NA NA NA 350 NA CRISIL AA/Stable
NA Proposed Fund-Based Bank Limits NA NA NA 50.82 NA Withdrawal

% yet to be placed.

Annexure – List of entities consolidated

Names of entities consolidated

Extent of consolidation

Rationale for consolidation

The Sirpur Paper Mills Ltd

Full

Majority ownership and strong operational and financial linkages
Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 2699.0 CRISIL AA/Stable 21-06-22 CRISIL AA-/Stable 19-03-21 CRISIL AA-/Stable 08-10-20 CRISIL AA-/Stable 18-12-19 CRISIL AA-/Stable CRISIL A+/Stable
      -- 17-03-22 CRISIL AA-/Stable   -- 06-04-20 CRISIL AA-/Stable 27-06-19 CRISIL A+/Positive CRISIL A/Positive / CRISIL A1
      --   --   -- 08-01-20 CRISIL AA-/Stable   -- --
Commercial Paper ST 150.0 CRISIL A1+ 21-06-22 CRISIL A1+ 19-03-21 CRISIL A1+ 08-10-20 CRISIL A1+ 18-12-19 CRISIL A1+ CRISIL A1
      -- 17-03-22 CRISIL A1+   -- 06-04-20 CRISIL A1+ 27-06-19 CRISIL A1+ --
      --   --   -- 08-01-20 CRISIL A1+   -- --
Fixed Deposits LT 100.0 CRISIL AA/Stable 21-06-22 CRISIL AA-/Stable 19-03-21 F AA/Stable 08-10-20 F AA/Stable 18-12-19 F AA/Stable F AA-/Stable
      -- 17-03-22 F AA/Stable   -- 06-04-20 F AA/Stable 27-06-19 F AA-/Positive --
      --   --   -- 08-01-20 F AA/Stable   -- --
Non Convertible Debentures LT 595.0 CRISIL AA/Stable 21-06-22 CRISIL AA-/Stable 19-03-21 CRISIL AA-/Stable 08-10-20 CRISIL AA-/Stable 18-12-19 CRISIL AA-/Stable CRISIL A+/Stable
      -- 17-03-22 CRISIL AA-/Stable   -- 06-04-20 CRISIL AA-/Stable 27-06-19 CRISIL A+/Positive --
      --   --   -- 08-01-20 CRISIL AA-/Stable   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Foreign Currency Term Loan 400 State Bank of India CRISIL AA/Stable
Proposed Fund-Based Bank Limits 350 Not Applicable CRISIL AA/Stable
Proposed Fund-Based Bank Limits 50.82 Not Applicable Withdrawn
Rupee Term Loan 10 ICICI Bank Limited CRISIL AA/Stable
Rupee Term Loan 13.56 IndusInd Bank Limited Withdrawn
Rupee Term Loan 2 RBL Bank Limited Withdrawn
Rupee Term Loan 46 Axis Bank Limited CRISIL AA/Stable
Rupee Term Loan 300 Bank of Baroda CRISIL AA/Stable
Rupee Term Loan 56.12 Union Bank of India Withdrawn
Rupee Term Loan 95 Exim Bank CRISIL AA/Stable
Rupee Term Loan 125 Axis Bank Limited CRISIL AA/Stable
Rupee Term Loan 300 State Bank of India CRISIL AA/Stable
Rupee Term Loan 80.5 State Bank of India CRISIL AA/Stable
Working Capital Facility 150 YES Bank Limited CRISIL AA/Stable
Working Capital Facility 310 State Bank of India CRISIL AA/Stable
Working Capital Facility 50 Standard Chartered Bank Limited CRISIL AA/Stable
Working Capital Facility 50 Axis Bank Limited CRISIL AA/Stable
Working Capital Facility 115 Axis Bank Limited CRISIL AA/Stable
Working Capital Facility 110 IDBI Bank Limited CRISIL AA/Stable
Working Capital Facility 40 IndusInd Bank Limited CRISIL AA/Stable
Working Capital Facility 45 ICICI Bank Limited CRISIL AA/Stable

This Annexure has been updated on 18-Oct-2022 in line with the lender-wise facility details as on 03-Aug-2021 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Paper Industry
CRISILs criteria for rating fixed deposit programmes
Understanding CRISILs Ratings and Rating Scales
CRISILs Criteria for Consolidation

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