| JK Paper Limited | ||||||
| Long-term rating upgraded to 'CRISIL A+/Stable'; short-term rating reaffirmed | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has upgraded its ratings on the long-term bank facilities, non-convertible debentures, and fixed deposit programme of JK Paper Ltd (JKPL) to 'CRISIL A+/FAA-/Stable' from 'CRISIL A/FA+/Positive'; and reaffirmed the rating on the short-term bank facility and commercial paper programme at 'CRISIL A1'. The upgrade reflects sustained improvement in cost efficiencies and profitability, resulting in faster-than-expected deleveraging. The high operating rate at the company's plant in Rayagada, Odisha, which enjoys strong operational efficiencies along with continued initiatives towards wood plantation through farm forestry programme, have resulted in lower operating costs. This, along with increasing sales volumes, have improved EBITDA margins on a sustained basis, to 20% in fiscal 2018 from 17.8% in fiscal 2017 (excluding income from REC certificates, interest income, and mutual fund yields). The company used accrual generated from better efficiencies and buoyant paper realisations to deleverage faster than expected. As a result, gross debt to EBITDA reduced to 2.3 times as on March 31, 2018, from over 3 times as on March 31, 2017. CRISIL expects margins to remain resilient with continued cost efficiencies and supportive paper prices (actual blended realisation of paper has been Rs 57,350 per tonne in fiscal 2018 against the expected Rs 56,525 per tonne). Operating efficiencies arise on account of lower inputs used per tonne of paper produced, and is a durable source of advantage. Furthermore, the paper realisations could sustain at current levels, given the positive industry demand-supply outlook. The company's expansion plan of up to 200 kt in the packaging board segment (including pulp capacity of 160 kt), at a capital expenditure (capex) of Rs 1,450 crore in the next three fiscals, should help consolidate its leading market position and improve operating efficiencies at its CPM plant in Gujarat. The company has also made a bid for The Sirpur Paper Mills Ltd (SPM), which is undergoing insolvency proceedings at the National Company Law Tribunal (NCLT), was approved by the committee of creditors in May 2018. The deal, if approved by NCLT, would result in JKPL getting majority stake in SPM. The proposed acquisition should help add capacity of 135 kt, with a total investment of about Rs 782 crore by JKPL, including incremental capex towards rebalancing and power plant. The capex, for both the planned organic and possible inorganic expansion, would lead to an increase in leverage, especially over fiscals 2020 and 2021. However, the brownfield and staggered nature of the capex, with favourable industry fundamentals, mitigates this risk. The ratings reflect JKPL's superior position in the domestic writing and printing (WPP) market, and healthy product and geographical diversities. These strengths are partially offset by inherent cyclicality in the industry and the potential impact of any latent capacity in the industry coming on-stream. |
| Key Rating Drivers & Detailed Description |
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Strengths * Superior operating performance backed by fully utilised new capacity: Cost benefits are accruing from the company's new unit in Rayagada (commissioned in fiscal 2014), which is operating at over 100% capacity utilisation. Consequently, operating margin has steadily increased over the last few fiscals. Improvement in margin will sustain over the medium term as it is driven by underlying process efficiencies that economise on inputs used per tonne of production. Furthermore, this cost leadership is a source of significant competitive advantage and ensures sustained demand for products with high capacity utilisation, even with potentially higher paper imports. Also, JKPL has made efforts to ensure enhanced raw material security of hardwood, key raw material, through wider acreage proximal catchment areas. Around 88% of the total plantation is under catchment areas of less than 200 kilometres now, up from 85% a year ago. * Leading market position in the WPP market: JKPL is one of the largest players in the domestic WPP and paper board space, with an installed capacity of 455,000 tonne per annum. Market position is sustained on the back of leadership in the copier segment, established brands offering premiums, a diversified product portfolio and customer base, and robust distribution network. Acquisition of SPM and packaging board expansion will continue to aid leadership position. * Improved financial risk profile: Balance sheet has strengthened with reduced leverage, lower debt servicing post-refinancing, full conversion of its FCCBs, and healthier liquidity. Gearing improved to 0.80 time as on March 31, 2018, from 1.29 times as on March 31, 2017. Apart from improved profitability, conversion of deep-in-the-money FCCBs in fiscal 2018, refinancing with longer tenure debt, and efficient working capital management also aided improvement in financial risk profile. Liquidity is adequate, with cash of Rs 249 crore as on March 31, 2018, small working capital requirement, and undrawn credit limit. However, leverage is expected to increase moderately over fiscals 2019-21 with investment of about Rs 2,000 crore towards expansion plan and SPM. While SPM would contribute to operating profits by fiscal 2020, the packaging board capex is likely to contribute to profitability only from fiscal 2022 onwards exposing the company to moderately higher leverage meanwhile. Weaknesses * Exposure to implementation risk in both capex and turning around SPM SPM is a sick unit, whose timely turnaround and ramp up in operations would pose implementation risks. Additionally, JKPL's 200 kt capacity expansion is a fairly large capex, given its balance sheet size. However, the brownfield and staggered 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 2014 cyclical downturn in the industry, enhanced scarcity of raw material had negatively affected margins. 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. * Exposure to market impact of latent industry capacity coming on-stream With some capacity in the industry lying non-operational, any restitution in its status could have an impact on the supply-demand and competitive intensity of the industry. Any production ramp-up could impact prices impacting margins. |
| Outlook: Stable |
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CRISIL believes JKPL's credit profile should remain stable with supportive margins and comfortable debt protection metrics. |
| About the Company |
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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 paper and coated paper. The company has an annual capacity of 455,000 mt of paper and paper boards. Of this, 160,000 mt is in Songadh and the remaining in Rayagada. Mr Harsh Pati Singhania is the company's vice chairman and managing director. For fiscal 2018, JKPL reported a profit after tax of Rs 260 crore (Rs 163 crore in fiscal 2017) on revenue of Rs 2793 crore (Rs 2601 crore). |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
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