Rating Rationale
October 08, 2020 | Mumbai
JK Paper Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.2649 Crore
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
 
Non-Convertible Debentures Aggregating Rs.335 Crore     CRISIL AA-/Stable (Reaffirmed)
Rs.100 Crore Fixed Deposits FAA/Stable (Reaffirmed)
Rs.150 Crore Commercial Paper (Enhanced from Rs.100 Crore)  CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the long-term bank facilities, non-convertible debentures, fixed deposit programme and commercial paper programme of JK Paper Limited (JKPL) at 'CRISIL AA-/FAA/Stable/CRISIL A1+'.
 
The reaffirmation reflects the improved cost and operational efficiencies, resulting in better-than-expected operating profitability (earnings before interest, taxes, depreciation, and amortisation {EBITDA} margin was 26.6% in fiscal 2020 against 24.9% in fiscal 2019). The reaffirmation also factors in the healthy liquidity in the form of cash and cash 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 Covid-19 and the subsequent lockdown impacting demand and realisations (net sales realisation {NSR}) for the writing and printing paper (WPP) industry. While JKPL remained operational during the lockdown as paper falls under the Essential Commodities Act, capacity utilisation has been impacted (utilisation rate was 79% in the first quarter of fiscal 2021 against 112% in fiscal 2020), along with fall in realisation (blended NSR of Rs 56,889 per tonne against Rs 59,214 per tonne). During the first quarter of fiscal 2021, EBITDA was Rs 97.5 crore (21.2% margin) against Rs 267 crore (37.4% margin) in the corresponding period of the previous fiscal. However, with easing of lockdown restrictions, demand has improved as utilisation rates increased to 87.5% in June 2020 from 66.5% in April 2020.
 
Demand for WPP will improve gradually and is expected to reach pre-pandemic levels by the fourth quarter of fiscal 2021, leading to improvement in EBITDA over the medium term. Expected decline in profitability along with increased debt towards planned capital expenditure (capex) are likely 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 expected improvement in EBITDA and cash accrual, net leverage should reduce sustainably to below 2.5 times in fiscal 2022.
 
The company's acquisition of 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 CPM plant in Gujarat over the medium term.
 
The ratings continue to reflect JKPL's superior position in the domestic WPP market 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

For arriving at its ratings, CRISIL 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 455,000 tonne per annum. The company's sustained market position is backed by its leadership in the copier segment, well-established brands offering premiums, a diversified product portfolio and clientele, and a robust distribution network. Acquisition of SPM and packaging board expansion should continue to aid leadership position.
 
* Strong and improving operating efficiency: Cost benefits are accrued 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. 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. More than 90% of the total plantation is under catchment areas of less than 200 kilometres, 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 (7.4 times in fiscal 2019) in fiscal 2020; gearing was healthy at 0.7 time (0.8 time as on March 31, 2019) as on March 31, 2020. 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 365 crore as on August 31, 2020, and undrawn credit limit.
 
However, credit metrics are to be impacted in fiscal 2021 due to reduced operating profitability and increased debt to over Rs 2,000 crore for planned expansion towards SPM. 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 fiscal 2021, the packaging board capex is likely to contribute to profitability only from fiscal 2022 onwards, 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. Currently, the operations at SPM are shut due to maintenance capex being undertaken, and are expected to resume from the end of the third quarter of fiscal 2021. 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. Furthermore, 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 Rs 278 crore and Rs 431 crore is likely to adequately cover debt repayments of Rs 237 crore each over fiscals 2021 and 2022, respectively. Cash and liquid investments were Rs 365 crore as on August 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 August 31, 2020, the company has undrawn bank lines of Rs 127 crore. Furthermore, company is likely to build in more liquidity cushion by increasing its bank lines.    

Outlook: Stable

CRISIL 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 temporary impact, 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 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 138 kt through the National Company Law Tribunal process for an enterprise consideration of Rs 750 crore, including incremental capex and working capital investments.
 
In fiscal 2020, JKPL's profit after tax was Rs 468 crore (Rs 424 crore in the previous fiscal) on revenue of Rs 3,258 crore (Rs 3,469 crore).

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

Note on complexity levels of the rated instrument:
CRISIL 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. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 Fixed Deposits Programme NA NA NA 100 Simple FAA/Stable
NA Commercial Paper NA NA 7-365 days 150 Simple CRISIL A1+
NA Working Capital Facility NA NA NA 720 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
 
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
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  150.00  CRISIL A1+  06-04-20  CRISIL A1+  18-12-19  CRISIL A1+  27-08-18  CRISIL A1  31-10-17  CRISIL A1  -- 
        08-01-20  CRISIL A1+  27-06-19  CRISIL A1+  03-07-18  CRISIL A1  12-07-17  CRISIL A1   
                14-03-18  CRISIL A1  17-04-17  CRISIL A1   
Fixed Deposits  FD  100.00  FAA/Stable  06-04-20  FAA/Stable  18-12-19  FAA/Stable  27-08-18  FAA-/Stable  31-10-17  FA+/Positive  -- 
        08-01-20  FAA/Stable  27-06-19  FAA-/Positive  03-07-18  FAA-/Stable       
                14-03-18  FA+/Positive       
Non Convertible Debentures  LT  335.00
08-10-20  		CRISIL AA-/Stable  06-04-20  CRISIL AA-/Stable  18-12-19  CRISIL AA-/Stable  27-08-18  CRISIL A+/Stable  31-10-17  CRISIL A/Positive  -- 
        08-01-20  CRISIL AA-/Stable  27-06-19  CRISIL A+/Positive  03-07-18  CRISIL A+/Stable  12-07-17  CRISIL A/Stable   
                14-03-18  CRISIL A/Positive  17-04-17  CRISIL A/Stable   
Fund-based Bank Facilities  LT/ST  2649.00  CRISIL AA-/Stable  06-04-20  CRISIL AA-/Stable  18-12-19  CRISIL AA-/Stable  27-08-18  CRISIL A+/Stable  31-10-17  CRISIL A/Positive/ CRISIL A1  -- 
        08-01-20  CRISIL AA-/Stable  27-06-19  CRISIL A+/Positive  03-07-18  CRISIL A+/Stable/ CRISIL A1  12-07-17  CRISIL A/Stable/ CRISIL A1   
                14-03-18  CRISIL A/Positive/ CRISIL A1  17-04-17  CRISIL A/Stable/ CRISIL A1   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
External Commercial Borrowings 400 CRISIL AA-/Stable External Commercial Borrowings 400 CRISIL AA-/Stable
Rupee Term Loan 1529 CRISIL AA-/Stable Rupee Term Loan 1529 CRISIL AA-/Stable
Working Capital Facility 720 CRISIL AA-/Stable Working Capital Facility 720 CRISIL AA-/Stable
Total 2649 -- Total 2649 --
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Paper Industry
Understanding CRISILs Ratings and Rating Scales

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