Rating Rationale
November 25, 2022 | Mumbai
N R Agarwal Industries Limited
'CRISIL A1' assigned to Commercial Paper
 
Rating Action
Rs.50 Crore Commercial PaperCRISIL A1 (Assigned)
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 assigned its ‘CRISIL A1’ rating to the commercial paper of N R Agarwal Industries Limited (NRAIL).

 

The rating reflects NRAIL's established market position in the paper industry marked by longstanding relations with customers, the extensive industry experience of its promoters, healthy financial profile marked by and efficient working capital cycle. These strengths are partially offset by exposure to risks related to cyclicality in the paper industry, volatility in operating margin due to input prices and large, planned capital expenditure (capex).

Key rating drivers and detailed description

Strengths:

  • Established market position in the paper industry: NRAIL has a strong market position marked by strong track record of operations, longstanding relations with majority of its customers and enhanced manufacturing capacities of 180000 MT per annum and 108000 MT per annum for duplex and writing & printing paper respectively. The company has a diversified customer base with top 10 customers account for less than 30% of revenue. The company caters to both domestic and export markets with exports accounting for 20-25% of revenue. The scale has increased to Rs 1616 crore in fiscal 2022 from Rs 1318 crore in fiscal 2019 and is expected to augment further with expansion in capacity and healthy demand for products over the medium term.

 

  • Extensive industry experience of the promoters: The promoters’ have an experience of nearly three decades in paper manufacturing industry which has provided them an understanding of the dynamics of the market and have established healthy relationships with suppliers and customers which should continue to support the business.

 

  • Healthy financial risk profile: Networth was strong and total outside liabilities to adjusted networth (TOLANW) ratio low at Rs 524.9 crore and 0.89 time, respectively, as on March 31, 2022. The capital structure has been healthy due to low reliance on external funds and steady accretion to reserve. Despite, the on-going expansion in the manufacturing facility at an estimated cost of Rs 650 crore, which is aggressively funded in a debt-equity ratio of 1.89 times, NRAIL’s capital structure is expected to remain comfortable over the medium term.  Debt protection measures have also been adequate due to moderate leverage and healthy profitability. The interest coverage and net cash accrual to total debt ratios were 6.1 times and 0.66 time, respectively, for fiscal 2022. Debt protection measures are expected to weaken slightly on account of higher debt levels but remain comfortable over the medium term.

 

  • Efficient working capital cycle: Gross current assets were 81 days as on March 31, 2022, driven by average debtors and inventory of 38 and 39 days, respectively. The company extends moderate credit period to customers and has been able to receive timely payments from them. Inventory requirement is average as raw materials are procured easily. The working capital cycle is expected to remain stable over the medium term.

 

Weaknesses:

  • Exposure to cyclicality in the paper industry: The long gestation period in capacity addition among other factors, make the paper industry inherently cyclical. Demand for paper is also linked to the level of economic activity. Hence, cyclical downturns or adverse variability in the demand-supply balance may result in volatility in realisations. Furthermore, the risk to pass on the increase in raw materials prices to end customers, amidst demand-supply dynamics, would remain a key monitorable.

 

  • Susceptibility to volatility in waste-paper prices: Wastepaper, the key input, accounts for 65-70% of NRAIL’s total raw material costs. Price of wastepaper, which is a commoditised product, tends to fluctuate sharply and adversely affects profitability of paper manufacturers. The other key input for the entity is coal, which is largely imported and is also volatile. Operating margin has hence remained volatile in range of 9.5%-15.6% over past four fiscals ended March 2022. Sustenance of operating margin would remain a key monitorable.

 

  • Risks related to large, planned capex: The company is undertaking capacity expansion at a cost of Rs 650 crore, which is being funded through a term loan of Rs 425 crore and internal accruals. Timely completion and stabilisation of the new manufacturing facility is critical and would remain a key rating sensitivity factor.

Liquidity: Strong

Expected cash accrual of Rs135-150 crore is sufficient against term debt obligation of Rs 36.42  crore and Rs 1 crore in fiscals 2023 and 2024, respectively, and the surplus will support liquidity. Further capex is partially funded through debt, repayments of which would commence from fiscal 2025. Bank limit utilisation averaged a modest 42% over the 12 months through September 2022. Current ratio was healthy at 1.8 times on March 31, 2022 while cash and bank balance was Rs 6 crore. Low gearing and moderate networth support the financial flexibility of the company.

Rating Sensitivity Factors

Upward factors

  • Increase in revenue and operating margin above 11%, leading to higher cash accruals
  • Timely stabilisation of new manufacturing unit
  • Sustenance of financial profile and working capital cycle

 

Downward factors

  • Decline in scale of operations leading to fall in revenue or operating margin below 9% resulting in lower cash accruals
  • Further large debt-funded capex weakens capital structure and liquidity

About the Company

NRAIL was incorporated in 1993 by Late Mr N R Agarwal. It is currently headed by Mr Rajendra N Agarwal as Chairman and Managing Director. The company is listed on the National Stock Exchange and Bombay Stock Exchange.

 

NRAIL is engaged in the business of manufacturing various duplex paper boards, writing, printing paper. The company has four facilities located at Vapi and Sarigam, both in Gujarat. Also, it has a 26.65-megawatt captive co-generation power plant. Further, it is setting up a new manufacturing plant at Sarigam to increase the total installed capacity.  The plant is expected to be commissioned in October 2023.

Key financial indicators

As on/for the period ended March 31

Unit 

2022

2021

Operating income

Rs.Crore

1616.5

1145.6

Reported profit after tax (PAT)

Rs.Crore

61.02

57.23

PAT margin

%

3.77

5.00

Adjusted debt/Adjusted networth

Times

0.27

0.36

Interest coverage

Times

6.12

4.65

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.crisil.com/complexity-levels. 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

levels

Rating assigned

with outlook

NA

Commercial Paper

NA

NA

7-365 Days

50

Simple

CRISIL A1
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
Commercial Paper ST 50.0 CRISIL A1   --   --   --   -- --
All amounts are in Rs.Cr.

   

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Paper Industry

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