Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL BBB+/Stable/CRISIL A2' ratings on the bank facilities of Nath Industries Limited (Nath; formerly, Rama Pulp and Papers Ltd).

 

The revenue of Nath rose 44.5% to Rs 421 crore in fiscal 2022 from Rs 292 crore in fiscal 2021 on account of 39% increase in realisation and 5% growth in volume following revival in demand. However, operating margin declined to 6.4% from 10.4% largely because of higher freight cost and prices of raw materials such as wastepaper, chemicals and coal, which the company was unable to pass on entirely to customers. Revenue is expected to grow 10% in fiscal 2023 driven by continued high realisation and increase in volume. Raw material prices are also likely to continue increasing, keeping operating margin at 6-8%.

 

The company is undertaking capital expenditure (capex) for increasing capacity of the chemicals division from 280 tonne per day (TPD) to 500 TPD, and has enhanced paper capacity to 28,800 tonne per annum (TPA) from 21,600 TPA. Also, ongoing capex for installing high pressure boiler with 2 megawatt (MW) back pressure steam turbine for paper and upgrade of existing turbine from 2MW to 3.3MW for chemicals should help save on electricity cost, thereby improving the operating margin.

 

The financial risk profile is expected to remain adequate with increase in scale of operations leading to higher cash accrual which will be sufficient to service debt availed for capex. Debt protection metrics will remain stable—the interest coverage reduced to 5.8 times in fiscal 2022 from 9.4 times in fiscal 2021 and is expected at a similar level for fiscal 2023 while the net cash accrual to total debt ratio remained around 0.3 time but is expected to reduce to around 0.2 time over the medium term owing to additional debt for capex. Networth was adequate at Rs 244 crore and gearing healthy at 0.31 time as on March 31, 2022. The gearing is expected to remain under 0.5 time over the medium term despite additional debt of Rs 35 crore for capex and Rs 7.7 crore loan under the Guaranteed Emergency Credit Line (GECL). Unutilised bank line of Rs 12 crore and expected accrual of Rs 20-25 crore will cover debt obligation, capex and incremental working capital requirement. Of the total capex of Rs 53.6 crore, the State Bank of India (SBI) has sanctioned debt of Rs 35 crore and the balance will be funded through internal accrual. As of September 2022, the company had availed around Rs 15 crore of the sanctioned term loan.

 

The ratings continue to reflect the diversified revenue profile of the company, its longstanding market presence and adequate financial risk profile. These strengths are partially offset by susceptibility to volatility in input prices and demand cyclicality.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of Nath.

Key Rating Drivers & Detailed Description

Strengths:

• Diversified revenue profile: Nath derives about 75% of its revenue from the paper division and the balance from the chemicals division. Within the paper business, the company has diverse product offerings—laminates and absorbent paper, speciality paper and core board paper. In the chemicals segment, products include sulphuric acid, sulphur dioxide, oleum and chlorosulphuric acid. The company caters to diverse industries such as textiles, banking (ATM rolls) and pharmaceuticals, and is focusing on exports to improve geographical diversification.

 

• Longstanding market presence: The company has a leading position in certain niche segments and longstanding client relationships. It is a leader in tube grade paper and thermal paper used in automated teller machine (ATM) slips, and among the few players in the absorbent paper segment. In the chemical business, it has an established market position in sulphur dioxide, sulphuric acid and oleum, with customer relationships of over two decades.

 

• Adequate financial risk profile: The financial risk profile should remain adequate over the medium term. Networth increased to Rs 244 crore as on March 31, 2022, from Rs 230 crore as on March 31, 2021. The total debt of Rs 76 crore comprises interest-free sales tax loans from the government of Rs 35 crore and working capital loan of Rs 10 crore, with long-term loan accounting for the balance. The company is setting up a co-generation plant for the paper division at an estimated cost of Rs 19.10 crore to be funded through debt of Rs 12.5 crore and cash accrual. It is upgrading the chemical plant and turbine at an expected cost of Rs 34.5 crore of which Rs 22.50 crore will be funded through debt and Rs 12 crore through internal accrual. The SBI has sanctioned term loan of Rs 35 crore for the capex. Expected annual accrual of Rs 20-25 crore will be sufficient to fund the balance capex along with debt obligation of Rs 10-12 crore and increased working capital requirement.

 

Weaknesses:

• Susceptibility to volatility in input prices: Nath uses waste paper to produce laminate paper and special grade paper. Waste paper prices are highly volatile as they are driven by the global demand-supply scenario. As the company imports a large part of its requirement, the operating margin is also vulnerable to fluctuations in foreign exchange rates. However, Nath has largely maintained its operating margin by passing on increase in waste paper prices to customers. Sulphur and chlorine are key inputs for the chemical business, prices of which are also volatile.

 

• Vulnerability to demand cyclicality: In the paper segment, the company derives sizeable revenue from laminate grade paper used in the real estate industry. Cyclicality in the end-user industry impacts demand, though this is mitigated by diversity in product profile. Profitability remains constrained by the commoditised nature of paper and linear alkyl benzene sulfonic acid (LABSA). While Nath does partly pass on price variation, any steep downturn or adverse change in demand-supply balance may result in lower realisations, thereby affecting profitability.

Liquidity: Adequate

Cash accrual is expected at Rs 20-25 crore in fiscal 2023 and is expected to rise to Rs 30-35 crore in fiscal 2024 against yearly debt obligation of Rs 10-12 crore. Capex will be funded through debt of Rs 35 crore and through internal accrual. Fund-based limit was utilised 69% on average during the 12 months through August 2022. Internal accrual and unutilised bank limit would be largely sufficient to meet debt obligation as well as incremental working capital requirement.

Outlook: Stable

Nath will continue to benefit from its diversified product profile, established market position, increasing scale of operations and operational synergies. The financial risk profile should remain comfortable, supported by steady cash accrual, moderate capex and prudent working capital management.

Rating Sensitivity factors

Upward factors

• Higher-than-expected revenue growth and improvement in operating profitability to over 10%
• Sustained improvement in the financial risk profile with healthy debt protection metrics 

 

Downward factors

• Steep decline in revenue or profitability leading to lower cash generation
• Large, debt-funded capex or significant stretch in the working capital cycle, weakening the debt metrics with gearing increasing to over 1 time.

About the Company

Nath was incorporated as a private limited company in 1980 and reconstituted as a public limited company in 1983. In 1993, Mr Nandkishor Kagliwal and entities in which he held stakes bought 51.41% of Nath’s equity. The company manufactures writing and printing paper (WPP), absorbent paper and special-grade paper, with WPP and absorbent paper capacity of 21,600 TPA and speciality paper capacity of 8000 TPA in Vapi, Gujarat. In fiscal 2017, the company started its LABSA manufacturing plant in Vapi.

 

On October 30, 2017, Nath announced a scheme of arrangement and amalgamation between Nath Pulp and Paper Mills Ltd (NPPL), Nath Industrial Chemicals Ltd (NICL) and Nath along with their respective shareholders. The National Company Law Tribunal’s approval for the same was received on August 22, 2019.

About the Group

About NPPL

NPPL, incorporated in April 1975 and promoted by Mr Nandkishor Kagliwal, manufactures high-strength core board and thermal grade paper and caters to a pan-India clientele. Based in Aurangabad, Maharashtra, the company has capacity to manufacture 68,400 TPA of core board paper and 6,000 TPA of thermal paper.

 

About NICL

NICL was incorporated as a private limited company and reconstituted as public limited company in 1983. In 1993, Mr Nandkishor Kagliwal bought the entire stake in NICL from its shareholders. NICL manufactures and trades in industrial chemicals. The key product, sulphuric acid, is used in pharmaceuticals, dyes and textiles. The company has a 2-MW captive thermal power plant which is expected to be upgraded to 3.3 MW by March 2023. Also, it has undertaken capex to enhance its chemical plant capacity from 280 TPD to 500 TPD.

 

During the three months ended June 30, 2022, Nath reported a net profit of Rs 2.16 crore on operating income of Rs 122.14 crore, against a net profit of Rs 6.12 crore on operating income of Rs 105 crore in the corresponding period of the previous fiscal.

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
NA	Cash Credit*	NA	NA	NA	41	NA	CRISIL BBB+/Stable
NA	Bank Guarantee	NA	NA	NA	1.5	NA	CRISIL A2
NA	Non-Fund Based Limit	NA	NA	NA	0.5	NA	CRISIL A2
NA	Term Loan	NA	NA	Feb-24	2.43	NA	CRISIL BBB+/Stable
NA	Term Loan	NA	NA	Mar-28	12.50	NA	CRISIL BBB+/Stable
NA	Term Loan	NA	NA	Mar-28	22.50	NA	CRISIL BBB+/Stable
NA	Term Loan	NA	NA	Dec-26	7.70	NA	CRISIL BBB+/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	1.13	NA	CRISIL BBB+/Stable

*Bank guarantee sublimit of Rs 3.50 crore

*Export packaging credit sublimit of Rs 10.00 crore

*Foreign bill discounting sublimit of Rs 20.00 crore

*Full interchangeability within the overall cash credit limit