Rating Rationale
November 01, 2019 | Mumbai
Rama Pulp and Papers Limited
Ratings upgraded to 'CRISIL BBB+/Stable/CRISIL A2', removed from 'Watch Developing'
 
Rating Action
Total Bank Loan Facilities Rated Rs.15.23 Crore
Long Term Rating CRISIL BBB+/Stable (Upgraded from 'CRISIL BBB'; Removed from 'Rating Watch with Developing Implications')
Short Term Rating CRISIL A2 (Upgraded from 'CRISIL A3+'; Removed from 'Rating Watch with Developing Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has removed its ratings on the bank facilities of Rama Pulp and Papers Limited (RPPL) from 'Rating Watch with Developing Implications' and upgraded it to 'CRISIL BBB+/CRISIL A2' from 'CRISIL BBB/CRISIL A3+'; CRISIL has also assigned a 'Stable' outlook to the long-term rating.
 
The watch resolution follows receipt of National Company Law Tribunal (NCLT)'s approval on August 22, 2019, for the merger of Nath Pulp and Paper Mills Ltd (NPPL) and Nath Industrial Chemicals Ltd (NICL) with RPPL and clarity from the management on synergies post the amalgamation and future growth plan of the merged entity.
 
The upgrade reflects a belief that RPPL's business risk profile will improve further, marked by higher scale, better product diversity and market presence, and increased integration in operations. The product offering will now expand to include NICL's chemical products and NPPL's core board paper and specialty paper. Consequently RPPL's revenue should increase to Rs 350-400 crore per annum over the medium term, compared to the pre-merger revenue of Rs 135 crore in fiscal 2019. Further, the merger is expected to result in business synergies; NICL's sulphuric acid output and captive power plant will provide backward integration, while RPPL's white paper output will be used by NPPL for coating and supply to customers. Besides, operating margin of the chemicals business in NICL is higher (31.0% in fiscal 2019) compared to RPPL's (6.60% in fiscal 2019). Consequently the margin of merged entity is also expected to be higher at 13-14%.
 
The financial risk profile is expected to remain adequate, driven by comfortable networth and debt protection metrics. While gearing will moderate compared to 0.27 times in RPPL as on March 31, 2019, it is nevertheless likely to remain adequate at less than 1 time over the medium term. Besides, most of the debt pertains to promoter loans and interest-free sales tax loans.
 
CRISIL on November 7, 2017 had placed the ratings on 'watch with negative implications' following RPPL's announcement on October 30, 2017, regarding its merger with NPPL and NICL. The ratings factored the sizeable external debt and accumulated losses in NPPL, even as NICL was debt-free with steady cash flow.
 
On October 17, 2018, CRISIL revised its outlook to 'rating watch with developing implications' from 'rating watch with negative implications' following progress made towards repayment of sizeable external debt in NPPL through infusion of promoter funds and improving profitability.
 
The ratings continue to reflect RPPL's diversified revenue profile, longstanding market presence and adequate financial risk profile. These strengths are partially offset by exposure to volatility in input prices, demand cyclicality and limited pricing flexibility.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of RPPL, NPPL, and NICL following the merger of these entities.

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:
* Diversified revenue profile
The combined entity will have better revenue diversity. Product offering will now expand to include NICL's chemical products such as sulphuric acid, sulphur dioxide, oleum and chlorosulphuric acid and NPPL's paper products mainly core board paper and specialty paper. The paper business will thus account for about 67% of the combined revenue, while chemical business will contribute to 33%. Further, the merged entity will cater to diverse end-user industries such as textiles, banking (ATM rolls), and pharmaceuticals. Besides, RPPL has been increasing its focus on exports, which will aid in geographical expansion.
 
* Longstanding market presence
The combined entity would have a healthy market presence, marked by a leading position in certain niche segments and longstanding client relationship. NPPL is a leader in the tube grade paper and thermal paper used in ATM slips while RPPL is one of the few players in the absorbent paper segment. The chemical business, largely driven by NICL, has an established market position in products such as sulphur dioxide, sulphuric acid and oleum besides longstanding customer relations of over two decades.
 
* Adequate financial risk profile
The financial risk profile should remain adequate over the medium term. Networth is expected at over Rs 110 crore as on March 31, 2020, for the combined entity compared to Rs 51 crore for RPPL (pre-merger) as on March 31, 2019. Most of the outstanding debt pertains to promoter loans and interest-free sales tax loans. Annual cash accrual is expected to be more than Rs 30 crore over the medium term, which will be largely sufficient to fund moderate capital expenditure (capex) plans of Rs 3-4 crore annually.
 
Weaknesses
* Exposure to volatility in input prices
RPPL uses waste paper as an input for production of laminate paper, and special grade paper. Wastepaper prices are highly volatile, as the global demand-supply scenario tends to drive their prices. As the company imports a large part of its requirement, RPPL's margins are exposed to any fluctuation in waste paper prices and foreign exchange rates. Sulphur and chlorine are key inputs for NICL prices of which are also volatile.
 
Part vulnerablity to demand cyclicality and limited pricing flexibility
In the paper segment, the company derives sizeable share of sales from laminate grade papers used in the real estate industry. Cyclicality in the end-user industry will impact the demand potential during downturns. This is partly mitigated by the diversity in revenues. Profitability remains exposed to commoditised nature of paper and linear alkyl benzene sulfonic acid (LABSA). While RPPL does partly pass on price variation, any steep cyclical downturns or adverse change in demand-supply balance may result in lower realisations, thereby constraining the operating margin.
 
Liquidity: Adequate
Liquidity should continue to be adequate for the merged entity. Cash accrual ' projected at more than Rs 30 crore per annum over the medium term ' will comfortably meet the yearly maturing debt of Rs 2 crore. Cash and cash equivalents were moderate at around Rs 12 crore as on March 31, 2019. Utilisation of the fund-based limit during the six months through July 2019 averaged 70% for RPPL and 17% for NICL; NPPL does not have any bank line. RPPL has manageable capex plans of Rs 3-4 crore per annum over the medium term. CRISIL expects internal accruals, cash and cash equivalents and unutilized bank lines to be largely sufficient to meet its repayment obligations, capex and incremental working capital requirements.
Outlook: Stable

CRISIL believes RPPL will continue to benefit from a diversified product profile, established market position, and operational synergies with NPPL and NICL. Financial risk profile is expected to remain adequate, supported by steady cash accrual, moderate capex plan, and prudent working capital management.
 
Rating sensitivity factors
Upwrad factor
* Higher-than-expected revenue growth and steady operating profitability at over 15%
* Improvement in gearing and debt protection metrics
 
Downward factor
* Large, debt-funded capex or a significant stretch in the working capital cycle, leading to weakening of credit metrics
* Gearing increasing to over 1.5-1.7 times
* Lower than expected revenues or steep decline in margins leading to lower cash generation.

About RPPL
RPPL was incorporated as a private-limited company in 1980 and reconstituted as a public-limited company in 1983. In 1993, Mr Akash Kagliwal and entities in which he held stakes bought 51.41% of RPPL's equity. The company manufactures writing and printing paper (WPP), absorbent paper, and special-grade paper, with WPP and absorbent paper capacity of 50 tonne per day (tpd); and speciality paper capacity of 16 tpd in Vapi, Gujarat. In fiscal 2017, the company started its LABSA manufacturing plant in Vapi.
 
On October 30, 2017, RPPL announced scheme of arrangement and amalgamation between NPPL, NICL and RPPL along with their respective shareholders. NCLT's approval for the same was received on August 22, 2019.
 
About NPPL
NPPL, incorporated in April 1975 by Mr Akash Kagliwal, manufactures high-strength core board and thermal grade paper and caters to a pan-India clientele. This Aurangabad-based company has capacity to manufacture 50,000 tonne of paper per annum.

About NICL
NICL, incorporated in July 1978 by Mr Akash Kagliwal manufactures and trades in industrial chemicals. The key product, sulphuric acid, is used in pharmaceuticals, dyes, and textiles. It has a 2-megawatt captive thermal power plant.
 
In RPPL (standalone) during the three months ended June 30, 2019, net profit was Rs 1.61 crore on operating income of Rs 29.95 crore, vis-a-vis Rs 0.65 crore and Rs 31.88 crore, respectively, in the previous corresponding period.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 358 300
Profit after tax (PAT) Rs crore 27 15
PAT margin % 7.34 5.07
Adjusted debt/adjusted networth Times 1.14 1.55
Interest coverage Times 4.33 5.03

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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity Date Issue size
(Rs crore)		 Rating assigned
with outlook
NA Cash Credit* NA NA NA 12.50 CRISIL BBB+/Stable
NA Bank Guarantee NA NA NA 1.1 CRISIL A2
NA Term Loan** NA NA NA 1.63 CRISIL BBB+/Stable
*Letter of credit sublimit of Rs 1.50 crore
*Bank guarantee sublimit of Rs 1.50 crore
*Export packaging credit sublimit of Rs 2.00 crore
*Foreign bill discounting sublimit of Rs 1.00 crore
*Letter of undertaking for bank guarantee sublimit of Rs 3.00 crore
* Full interchangeability among non-fund-based limits
** Term loan not yet availed

Annexure - List of entities consolidated
Name of entity Extent of consolidation Rationale for consolidation
Nath Pulp and Paper Mills Ltd Full Merger and operational linkages
Nath Industrial Chemicals Ltd Full Merger and operational linkages
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  14.13  CRISIL BBB+/Stable  03-10-19  CRISIL BBB/Watch Developing  22-10-18  CRISIL BBB/Watch Developing  07-11-17  CRISIL BBB/Watch Negative  09-03-16  CRISIL BBB/Stable  CRISIL BBB/Stable 
        11-07-19  CRISIL BBB/Watch Developing  25-07-18  CRISIL BBB/Watch Negative  13-06-17  CRISIL BBB/Stable       
        22-04-19  CRISIL BBB/Watch Developing  27-04-18  CRISIL BBB/Watch Negative           
        17-01-19  CRISIL BBB/Watch Developing  02-02-18  CRISIL BBB/Watch Negative           
Non Fund-based Bank Facilities  LT/ST  1.10  CRISIL A2  03-10-19  CRISIL A3+/Watch Developing  22-10-18  CRISIL A3+/Watch Developing  07-11-17  CRISIL A3+/Watch Negative  09-03-16  CRISIL A3+  CRISIL A3+ 
        11-07-19  CRISIL A3+/Watch Developing  25-07-18  CRISIL A3+/Watch Negative  13-06-17  CRISIL A3+       
        22-04-19  CRISIL A3+/Watch Developing  27-04-18  CRISIL A3+/Watch Negative           
        17-01-19  CRISIL A3+/Watch Developing  02-02-18  CRISIL A3+/Watch Negative           
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
Bank Guarantee 1.1 CRISIL A2 Bank Guarantee 1.1 CRISIL A3+/Watch Developing 
Cash Credit* 12.5 CRISIL BBB+/Stable Cash Credit* 12.5 CRISIL BBB/Watch Developing
Term Loan 1.63 CRISIL BBB+/Stable Term Loan 1.63 CRISIL BBB/Watch Developing
Total 15.23 -- Total 15.23 --
*Letter of credit sublimit of Rs 1.50 crore
*Bank guarantee sublimit of Rs 1.50 crore
*Export packaging credit sublimit of Rs 2.00 crore
*Foreign bill discounting sublimit of Rs 1.00 crore
*Letter of undertaking for bank guarantee sublimit of Rs 3.00 crore
* Full interchangeability among non-fund-based limits
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Paper Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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