Rating Rationale

Strengths:
* Diversified product profile: The overall paper segment contributes 69% to total revenue, of which paper used to manufacture laminates contributes 46% and other speciality offerings (tissue paper, carbon-base paper, thermal paper, pleating paper, and wax match tissue paper) account for the rest. RPPL has also started manufacturing linear alkyl benzene sulphonic acid (LABSA) by commissioning its unit successfully in fiscal 2017. Revenue has grown by 14% in fiscal 2019, driven by paper division. Although growth in the chemicals segment was constrained owing to intense competition in LABSA.

* Adequate financial risk profile: Capital structure and debt protection metrics are adequate and should remain so over the medium term, backed by moderate reliance on debt, steady growth in revenue, and stable profitability (of 6-7%). Networth and gearing were Rs 51 crore (after adjusting for revaluation reserve) and 0.30 times respectively, as on March 31, 2019. While interest coverage moderated to around 4.5 times in fiscal 2019 (compared to 8-10 times in the previous years) on account of debt-funded capital expenditure, it continues to be adequate.

Weaknesses
* Small scale of operation: Despite longstanding presence in the industry, overall size remains modest, with revenue of at Rs 137 crore in fiscal 2019. Lack of a captive power plant leads to lower efficiency, compared with other large players in the paper industry. However, with the proposed merger, RPPL will have a 2-megawatt captive thermal power plant.

* Exposure to volatile raw material prices: The commoditised nature of paper and LABSA and sharp fluctuations in raw material prices continue to constrain operating margin. Cyclical downturns or an adverse change in demand-supply balance may also impinge on the margin.

Liquidity: Adequate
RPPL's has adequate liquidity supported by expected cash accruals of over Rs. 6-7 crore per annum in the medium term and negligible term debt obligations. The company also has access to fund based limits of Rs. 17 crore utilised at an average of 85% for the last 6 months through July 2019. CRISIL expects internal accruals and unutilized bank lines to be largely sufficient to meet its capex and incremental working capital requirements.

Rating Sensitivity factors
Upward factor
* Realisation of synergies and value accretion due to integration marked by higher scale and profitability
* Improvement of debt protection metrics of the combined entity on account of the merger

Downward factor
* Delays in integration of NPPL and NICL with RPPL leading to moderate cost efficiencies and weaker cash flows
* Deterioration of debt protection metrics of the combined entity on account of the merger

About RPPL
RPPL, based in Gujarat, 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, thereby obtaining management control over the company. RPPL 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 fiscal 2017, the company set up a LABSA plant, which began commercial operations from April 2016.

About NPPL
Incorporated in April 1975, Aurangabad-based NPPL manufactures high-strength core board and thermal grade paper. Installed capacity is 50,000 tonne per annum, and customer base is spread across India. Mr Akash Kagliwal is the promoter.

About NICL
NICL, based in Vapi and promoted by Mr Akash Kagliwal, was incorporated in July 1978. It manufactures and trades in industrial chemicals. The key product, sulphuric acid, is used in pharmaceuticals, dyes, and textiles. The company has a 2-megawatt captive thermal power plant.

In the three months ended June 30, 2019, net profit was Rs 1.6 crore on net sales of Rs 30 crore vis-a-vis Rs 0.65 crore and Rs 32 crore, respectively, in the previous corresponding period.