| Tamil Nadu Newsprint and Papers Limited | ||||
| Rating Reaffirmed and Withdrawn | ||||
| Rating Action | ||||
| ||||
| 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 reaffirmed its rating on the long-term bank facilities of Tamil Nadu Newsprint and Papers Limited (TNPL) and subsequently withdrawn the ratings at the request of the company and on receipt of a no-objection certificate from bankers. The withdrawal is in line with the CRISIL Ratings’ policy on withdrawal of bank loan ratings.
The reaffirmation in ratings continues to reflect TNPL’s established position in the domestic writing and printing paper (WPP) market, product diversity with presence in both WPP and Packaging Board, and improving operating capabilities, through increasing integration with expansion of captive pulp facilities. The rating is also supported by the company’s adequate and improving financial risk profile. These strengths are partially offset by partial susceptibility of operating profitability to volatile demand conditions and competition, and capital intensive nature of operations.
The ratings also reflect strong operating performance of TNPL during fiscal 2023 with a revenue growth of 22% supported by the strong demand for WPP owing to the reopening of educational institutions/offices. Packaging board segment revenues increased in fiscal 2023 despite fall in volumes driven by increased realizations, indicating that the major portion of raw material price rise has been passed on to the customers.
Operating margins increased sharply to 18.82% (Rs.1009 crore) in fiscal 2023 from 9.08% (Rs. 399 crore) in fiscal 2022, on account of better WPP volume growth, improved realizations and cost savings from newly commissioned pulp manufacturing plant in July 2022, which has enabled TNPL to manufacture pulp inhouse thereby substituting share of imported pulp. Also, the pulp mill enables the company to produce better-quality products such as folding box board (FBB) and cup stock varieties, which have high realisation compared to grey back boards produced earlier. Further, higher operating profits led to PBT increasing to Rs. 602 crore in fiscal 2023 from Rs. 22 crore in fiscal 2022.
Over the medium term, revenue growth is expected to be sluggish due to expected moderation in both WPP and paper board prices due to intense competition and as players pass on benefit of lower raw materials. Operating margins are expected to sustain at 15-17%.
The rating also factors the adequate financial risk profile of TNPL, marked by improvement in debt protection metrics. Gearing improved to 0.96 times at March 31, 2023, from 1.40 times at March 31, 2022, on account of healthy cash generation, which led to increase in net worth to Rs.1944 crore, from Rs. 1589 crore. Besides debt levels also reduced to Rs. 1860 crore at March 31, 2023 from Rs. 2222 crore at March 31, 2022. Liquidity will continue to be adequate over the medium term, with healthy liquid surplus of Rs. 116 crore generated in fiscal 2023 and supported by sufficient cash accrual to meet term debt obligation of Rs.300-320 crore per annum. |
Key Rating Drivers & Detailed Description Strengths Leading position in the domestic WPP market TNPL is the second-largest player in the domestic WPP segment, with installed capacity of 440,000 tonne per annum (TPA). Market position has been strong, despite intense competition, backed by the established brand, diversified product portfolio and customer base, robust distribution network and regular capacity expansions. Besides, the company uses bagasse to manufacture WPP, which adds to its operating efficiencies. Post gradual resumption of educational institutions, demand for WPP segment picked up with higher realisations, giving a growth in EBITDA margin to 23.70% from 11.60%. Volume growth is expected to remain flattish as company is already operating at over 100% utilization rates, while WPP prices could soften due to rising competition, and pass on of lower input costs.
Improving operating capabilities resulting from integrated operations The operating margin of TNPL has substantially increase in fiscal 2023 due to moderation in raw material prices and healthy WPP demand. Further, among the pulp, wood pulp, bagasse pulp and imported pulp constitute 30-35% each in terms of usage in the manufacturing process. Since July 2022, post commissioning of MEP, the company could manufacture 1,08,435 MT of Hardwood pulp, which replaced the imported pulp giving cost benefit of approx., Rs.320 crore at operating profits level in fiscal 2023. Operating from the country's largest single location paper plant continues to give TNPL significant economies of scale for WPP.
Expanded product portfolio, with presence in both WPP and Packaging Board TNPL has presence in both WPP and packaging board segments, which provides diversity to its revenue profile. Its greenfield (Multi Layered Coated Board) MCPB project has capacity of 200,000 TPA and caters to diverse end-user segments. Packaging board is used by industrial players for packaging consumer products, while WPP is used for making notebooks, textbooks, copier paper and diaries. With limited flexibility in enhancing WPP volumes as company is already operating at over 100%, higher packaging board volumes will largely drive overall volume growth over the medium term.
Improving financial risk profile Financial risk profile is adequate and improved materially in fiscal 2023, due to strong cash generation and only modest capex, enabling material debt reduction, and improving debt protection metrics. Interest coverage ratio improved to 5.77 times in fiscal 2023, from 2.60 times in fiscal 2022, while the ratio of debt/EBITDA (earnings before interest, taxes, depreciation, and amortization), substantially improved to 1.84 times in fiscal 2023, from 5.57 times in fiscal 2022.
Despite large capex plans (phase 2 of MEP) expected, which will involve part debt funding, high annual debt repayments on existing debt will ensure overall debt levels remain largely steady. Debt protection metrics are expected to remain at healthy levels over the medium term.
Weaknesses Dependence on imported raw materials TNPL presently does not have adequate captive pulping capacity to cater to both its units, it imports pulp to meet ~25-35% portion of the soft wood requirement in the MCPB unit, even post commissioning of the pulp capacity, in June 2022. This partially exposes the company’s profitability to sharp and volatile pulp movements.
Exposure to risks related to project implementation and stabilization, competition and capital intensive nature of operations TNPL may undertake capex (Phase II of MEP) at a cost of ~Rs.1500 crore and is contemplating between setting up a new packaging board plant with additional captive pulp capacity or a WPP plant; this may be implemented between fiscals 2025-2027. This large project in turn exposes TNPL to project-related risks over the medium term; pre-commissioning risks comprise time or cost overruns, while post-commissioning risks will include stabilization and ramp up in operations.
These risks, however, are partly offset as the company has executed large projects of similar scale earlier, with phased spending on the project and funding through long maturity loans with spaced-out debt obligations.
Competitive intensity in the paper sector has risen, including from imports coming from China and East Asian nations. Besides, with demand slowing and input prices correcting, realisations may remain under pressure in fiscal 2024. |
Liquidity: Strong Cash accrual is projected at Rs 600 crore per annum, sufficient to meet the repayment obligation of Rs 320 crore in fiscal 2024. As the company deferred the Phase-II capex and accruals are improving, debt obligations will be comfortably managed.
Besides, CRISIL Ratings derives comfort from the strong refinancing capabilities and established relationship with lenders, which will enable TNPL to arrange for funds during any shortfall in cash accrual for servicing debt obligations, as has been amply demonstrated in the past. Besides, these loans have been raised at extremely competitive interest rates. TNPL also has headroom in its fund-based working capital limit, which has been utilised at 50-60% on average over the six months through August 2023. |
Outlook: Stable CRISIL Ratings believes that TNPL’s credit profile will benefit from its established position in the domestic WPP and paper board segments, amid intensifying competition. Lower reliance on imported pulp post commissioning of its own pulp unit for paper board will support cash generation. Further, its financial risk profile will further strengthen over the medium term, supported by good cash generation, progressive debt repayment, which will help it absorb impact of large capex expected over the medium term. |
Rating Sensitivity factors Upward factors
Downward factors
|
About the Company TNPL was promoted by the Government of Tamil Nadu (GoTN) and the Industrial Development Bank of India in 1979 to manufacture newsprint and WPP using bagasse as the principal fibre source. GoTN is currently the single largest shareholder with a stake of 35.3% stake.
TNPL has total production capacity of 640,000 TPA. Unit 1 has production capacity of 440,000 TPA at its plant at Pugalur in Kagithapuram (Tamil Nadu), which is the largest single location paper plant in India. The company possesses manufacturing capability for both newsprint and WPP; however, because of better product profitability, TNPL has been manufacturing only WPP. The Pugalur plant is backward integrated and has a pulp production capacity of 880 tonne per day (TPD). Furthermore, TNPL has a 300-TPD de-inking pulp plant to produce pulp from wastepaper. Also, the residue generated from the Pugalur plant is combined with limestone to produce cement at its 900-TPD cement plant. The company has captive power facilities of 103.62 megawatt (MW), of which about 7 MW is available to be sold to the state grid after meeting its entire in-house requirement. Besides, the company has wind farms with capacity of 35.5 MW (as on March 31, 2016) in Tirunelveli (Tamil Nadu). TNPL implemented a 200,000-TPA Greenfield project (Unit 2) in the value-added packaging board segment in 2016.
As on June 30, 2023, the company had reported operating income of Rs. 1262 crore with EBITDA margin at 24.87% and net cash accruals of Rs.198 crore. |
Key Financial Indicators
|
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
|
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||
|
Criteria Details
|