Rating Rationale
August 23, 2017 | Mumbai
Tamil Nadu Newsprint and Papers Limited
Ratings Reaffirmed
 
Rating Action
Rs.50 Crore Commercial Paper CRISIL A1 (Reaffirmed)
Rs.50 Crore Commercial Paper CRISIL A1+(SO) (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1' rating on the Rs 50 crore commercial paper programme (CP) of Tamil Nadu Newsprint and Papers Ltd (TNPL). CRISIL has also reaffirmed its 'CRISIL A1+(SO)' rating on TNPL's Rs 50 crore CP programme, which is supported by an unconditional and irrevocable standby letter of credit (SBLC) extended by Kotak Mahindra Bank Ltd (KMBL; 'CRISIL AAA/FAAA/Stable/CRISIL A1+').

Rationale for reaffirmation of rating for CP:
The rating reaffirmation factors in the expected improvement in TNPL's operating performance from the second quarter of fiscal 2018, supported by favourable demand-supply dynamics for writing and printing paper (WPP). Further, the company's multi-layer coated paperboard (MCPB) plant is also expected to gradually ramp up utilization levels to ~70% in fiscal 2018, which will support business performance.
 
Earlier, operations at TNPL's Karur plant were affected in the first quarter of fiscal 2018, due to lack of adequate water for their WPP plant, and captive pulping unit. Production volumes declined by about 50% leading to sharp fall in revenues and profitability in the first quarter of fiscal 2018; operating margin fell to 6.2% in this period,  compared with 23.8% during the corresponding period of previous fiscal, due to lower production and higher pulp cost, as the company had to import pulp, at a higher rate
 
Operations have resumed from July 2017 owing to improvement in water availability. Overall WPP capacity utilization is likely to improve to more than 80% while profitability will recover gradually in the current year, and revert to previous levels of 20-22% from next fiscal. Albeit, cash generation for fiscal 2018 will be lower than earlier expectations and gearing, though improving, will remain moderately higher than earlier expected.  The company's established relationship with lenders, and proactive measures to arrange for funds due to short term cash flow mis-matches should enable it manage its sizeable repayments, commencing from fiscal 2018.
 
The ratings continue to reflect TNPL's leading position in the domestic WPP market, strong operating capabilities, expected product diversity from expansion into multi-layer double coated paperboard (MCBP) plant. These strengths are partially offset by TNPL's moderate financial risk profile, reflected by high gearing and modest debt protection ratios. Further, the company also has sizeable long term debt obligations commencing from fiscal 2018, which will require part refinancing.
 
Rationale for reaffirmation of rating for SBLC backed CP:
The ratings continue to reflect the strength of the unconditional SBLC from KMBL, acting in dual capacity, as the SBLC providing bank and the issuing and paying agent (IPA). The rating is also supported by a well-defined payment structure (refer to annexure for details) to ensure timely servicing of obligations.

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 400,000 tonne per annum (tpa). Despite intense competition, the company has sustained its strong market position backed by established brand, diversified product portfolio and customer base, robust distribution network and regular capacity expansions. Revenue (which registered a compound annual growth rate [CAGR] of 17% over the five years through fiscal 2016) is expected to grow at a steady 14% CAGR over the medium term.
 
* Strong operating capabilities resulting from integrated operations: Operating margin is among the highest in the industry owing to strong efficiencies arising from backward integration, long-term supply tie-ups and captive power plant. Furthermore, operating from the country's largest single-location paper plant gives TNPL significant economies of scale. Given strong operating efficiencies and expected ramp-up in MCBP utilization, overall profitability is expected to be more than 20% over the medium term.
 
* Expanded product portfolio and improving cash flows from operations: The recently commissioned greenfield MCBP project has a capacity of 200,000 tpa and will cater to diverse end-user segments as MCBP is used for packaging consumer products, while WPP is used for making notebooks and diaries. TNPL is also expected to leverage its existing dealer network and establish a foothold in the MCBP segment. As the unit scales up, MCBP is expected to contribute about 25% to the revenue by fiscal 2018 and further improve cash generation.
 
Weakness
* Moderate financial risk profile, reflected by high gearing and modest debt protection ratios: TNPL's capital structure has remained moderate with gearing averaging 1.6 times in the last five fiscals ending March 31, 2017. Debt protection metrics are also moderate: debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratio and net cash accrual to total debt ratio averaged 3.7 times and 0.15 time, respectively, in the same period. However, financial risk profile is expected to improve gradually over the medium term given healthy cash generation, significant reduction in capex to about Rs 100-150 crore per annum and progressive debt repayments. Hence, gearing and debt to EBITDA ratios are expected to improve to below 1.5 times and 3.5 times, respectively, over the medium term.
 
* Sizeable long-term debt obligations in fiscal 2018, which is likely to be met through part refinancing: TNPL's obligations are expected to be high at Rs 420 crore in fiscal 2018 and Rs 490 crore in fiscal 2019, as repayments on MCBP loans commence; cash flows, though improving, are not expected to suffice. Nevertheless, strong refinancing capabilities and established relationship with lenders, will enable it to arrange for funds to service shortfalls in accruals for servicing debt obligation, as has been amply demonstrated in the past. Besides, these loans have been raised at extremely competitive interest rates, resulting in overall cost of debt ranging between 9-9.5%.
 
Key Rating Drivers and Description (for SBLC backed CP programme):
* Unconditional and irrevocable SBLC from KMBL, covering the entire rated amount: The rating is based on strength of the credit enhancement facility provided by KMBL, through an unconditional and irrevocable SBLC for the entire rated amount. The SBLC is valid for a single tranche of CP, to be issued for a maximum tenor of 90 days subject to maturity date being on or before the expiry date of the SBLC facility and quantum, subject to maximum outstanding amount of Rs 50 Crore under the CP programme.
 
* Well-defined payment structure designed to ensure full and timely payment to investors: A well-defined payment mechanism has been put in place to ensure timely payment of obligation to the investors of the CP programme. The payment structure is depicted in the Annexure.
About the Company

TNPL was promoted by the Government of Tamil Nadu (GoTN) and the Industrial Development Bank of India (IDBI) 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 a production capacity of 400,000 tpa at its plant at Pugalur in Kagithapuram (TN), which is the largest single location paper plant in India. The company possesses manufacturing capability for both newsprint and WPP; however, because of better cost economics, TNPL has been manufacturing only WPP. The Pugalur plant is backward integrated, and has a pulp production capacity of 880 tonnes per day (tpd). Furthermore, TNPL has a 300-tpd de-inking pulp plant to produce pulp from waste paper. Also, the residue generated from the Pugalur plant is combined with limestone to produce cement at its 900-tpd cement plant. The company also has captive power facilities of 103.62 megawatts (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 also has wind farms with a capacity of 35.5 MW (as on March 31, 2016)/ in Tirunelveli district of TN. TNPL has also recently implemented a 200,000-tpa greenfield project in the value-added coated board segment. This project, established in Trichy, will source a part of its pulping requirements from the Pugalur unit.

For the first three months ended June 30, 2017, the company reported loss of Rs 89 Crore on net sales of Rs 555 Crore, against a PAT of Rs 70 Crore on net sales of Rs 745 Crore for the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars Unit 2017 2016
Revenue Rs. Cr. 2,950 2,712
Profit After Tax Rs. Cr. 265 254
PAT Margins % 9.0 9.4
Adjusted Debt/Adjusted Net worth Times 1.67 1.82
Interest coverage Times 3.04 4.28

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. Cr.) Rating Assigned with Outlook
NA Commercial Paper NA NA 7-365 days 50.0 CRISIL A1
NA Commercial Paper NA NA 7-90 days 50.0 CRISIL A1+(SO)

Annexure: Payment Structure for SBLC backed CP programme
Timeline Event
T - 1 day * TNPL shall deposit the requisite amount in the collection and payment account held with KMBL(IPA) on or before 4.00 pm one working day in advance of due date/date of maturity of the CP
* In case if TNPL fails to deposit the requisite amount by 4.00 pm, the IPA shall provide a written notice to SBLC Bank calling upon the bank to arrange requisite amount for repayment
* IPA shall also ensure that the notice reaches the SBLC bank by 5.00 pm on T-1 date
T day by 12.00 pm * Upon receipt of notice, SBLC bank shall make payments of requisite amount to the collection and payment account by at least 12.00 pm on due date/date of maturity of the CP
T day * Payment made to investor based on funds deposited in the collection and payment account

If TNPL ascertains that it is unable to meet repayment obligations, it will intimate the SBLC bank and IPA in writing on or before Day T-2 (2 days in advance of due date of the CP). Failure to do so shall not in any manner affect the obligation of the SBLC bank to advance the facility or obligation of the IPA under this agreement.
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100  CRISIL A1| CRISIL A1+(SO)    No Rating Change  04-11-16  CRISIL A1| CRISIL A1+(SO)    --    --  -- 
            24-06-16  CRISIL A1+(SO)           
            25-05-16  Provisional CRISIL A1+(SO)           
Short Term Debt (Including Commercial Paper)  ST    --    --  25-05-16  Withdrawal    No Rating Change  08-12-14  CRISIL A1  -- 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Paper Industry
Criteria for rating Short-Term Debt (including Commercial Paper)

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