Rating Rationale
August 31, 2018 | 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 rating of 'CRISIL A1+(SO)' 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
TNPL's operating performance is expected to improve in fiscal 2019 supported by healthy demand for both writing and printing paper (WPP) and multi-layer double coated paperboard (MCBP) from end user industries combined with TNPL's efforts to improve profitability. While capacity utilization levels at the recently commissioned MCBP unit have been steadily improving, TNPL is also taking measures to improve its realizations through changes in MCBP product mix. Besides, WPP margins continue to remain healthy benefiting from strong operational efficiencies and favourable demand-supply scenario. CRISIL expects that TNPL's operating profitability will improve to around 18% in fiscal 2019 and gradually to over 20% from fiscal 2020, from 12% in fiscal 2018.

Earlier in fiscal 2018, TNPL's operating performance was impacted by the temporary shutdown in operations at the Pugalur plant (manufacturing pulp and WPP) leading to net losses in the first two quarters of the fiscal. However, with improved water supply and storage, production resumed in end of July 2018, leading to a much improved performance in the second half of the fiscal. Margin was nevertheless lower than the historical levels due to higher global raw material (pulp) prices and TNPL's sizeable dependence on imported pulp for its MCBP unit in Mondipatti.

CRISIL also notes that TNPL is planning a large capacity expansion (costing about Rs.2500 crore) in its facility in Mondipatti for setting up a captive pulping unit and a WPP manufacturing unit. Environmental clearance is awaited for the project. The capital expenditure (capex) is expected to be incurred from fiscal 2020 onward and will be implemented in a phased manner with prudent mix of debt and equity. With expected improvement in margins and progressive debt repayments, TNPL will be able to deleverage its balance sheet adequately prior to initiation of the new project in fiscal 2020. This will enable the company to sustain gradual improvement in credit metrics. Furthermore, CRISIL also believes that TNPL's strong refinancing capabilities and established relationship with lenders, will enable it to tide over any cash flow mismatches. 

The rating continues to reflect TNPL's leading position in the domestic WPP market, strong operating capabilities, product diversity with presence in both WPP and MCBP. These strengths are partially offset by TNPL's moderate financial risk profile, reflected by high (though improving) gearing and modest debt protection ratios. Further, the company also has sizeable long term debt obligations over the medium term, which will require part refinancing. Also, the company's operating profitability is partially susceptible to volatility in imported pulp prices.

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 an installed capacity of 400,000 tonne per annum (tpa). Despite intense competition, the company has sustained its strong market position backed by its established brand, diversified product portfolio and customer base, robust distribution network and regular capacity expansions. Revenues (which registered a CAGR of 10% over the five years through fiscal 2018) is expected to grow at a steady pace of 9-11% CAGR over the medium term.

* Strong operating capabilities resulting from integrated operations: TNPL's operating margins in WPP are among the highest in the industry owing to strong efficiencies arising out of 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. However margins were temporarily impacted in fiscal 2018 owing to temporary shutdown of operations. Given the company's strong operating efficiencies and expected improvement in product mix, especially MCBP, overall operating profitability is expected to improve to more than 20% over the medium term.

* Expanded product portfolio, with presence in both WPP and MCBP: TNPL has presence in both WPP and MCBP which provides diversity to its revenue profile. TNPL's greenfield MCBP project has a capacity of 200,000 tpa and caters to diverse end-user segments - MCBP is used by industrial players for packaging consumer products, while WPP is used for making notebooks, textbooks, copier paper and diaries. TNPL is also expected to leverage its existing dealer network and establish a foothold in the MCBP segment. The MCBP unit which reported losses for fiscal 2018; achieved cash breakeven in the last quarter of fiscal 2018. As the unit scales up, cash flows from the MCBP unit will increase which will further improve overall cash generation.

Weaknesses
* Moderate financial risk profile, reflected by high (though improving) gearing and moderate debt protection ratios: TNPL's financial risk profile is marked by moderate gearing and debt protection metrics, even as networth remains healthy at Rs 1578 crore as on March 31, 2018. Debt funded capacity expansions in the past have resulted in moderate gearing; however the ratio has improved to 1.5 times as on March 31, 2018 from 1.8 times as on March 31, 2016. The proposed capex of Rs 2500 crore from fiscal 2020 is expected to be mainly debt funded. However expected improvement in margins and thus cash generation, and progressive sizeable debt repayments, will help mitigate the net debt addition due to the proposed capex. This will enable the company to sustain the credit metrics at similar levels seen in fiscal 2018.

* Sizeable long-term debt obligations: TNPL's long term debt repayment obligations are sizeable estimated at around Rs 490 Cr in fiscal 2019 and Rs 460 Cr in fiscal 2020, as repayments on MCBP loans continue. While repayments in fiscal 2019 may require part refinancing, internal accruals will be adequate to service these obligations from thereon. Further, CRISIL derives comfort from TNPL's strong refinancing capabilities and established relationship with lenders, which will enable it to arrange for financing to service shortfalls in accruals for servicing debt obligations, as has been amply demonstrated in the past. Besides, these loans have been raised at extremely competitive interest rates.

* High dependence on imported pulp for MCBP: As TNPL currently doesn't have adequate captive pulping capacity to cater to both its units, it imports pulp to meet a large portion of the raw material requirement in the MCBP unit. This exposes the company to volatility in the movement of global pulp prices, which have been on an increasing trajectory in the past few months. While TNPL is taking measures to address the same with the proposed captive pulping unit by fiscal 2020, profitability in this segment will remain partially susceptible to imported pulp prices and forex movements till such time. 

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. There is no outstanding against this facility at present.

* 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 at Mondipatti in Trichy, sources a part of its pulping requirements from the Pugalur unit.

The company reported a profit after tax (PAT) of Rs.24.69 crore during the first quarter of fiscal 2019, compared to a net loss of Rs.89.15 crore in the corresponding quarter of fiscal 2018, on revenues of Rs.925.31 crore (Rs.592.44 crore).

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs.Cr 3,156 3,219
Profit After Tax (PAT) Rs.Cr -42 365
PAT Margins % -1.3 8.2
Adjusted Debt/ Adjusted Networth Times 1.5 1.7
Interest coverage Times 1.7 3.0

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 2: 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 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100.00  CRISIL A1| CRISIL A1+(SO)      23-08-17  CRISIL A1| CRISIL A1+(SO)  04-11-16  CRISIL A1| CRISIL A1+(SO)    --  -- 
            04-01-17  CRISIL A1| CRISIL A1+(SO)  30-09-16  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  Withdrawn  18-12-15  CRISIL A1  CRISIL A1 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Paper Industry
CRISILs Criteria for rating short term debt

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