Detailed rationale

CRISIL Ratings has reaffirmed its ‘CRISIL BBB-/Stable/CRISIL A3’ ratings on the bank facilities of Genus Paper & Boards Ltd (GPBL; part of Genus Paper group).

 

The ratings reflect the stable business risk profile of the group supported by revenue of Rs 714 crore in fiscal 2024 against Rs 722 crore in fiscal 2023. The decline in revenue was due to a temporary shutdown of the plant for turbine installation during December 2023 and January 2024. Going forward, the group is expected to achieve a healthy revenue growth of 20-25% in fiscal 2025 supported by volumetric expansion from existing product lines as well as from commencement of food grade manufacturing. Operating margin improved to 8.5% in fiscal 2024 from 4.47% in fiscal 2023 driven by softening input prices and decline in power and fuel costs. Improvement in revenue driven by volumetric growth along with sustenance of operating margin around 9% will remain key monitorable.

 

The ratings also factor in the need-based support from group company in the form of unsecured loans aiding the liquidity profile. The net cash accruals were insufficient against repayment obligations for fiscal 2024 and the same were met through infusion of USLs by its group companies.

 

GPBL is undertaking a capital expenditure (capex) of Rs 135 crore for establishing a de-inking unit (a backward integration plan) at its existing facility in Muzaffarnagar, Uttar Pradesh. The capex is spread over fiscals 2025 and 2026. The total project cost of Rs 135 crore is expected to be 70% funded through bank and rest through promoters’ contribution in the form of unsecured loans and recalling investments/loans and advances from group company. The de-inking unit is expected to commence operations by the third quarter of fiscal 2026. Through this backward integration, GPBL is expected to produce its own pulp, which will support overall profitability. The group expects a gradual improvement in operating margin to above 10% over the medium term. As the capex is yet to commence, its timely completion without any cost overrun shall remain key monitorable over the medium term.

 

The ratings reflect GPBL’s established presence in kraft paper manufacturing and the extensive industry experience of its promoters, moderate working capital cycle and above average financial profile. These strengths are partially offset by exposure to intense competition and cyclicality in the industrial paper industry, susceptibility to volatility in raw material prices and project related risks.

Analytical approach

CRISIL Ratings has combined the business and financial risk profiles of GPBL with its wholly owned subsidiary, Genus Paper & Coke Ltd (GPCL).

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key rating drivers and detailed description

Strengths:

• Established presence and extensive industry experience of the promoters: The promoters have experience of over a decade in the industrial paper industry. The group benefits from the promoters’ extensive experience in the industry, which has helped it to build a strong distribution network and approved supplier status with reputable clients from diverse end-user industries. The same is expected to continue to support the business.

 

• Moderate working capital cycle: Gross current assets (GCAs) were 120-140 days over the three fiscals ended March 31, 2024. Its moderate working capital management is reflected in GCAs of 141 days as on March 31, 2024, marked by debtors of 29 days and inventory of 102 days. It is required to extend credit in line with industry standards as the customers include small and medium-sized players with weak credit profiles. Furthermore, as the company imports wastepaper wherein the transit period is generally between 70-80 days inventory holding is sizeable. Hence, the working capital cycle is expected to remain along similar lines over the medium term.

 

• Above average financial risk profile: Networth was healthy at Rs 481 crore while limited reliance on external funds yielded a gearing of 0.69 time as on March 31, 2024. Networth is expected to improve and remain above Rs 500 crore and gearing less than 0.8 time as on March 31, 2025, backed by healthy accretion to reserve. The company is undertaking capex of Rs 135 crore in fiscals 2025 and 2026, which will be debt funded to the tune of 70% and rest through promoters’ contribution in the form of unsecured loans and recalling investments/loans and advances from group company. Despite the debt funded capex plan, gearing is expected to remain comfortable below 1 time over the medium term. Debt protection metrics have been moderate marked by the interest coverage and net cash accrual to total debt (NCATD) ratios of around 1.9 times and 0.09 times, respectively, for fiscal 2024. With the expected improvement in operating margin, interest coverage should remain at 2.4-2.5 times and NCATD at 0.1-0.2 time in fiscal 2025. Any stretch in the financial risk profile shall remain monitorable over the medium term.

 

Weaknesses:

• Susceptibility to intense competition and cyclicality in the industrial paper industry: The Indian paper industry is highly fragmented with several organised and unorganised players. The level of fragmentation is even higher in the industrial paper segment (which accounts for a major portion of the total paper industry) where unorganised players hold the majority of the market share. Rapid growth in the number of small mills has been because of the low entry barriers (the cost of setting up an industrial paper plant is relatively low as most smaller capacities are waste-paper-based and involve minimal investment in technology) and government policies (several excise concessions and other benefits to small paper mills granted from time-to-time).

 

Intense competition in the kraft paper segment limits the pricing flexibility of players. Moreover, end users of packaging paper are also price sensitive. This situation is expected to continue over the medium-to-long term, as consolidation is unlikely because of unviable capacities. Industry is also cyclical in nature, with small players shutting down capacities during downturns and resuming operations when the economy revives. This prevents established players from generating large profits even during periods of good economic growth. The business risk profile may remain constrained by these factors over the medium term.

 

• Susceptibility to volatility in raw material prices: Wastepaper, the main raw material used to produce packaging paper, is either sourced from the domestic market or imported. As 60-70% of the raw material requirement is imported, prices are subject to volatility in international prices and foreign exchange (forex) rates. Furthermore, intense competition limits the pricing power and ability to pass on input price increases to customers on time. The same led to a decline in operating margin to 4.47% in fiscal 2023 from 8.85% in fiscal 2022. In fiscal 2024, the group reported an operating margin of 8.5% and is expected to achieve around 9% in fiscal 2025 driven by stable raw material prices and sale of value-added products where margins are high.

Liquidity: Adequate

Bank limit utilisation averaged 78% over the 12 months ended June 2024. Net cash accrual of Rs 29 crore in fiscal 2024 was insufficient against repayment obligation of Rs 36.8 crore and the same was met through unsecured loans from group company. However, the expected annual net cash accrual of Rs 50-60 crore should comfortably cover yearly repayment obligation of Rs 40-50 crore over the medium term leaving sufficient cushion to cover working capital requirement. The current ratio was modest at 1.06 times as on March 31, 2024, and is expected to remain above 1.05 times in fiscal 2025. Need-based support from the group company is expected to continue.

Outlook: Stable

CRISIL Ratings believes the group will continue to benefit from its established market position in the industrial paper industry, the extensive experience of its promoters, and their healthy relationships with clients.

Rating sensitivity factors

Upward factors

• Growth in revenue and sustenance of operating margin at 9.0-9.5%, leading to healthy cushion between net cash accrual and repayment obligation of above 1.3 times.
• Improvement in the financial risk profile with an interest coverage ratio of more than 2.5 times.
• Reduction in loans and advances extended to group company aiding the financial and liquidity profiles.

 

Downward factors

• Decline in revenue and operating profitability below 7% leading to cash accrual below Rs 40 crore in the near-to-medium term.
• Any substantial increase in investment or loans and advances to group company or any stretch in the working capital cycle, weakening the financial and liquidity profiles.
• Any delay in ramping up of the capex or cost overrun leading to stretch in liquidity profile.

About the group

Incorporated in 2012, GPBL is engaged in the manufacturing of kraft paper, duplex paper, and writing and printing paper at its two facilities in Moradabad and Muzaffarnagar in Uttar Pradesh, with installed capacity of 2,18,000 MTPA (metric tonne per annum) for kraft paper, 1,00,000 MTPA for duplex paper, and 48,000 MTPA for writing and printing paper. The registered office of the company is located at Moradabad. GPBL’s shares are listed on the National Stock Exchange of India Ltd (NSE) and Bombay Stock Exchange Ltd (BSE).

 

GPBL is promoted by Mr Ishwar Chand Agarwal, his son Mr Kailash Chandra Agarwal and other family members.

 

GPCL (formerly known as Kailash Paper & Coke Ltd) is a wholly owned subsidiary of GPBL. Incorporated in 2020, GPCL is engaged in the manufacture of met coke with total installed capacity of 96,000 MTPA at its facility in Chopadava, Bhachau, Gujarat.

Any other information: Not Applicable