Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB-/Stable/CRISIL A3’ ratings to the bank facilities of Genus Paper & Boards Limited (GPBL).

 

GPBL is undertaking a Capital expenditure of Rs 135 crore for establishing a de-inking plant (as a backward integration plan) at its existing plant in Muzaffarnagar, Uttar Pradesh. The capex is expected to start from April24 onwards and is spread over a period of two years i.e. fiscal 2025 and fiscal 2026. The total project cost of Rs 135 crore is expected to be 70% funded through bank and rest through promoters’ contribution in form of unsecured loans and recalling investments or loans and advances from group companies. The deinking plant is expected to start operations from June 2025. Through this backward integration the company is expected to produce its own pulp which will benefit in the form of higher operating margins. The company expects the operating margins to remain above 13% over the medium term. As the capex has not yet started, the timely completion without any cost overrun shall remain key monitorable over the medium term.

 

The rating reflects GPBL’s established presence in kraft paper manufacturing and extensive industry experience of the promoters, moderate working capital cycle and above average financial profile. These strengths are partially offset by its susceptibility 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 operational and financial risk profile of GPBL with its wholly owned subsidiary, Genus Paper & Coke Limited (GPCL).

 

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

Key Rating Drivers & Detailed Description

Strengths:

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

 

• Moderate working capital cycle: Gross current assets were at 140-200 days over the three fiscals ended March 31, 2023. Its moderate working capital management is reflected in its gross current assets (GCA) of 140 days as on March 31, 2023 marked by debtors at 41 days and inventory at 85 days. It is required to extend the credit period in line with the industry standards. As the customers are small and medium size player who require credit. Furthermore, as the company imports wastepaper wherein the transit period is generally between 70-80 days hence to meet its business requirement, it holds a large inventory. Hence, the working capital cycle is expected to remain in the range of 120-140 days over the medium term.

 

• Above average financial profile: The group’s capital structure has been at healthy level marked by networth at Rs 477.7 crore and due to limited reliance on external funds yielding gearing of 0.6 times and total outside liabilities to adj tangible networth (TOL/ANW) of 0.89 times for year ending on 31st March 2023. The networth is expected to improve and remain above Rs 480 crore in fiscal 2024 backed by regular accretion to reserves. The gearing is expected to remain comfortable around 0.56 times and total outside liabilities to adjusted networth at 0.83 times in fiscal 2024. The company is undertaking capex of Rs 135 crore in fiscal 2025 and fiscal 2026 which will be debt funded to the tune of 70% and rest 30% will be from promoters contribution. Despite the debt funded capex plan, the gearing and total outside liabilities to adjusted networth ratios are expected to remain comfortable below 1 times over the medium term. The group’s debt protection measures have been at moderate levels marked by the interest coverage and net cash accrual to total debt (NCATD) ratio are at 1.58 times and 0.05 times for fiscal 2023. On account of improvement in operating margins the interest coverage is expected to remain at around 2 times and Net cash accruals to total debt at 0.8 times in fiscal 2024. 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 industrial paper industry is highly fragmented with several organized and unorganized 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 unorganized players hold 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 low 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 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. The 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 raw material requirement is imported, prices are subject to volatility in international rates and foreign exchange rates. Furthermore, intense competition limits pricing power and the ability to pass on input price increases to customers on time. The same led to decline in operating margins to 4.47% in fiscal 2023 from 8.85% in fiscal 2022. In the current fiscal year, the group has reported operating margins of around 8.4% as on 30th Sept 2023 and is expected to achieve around 8% in fiscal 2024. As Operating margin is likely to remain exposed to volatility in input prices over the medium term, any fluctuations in operating margins below 4.5% shall remain key sensitivity factor.

Liquidity: Adequate

Bank limit utilization averaged around 83% for the past 12 months ending November 2023. Expected Cash accruals of Rs 35-40 crore are tightly matched against term debt obligation of Rs 35-40 crore in fiscal 2024. However, net cash accruals is likely to range from Rs 52 crore to Rs 58 crore against repayment obligation in the range of Rs 40-45 crore in fiscal 2025 leaving a sufficient cushion to cover the working capital requirement. The Current ratio is moderate at 1.17 times as on March 31, 2023 and is expected to remain above 1.2 times in fiscal 2024. Free cash and bank balance of Rs. 4 crores maintained as on March 31, 2023. Infusion in the form of Unsecured loans from promoters shall continue to support liquidity profile.

Outlook: Stable

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

Rating Sensitivity Factors

Upward factors

• Sustained growth in scale of operation and sustenance of operating margin at around 9%, leading to healthy cushion in net cash accruals to repayment obligation above 1.3 times.
• Reduction in loans and advances extended to group companies aiding the financial and liquidity profile.

 

Downward factors

• Decline in revenue and operating profitability below 6% leading to cash accrual below Rs 40 crore in near to medium term.
• Any substantial increase in investment or loans and advances to group companies or any stretch in working capital cycle, weakening the financial and liquidity profile.
• Any delay in ramp up of the capex or any cost overrun leading to stretch in liquidity profile.

About the Group

GPBL was incorporated in 2012. GPBL is engaged in manufacturing of kraft paper, duplex paper, and writing & printing paper at its two manufacturing 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 & printing paper. The registered office of the company is located at Moradabad, Uttar Pradesh. GPBL’s shares are listed on National Stock Exchange of India Limited (NSE) and Bombay Stock Exchange (BSE Limited).

 

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 Limited) is a wholly owned subsidiary of GPBL. Incorporated in 2020, GPCL is engaged in manufacturing of met coke with total installed capacity of 96,000 MTPA at its manufacturing facility in Chopadava, Bhachau, Gujarat.

Any other information: Not Applicable