| JK Paper Limited | ||||||||||
| Ratings Reaffirmed | ||||||||||
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| 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 ‘CRISIL AA-/FAA/Stable/CRISIL A1+’ ratings on the long-term bank facilities, non-convertible debentures, fixed deposit and commercial paper programmes of JK Paper Limited (JKPL).
The ratings continue to reflect the company’s strong market position in the writing and printing paper industry, backed by its established position in the copier segment and superior market reach and dealers’ network. Strong market reach helped the company during fiscal 2021, as it could limit the impact of lower domestic demand through exports, thereby restricting decline in sales volume to around 2%. Revenue during fiscal 2021 declined 7.8% to Rs 3,046 crore in fiscal 2021 from Rs 3,303 crore in fiscal 2020. However, with improvement in demand and supported by better realisations, revenue grew strongly by 41.9% year-on-year to Rs 2,629 crore in the initial nine months of fiscal 2022.
Furthermore, JKPL reduced its cost per tonne of production over the years, making the company one of the lowest cost producers in the industry. This has helped it in improving its earnings before interest, taxes, depreciation and amortisation (EBITDA) margin from 19.2% in fiscal 2018 to 26.6% in fiscal 2020. In fiscal 2021, significant pressure on demand and realisations in the industry impacted the company’s EBITDA margin, which remained healthy at 20%. However, with improvement in demand and pricing scenario in the initial nine months of fiscal 2022, it bounced back to 25.2%.
The company’s packaging board capital expenditure (capex) was completed in the third quarter of fiscal 2022, and the commercial production started on January 14, 2022. Though there was some delay from scheduled commercial operation (COD) date, due to travel restrictions imposed during the second wave of the Covid-19 pandemic, the capex was completed within the budgeted cost. Also, with strong demand in the packaging board segment, the unit has been able to ramp up its operations quickly to nearly 80% by the first week of March 2022. Furthermore, JKPL’s subsidiary, The Sirpur Paper Mills Ltd (SPM) has ramped up its production, reaching capacity utilisation of around 70% in the initial nine months of fiscal 2022, helping it to generate revenue of Rs 378.5 crore and EBITDA of Rs 97 crore (including subsidies receivable from the government).
The company’s leverage (net debt to EBITDA ratio) weakened to 3.6 times in fiscal 2021 due to increase in debt towards capex and weaker profitability. However, the net debt to EBITDA ratio has been improving, reaching 3.1 times (annualised) in December 2021, as profitability improved during the initial nine months of fiscal 2022.
Going forward, the company’s revenue and EBITDA is expected to grow strongly, supported by robust growth in the packaging board segment and continued demand in the writing and printing paper segment. Coupled with lower capex, this will help the net debt to EBITDA ratio to continue to improve to nearly 2 times by fiscal 2023 and sustain below that level over the medium term. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of JKPL with SPM, which it acquired in fiscal 2019.
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: Leading position in the writing and printing paper market: JKPL is one of the largest players in the domestic writing and printing paper and paper board space, with installed capacity of 761,000 tonne per annum (including SPM and new packaging board unit). The company’s sustained market position is backed by its leadership in the copier segment, well-established brands offering premium products, diversified product portfolio and clientele, and robust distribution network. Ramp up of SPM and packaging board capacities should continue to aid its leadership position.
Strong and improved operating efficiency: Cost benefits accrue from the company's unit in Rayagada (commissioned in fiscal 2014), Odisha, which operates at over 100% capacity utilisation. Consequently, operating margin has steadily increased over the last few fiscals (25.2% EBITDA margin in the initial nine months of fiscal 2022 from 19.2% in fiscal 2018). The EBITDA margin should sustain at nearly 25% over the medium term, as it is driven by underlying process efficiencies that economises on inputs used per tonne of production. Also, JKPL has made efforts to ensure enhanced raw material security of hardwood (key input) through increased sourcing from nearby catchment areas as well as improved yield by developing short-rotation clones. The company’s procurement of wood resource within 200 km radius improved to 75% in fiscal 2021, up from 49% in fiscal 2017.
Moderation in the financial risk profile, but will improve from fiscal 2022: JKPL’s financial risk profile moderated in fiscal 2021, as drawdown of debt towards improvements in SPM and planned capacity expansion of packaging board led to increase in net debt to Rs 2,219 crore, with adjusted net gearing increasing to 0.89 time as of March 2021 from 0.57 time as of March 2020. Furthermore, as profitability was also impacted during fiscal 2021 and expanded capacities are expected to yield results only from fiscal 2023 (first full year of operations), the net debt to EBITDA ratio increased to 3.6 times from 1.5 times as of March 2020. With improvement in profitability during the initial nine months of fiscal 2022, net debt to EBITDA ratio (annualised) improved to 3.1 times as on December 31, 2021.
Nevertheless, as capex is expected to moderate over the near term, repayment of scheduled debt obligation shall reduce the debt level, while ramp up of additional capacities will translate into robust growth in EBITDA and internal accrual. Hence, net debt to EBITDA ratio is expected to improve to nearly 2 times by March 2023 and 1.5 times by March 2024.
Weakness: Exposure to cyclicality inherent in the industry: Long gestation period in capacity addition and lead time in raw material generation, among other factors, make the paper industry inherently cyclical. During the cyclical downturn in the industry in fiscal 2014, scarcity of raw material had negatively affected profitability. While the company has improved availability of hardwood near its plants through its farm forestry programme, it remains exposed to any sharp increase in hardwood prices due to higher minimum support prices of agricultural commodities. Furthermore, efficiency-related technology improvements in the space require periodic capacity upgrades, leading to high capital intensity over time. |
Liquidity: Strong The company’s liquidity is supported by healthy unencumbered cash and bank balance of Rs 560 crore as on December 31, 2021, and average unutilised fund-based limits of around Rs 115 crore (~54% of total limits of Rs 250 crore). Furthermore, annual net cash accrual of Rs 700-1,000 crore during fiscals 2023 and 2024 is sufficient to meet annual debt obligation of Rs 296 crore and Rs 472 crore in fiscals 2023 and 2024, respectively. Capex is expected to moderate significantly and will be funded by a mix of debt and internal accrual. |
Outlook: Stable CRISIL Ratings believes JKPL's credit risk profile will remain stable over the medium term, backed by healthy margin and debt protection metrics. |
Rating Sensitivity Factors Upward Factors:
Downward Factors:
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About the Company Incorporated in 1960, JKPL has two manufacturing plants, one each in Songadh, Gujarat, and Rayagada, Odisha. The Songadh plant produces copier paper and paper boards, and the Rayagada unit produces copier and coated paper. The company recently expanded its manufacturing capacity by 170,000 tonne per annum, taking its total capacity to 625,000 tonne per annum.
In July 2018, JKPL acquired SPM with capacity of 136,000 tonne through the National Company Law Tribunal process for an enterprise consideration of Rs 750 crore, including incremental capex and working capital investments. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure – List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 17-Mar-2022 in line with the lender-wise facility details as on 03-Aug-2021 received from the rated entity.
Criteria Details
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