Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of JK Paper Ltd (JKPL).

 

The ratings continue to reflect the strong market position of JKPL in the writing and printing paper industry, packaging board and corrugated box segment, backed by its established position in the copier segment, acquisition of players, superior market reach and dealer network. The ratings also factor in the company’s robust financial risk profile backed by healthy cash accruals and reducing net debt as well strong operating efficiency. These strengths are partially offset by susceptibility to cyclicality inherent in the paper industry.

 

In fiscal 2024, the revenue is expected to grow marginally after a 62% growth to Rs. 6,858 in fiscal 2023. Volume sales in the W&P segment will be supported by fresh demand from the roll out of the new education policy and increased work from office, while expansion by way of acquisition in the corrugated box segment will further aid growth in volume sales. Price realization is however expected to fall by 9-10% this fiscal due to softening in raw material prices.

 

The global paper industry witnessed an upsurge in paper prices by ~25% due to increase in demand and rise in input costs in fiscal 2023. However, with the company’s paper and paperboard division almost 70% backward integrated, expected fall in pulp prices this fiscal will result in margins to compress from supernormal highs of 30% last fiscal. Additionally, recent acquisitions in the corrugated boxes segment, which is largely commoditized with low premiumization and high number of unorganized players, will contribute ~15% to JKPL’s revenue this fiscal, resulting in some moderation in consolidated margins for fiscal 2024 and beyond. Despite the moderation, the margins will still remain healthy for JKPL.

 

Annual net cash accruals of Rs 1,100-1,200 crores during FY24-26 period is sufficient to meet annual debt repayment obligations of Rs 350-550 crore during fiscal 2024 to fiscal 2026.

 

The company is expected to undertake yearly maintenance capex of Rs. 100-150 crore and a partially debt funded capex of Rs. ~650 crore during FY 24-26 to set up a BCTMP pulp mill, which will help in backward integration and will substitute imported pulp at Unit CPM. Despite the said capex and acquisition of Manipal Utility Packaging Solutions Pvt Ltd for a consideration of Rs. ~90 crore, expected to be funded out of cash accruals, the leverage is expected to remain comfortable with gearing of below 0.5 times in fiscal 2024 from 0.68 time in fiscal 2023, while NCA/AD (Net Cash Accruals by Adjusted Debt) will improve from 0.47 time in fiscal 2023 to ~0.5 time in fiscal 2024.

 

The company’s liquidity position remains strong, characterized by healthy unencumbered cash and bank balances of Rs. 1225 Cr (Rs. 900 Cr in Mutual Fund and Rs. 325 Cr in Bonds) as on September 2023 and average unutilized fund based limits of around Rs 163 crores (~65% of total limits of Rs 250 crores).

 

The ramp up in utilization level of the manufacturing facility set up for corrugated box by JKPL Packaging Products Ltd (wholly owned subsidiary of JKPL) and the sustenance of performance of the recently acquired entities (Horizon Packs Pvt. Ltd, Securipax Packaging Pvt Ltd, Manipal) and Utility Packaging Solutions Pvt Ltd which is to be acquired, will remain a key monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of all its subsidiaries and joint venture proportionately. That's because all these entities, collectively referred to as JK Paper, have significant business and financial linkages.

 

CRISIL Ratings has amortized goodwill of Rs 139.19 crore and customer relationship rights of Rs. 197.11 crore generated at the time of acquisition of Horizon Packs Pvt. Ltd and Securipax Packaging Pvt. Ltd. over a period of five years.

 

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 the new packaging board unit). Its sustained market position is backed by its leadership in the copier segment, established brands offering premium products, diversified product portfolio and clientele, and robust distribution network. Strong market reach helped the company as revenue grew by 62% on-year (with ~25% improvement in volume and ~30% in value) in fiscal 2023. Additionally 85% acquisition of stake in HPPL and SPPL and proposed acquisition of Manipal Utility Packaging Solutions Pvt Ltd will expand the product portfolio and strengthen its market leadership in the corrugated packaging business.

 

Strong operating efficiency: Cost benefits accrue from the unit in Rayagada (Odisha; commissioned in fiscal 2014), which operates at over 100% capacity utilisation. Consequently, operating margin steadily increased over the past few fiscals (23.8% in fiscal 2022 , which has risen from 19.2% in fiscal 2018). However, margins substantially increased in fiscal 2023 to 30.6% on account of the company benefitting from high backward integration when the raw material prices were increasing. With the expected fall in wood pulp prices this fiscal, EBTIDA margins are expected to moderate to normalized levels.

 

The EBITDA margin should sustain at more than 20% over the medium term, driven by underlying process efficiency and sourcing raw material domestically, thus reducing input cost per tonne of production. Also, JKPL 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. Procurement of wood resource within 200 kilometre radius improved to above 70% in fiscal 2023, up from 49% in fiscal 2017.

 

Robust financial risk profile: Financial risk profile is expected to further strengthened in fiscal 2024, with net debt of Rs ~1,000 against Rs. 1,932 crore in fiscal 2023. The company is expected to undertake yearly maintenance capex of Rs. 100-150 crore and a debt funded capex of Rs. ~650 crore during FY 24-26 to set up a BCTMP pulp mill, which will help in backward integration and will substitute imported pulp at Unit CPM. Despite the said capex and acquisition of Manipal Utility Packaging Solutions Pvt Ltd for a consideration of Rs. ~90 crore, expected to be funded out of cash accruals, the leverage is expected to remain comfortable with gearing of below 0.5 times in fiscal 2024 from 0.68 time in fiscal 2023, while NCA/AD (Net Cash Accruals by Adjusted Debt) will improve from 0.47 time in fiscal 2023 to ~0.5 time in fiscal 2024.

 

Weakness:

Exposure to cyclicality inherent in the industry Long gestation period for capacity addition and lead time in raw material generation, among other factors, make the paper industry inherently cyclical. During the downturn in fiscal 2014, scarcity of raw material had constrained profitability for JKPL. While the company has improved availability of hardwood near its plants through its farm forestry programme, it remains vulnerable to any sharp increase in hardwood prices due to higher minimum support prices for agricultural commodities. Furthermore, efficiency-related technology improvement in this space requires periodic capacity upgrades, leading to high capital intensity over time.

Liquidity: Strong

The company’s liquidity position remains strong, characterized by healthy unencumbered cash and bank balances of Rs. 1225 Cr (Rs. 900 Cr in Mutual Fund and Rs. 325 Cr in Bonds) as on September 2023 and average unutilized fund based limits of around Rs 163 crores (~65% of total limits of Rs 250 crores). Annual net cash accruals of Rs 1,100-1,200 crores during FY24-26 period is sufficient to meet annual debt repayment obligations of Rs 350-550 crore during fiscal 2024 to fiscal 2026.

Outlook: Stable

JKPL will continue to benefit from healthy profitability and debt protection metrics.

Rating Sensitivity Factors

Upward Factors

• Improved operating efficiencies with sustained growth in net cash accrual or operating margins above 20-22% on a sustained basis 
• Net debt to Ebitda ratio steady at below 0.75 time, driven by faster-than-expected deleveraging

 

Downward Factors

• Net debt to Ebitda ratio deteriorating to more than 2.0 times owing to lower-than-expected profitability or sizeable debt-funded acquisition or capex
• Deterioration in operating margins to below 15-16% on a sustained basis

About the Company

Incorporated in 1960, JKPL has three manufacturing plants (with total capacity of 761,000 tonne per annum), at Songadh in Gujarat, at Rayagada in Odhisha and Sirpur Paper Mills plant in Telangana. The Songadh plant produces copier paper and paper boards, the Rayagada unit produces copier and coated paper and the Sirpur  plant produces paper and paper boards.

 

In December 2022, the company acquired 85% stake in Horizon Packs Pvt. Ltd and Securipax Packaging Pvt Ltd (total of 7 plants) for Rs 578 crores, which are engaged in Corrugated Packaging business.

 

In November 2023, the company is expected to acquire Manipal Utility Packaging Solutions Pvt Ltd for Rs. ~90 crore. MUPSPL is engaged in the business of manufacturing packaging products like paperboard, corrugated boxes and labels with four manufacturing plants across India.

 

For the six months ended September 30, 2023, net profit was Rs 619 crore on sales of Rs 3234 crore, as against Rs 591 crore and Rs 3,074 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Working Capital Facility	NA	NA	NA	1430	NA	CRISIL AA/Stable
NA	Rupee Term Loan	NA	NA	31-Dec-31	300	NA	CRISIL AA/Stable
NA	Rupee Term Loan	NA	NA	30-Sep-31	95	NA	CRISIL AA/Stable
NA	Rupee Term Loan	NA	NA	31-Mar-32	125	NA	CRISIL AA/Stable
NA	Rupee Term Loan	NA	NA	30-Sep-31	300	NA	CRISIL AA/Stable
NA	Rupee Term Loan	NA	NA	31-Mar-24	80.5	NA	CRISIL AA/Stable
NA	Foreign Currency Term Loan	NA	NA	27-Jul-29	400	NA	CRISIL AA/Stable
NA	Fixed Deposits	NA	NA	NA	100	Simple	CRISIL AA/Stable
INE789E07183	Non Convertible Debentures	27-Nov-18	MIBOR-OIS LINKED - REFER REMARKS	15-Jul-28	335	Simple	CRISIL AA/Stable
INE789E07191	Non Convertible Debentures	13-Dec-21	MIBOR LINKED	15-May-29	125	Simple	CRISIL AA/Stable
NA	Non Convertible Debentures&	NA	NA	NA	135	Simple	CRISIL AA/Stable
NA	Commercial Paper	NA	NA	7-365 days	150	Simple	CRISIL A1+

&Yet to be placed