| JK Paper Limited | ||||||||||
| Ratings reaffirmed | ||||||||||
| Rating Action | ||||||||||
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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/Stable/CRISIL A1+’ ratings on the bank non-convertible debentures, commercial paper programmes and fixed deposit of JK Paper Limited (JKPL).
On November 21, 2022, the company announced that it has signed agreements to acquire 85% stake in Horizon Packs Pvt Ltd (HPPL) and Securipax Packaging Pvt Ltd (SPPL) for a total of Rs 578 crore. The transaction is expected to be completed in December 2022.
HPPL and SPPL both manufacture corrugated packaging and have seven manufacturing plants across India. The acquisition will bolster the product portfolio of JKPL, as they entered corrugated packaging business. Acquisition will also facilitate expansion of the corrugated packaging business of JKPL Packaging Products Ltd (wholly owned subsidiary of JKPL) through ready access to the market and customers of HPPL and SPPL. During fiscal 2022, HPPL and SPPL had consolidated revenue of Rs 832 crore and operating margin of ~12%. Their consolidated debt stood at Rs 94 crore and liquidity at Rs 8 crore as on March 31, 2022 and consolidated debt will further reduce by December’2022.
The acquisition will be funded through internal accrual, keeping the capital structure and debt protection metrics strong. Company has strong liquidity with cash balance of Rs 1,100 crore as on September 30, 2022 and is expected to be remain healthy post acquisition.
CRISIL Ratings believe that acquisition will lead to synergy benefits to JK Paper Ltd and HPPL and SPPL.
The ratings continue to reflect the strong market position of JKPL in the writing and printing paper industry, backed by its established position in the copier segment and superior market reach and dealer network. The ratings also factor in the company’s strong operating efficiency and robust financial risk profile. These strengths are partially offset by susceptibility to cyclicality inherent in the paper industry. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of JKPL, its subsidiary Sirpur Paper Mills (SPM) and JKPL Packaging Products Ltd, as well as HPPL and SPPL, which are being acquired.
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. Ramp-up of operations in SPM and the packaging board capacity will aid the leadership position. Strong market reach helped the company as revenue grew by 39% on-year (with 13% improvement in volume and ~26% in value) in fiscal 2022. The proposed acquisition of HPPL and SPPL will strengthen the product portfolio and accelerate investments 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 (Ebitda margin rose to 23.8% in fiscal 2022 from 19.2% in fiscal 2018). 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 inputs 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 77% in fiscal 2022, up from 49% in fiscal 2017.
Robust financial risk profile: Financial risk profile has strengthened in fiscal 2022, with net debt of Rs 2,468 crore and adjusted net gearing improving to 0.84 time as on March 31, 2022 from 0.89 time a year ago. The net debt to Ebitda ratio enhanced to 2.45 times from 3.64 times, despite the limited operating track record of the new CPM packaging board plant (from January 14, 2022). Net debt should reduce, with the new CPM packaging board plant operating for the first full year and capex expected to moderate in the near term, translating into robust growth in the Ebitda margin and cash accrual. Net debt to Ebitda ratio is expected to consistently improve to 1.35 times by March 31,2023 and 1.13 times by March 31,2024.
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 Unencumbered cash and bank balance was healthy at ~Rs 1,100 crore as on September 30, 2022, and is expected to remain healthy post acquisition of HPPL and SPPL. Liquidity is supported by unutilised fund-based limit of ~Rs 95 crore (~38% of the total Rs 250 crore). Cash accrual is projected at Rs 800-900 crore each during fiscals 2023 and 2024, against annual debt obligation of Rs 350-450 crore. Capex is expected to moderate in the near term and will be funded through cash accrual. |
Outlook: Stable JKPL will continue to benefit from healthy profitability 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, at Songadh in Gujarat, and at Rayagada. 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 (capacity of 136,000 tonne) through the National Company Law Tribunal process for an enterprise consideration of around Rs 750 crore, including incremental capex and working capital investment.
For the six months ended September 30, 2022, net profit was Rs 591 crore on sales of Rs 3,074 crore, as against Rs 222 crore and Rs 1,605 crore, respectively, for the corresponding period of the previous fiscal. |
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)
% Yet to be placed. |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 30-Nov-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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