Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities, non-convertible debentures (NCDs), commercial paper programmes and fixed deposit of JK Paper Ltd (JKPL). Rating on NCDs worth Rs 135 crore (see Annexure - Details of rating withdrawn) has been withdrawn on the request of the company, as these NCDs have not been placed. The withdrawal is in line with the policy of CRISIL Ratings for withdrawal of ratings.

 

The ratings continue to reflect the strong market position of JKPL in the writing and printing paper (WPP) industry, packaging board and corrugated box segments, backed by its established position in the copier segment, superior market reach and dealer network. The ratings also factor in the robust financial risk profile, aided by healthy cash accrual, reducing net debt and strong operating efficiency. These strengths are partially offset by susceptibility to cyclicality inherent in the paper industry.

 

After 3% growth in fiscal 2024, revenue is likely to remain flat in fiscal 2025. Volume sales should grow by 5-6% this fiscal, as moderate domestic demand will ensure full utilisation of the paper and paperboard capacities. Utilisation in the corrugated box segment is also likely to improve, with growing demand from industries and e-commerce. Price realisations may drop 5-7% this fiscal, driven by softening of domestic demand and moderate export demand.

 

Operating margin could decline by 800 basis points to 16% in fiscal 2025, owing to a significant drop in market prices of coated and uncoated paper by 4-6% and a sharp surge in domestic wood prices, fueled by increased demand from competing wood-based industries. Domestic wood prices are expected to cool off from fiscal 2026, as wood plantations are expected to increase and cater to demand from both plywood and paper industries. Hence, the company is likely to see the margin improve from fiscal 2026.

 

The company is likely to undertake yearly maintenance capex of Rs 100-150 crore. It also has plans to incur capex of Rs 641 crore over fiscals 2025 and 2026 (earlier expected to start from fiscal 2024) to set up a BCTMP pulp mill. Even with the capex and lower accruals, the leverage is expected to remain very comfortable.

 

Financial risk profile is expected to remain healthy. Gearing has improved to 0.43 time as on March 31, 2024, from 0.68 time as on March 31, 2023. It is likely to improve to 0.39 time as on March 31, 2025, and remain below 0.5 time thereafter. Adjusted interest cover has moderated to 8.6 times in fiscal 2024, from 9.7 times in fiscal 2023, as cash accrual has normalised from abnormal peaks seen in fiscal 2023. Interest coverage is expected to moderate further to 5.5-6 times in fiscal 2025, due to an adverse impact on the margin. However, the ratio is expected to improve from next fiscal and remain above 6 times going ahead.

 

Liquidity remains strong too, marked by sufficient net cash accrual, unencumbered cash and bank balance and cushion available in fund-based limit.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of JKPL, with 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 amortised 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 (HPPL) and Securipax Packaging Pvt Ltd (SPPL) for 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 WPP industry: JKPL is one of the largest players in the domestic WPP industry and paper board segment, with an installed capacity of 761,000 tonne per annum (including SPM and the new packaging board unit) and one of the market leaders in the corrugated box segment. Sustained market position is backed by leadership in the copier segment, established brands offering premium products, the diversified product portfolio and clientele and robust distribution network. This, along with capacity expansion and strategic acquisitions have helped revenue grow by 33% in compounded terms over the last three years.

 

• Strong operating efficiency: Cost benefits accrue from the paper and paperboard units in Gujarat, Odisha and Telangana, where capacities operate near full or above 100% utilisation levels. Additionally, JKPL has made efforts to ensure enhanced access to hardwood (key input) through increased sourcing from nearby catchment areas and improved yield through short-rotation clones. Share of wood procured within a 200 kilometre radius, rose to over 70% in fiscal 2024, from 49% in fiscal 2017, resulting in lower logistic cost.

 

Consequently, operating margin has been strong at 20-24% (other than abnormal peaks seen in fiscal 2023, and a one-time impact in fiscal 2025 – both on account of an industry-wide phenomenon). The margin should sustain around 20% over the medium term, driven by underlying process efficiency and domestic sourcing of raw material, thus reducing input cost per tonne of production.

 

• Robust financial risk profile: The company plans to undertake yearly maintenance capex of Rs 100-150 crore and capex of Rs 641 crore over fiscals 2025 and 2026, to set up a BCTMP pulp mill. This will help backward integration and substitute imported pulp (from hardwood) at Unit CPM. Even with the capex and lower accrual, leverage is expected to remain comfortable.

 

Financial risk profile is expected to remain healthy. Gearing has improved to 0.43 time as on March 31, 2024, from 0.68 time as on March 31, 2023. It is likely to improve to 0.39 time as on March 31, 2025, and remain below 0.5 time thereafter. Adjusted interest cover has moderated to 8.6 times in fiscal 2024, from 9.7 times in fiscal 2023, as cash accrual has normalised from abnormal peaks seen in fiscal 2023. Interest coverage is expected to moderate further to 5.5-6 times in fiscal 2025, due to an adverse impact on the margin. However, the ratio is expected to improve from next fiscal and remain above 6 times going ahead.

 

Weakness:

• Exposure to cyclicality inherent in the paper industry: Long gestation period for capacity additions and lead time in raw material generation, among other factors, make the paper industry inherently cyclical. During the downturn in fiscals 2014 and 2025, scarcity of raw material constrained profitability for JKPL. While the company has started sourcing hardwood from areas adjacent to 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 and other industry-specific events. Furthermore, efficiency-related technology improvement requires periodic capacity upgrades, leading to high capital intensity over time.

Liquidity: Strong

Liquidity is marked by unencumbered cash and bank balance of Rs 1,010 crore (Rs 725 crore in mutual funds, Rs 260 crore in bonds and Rs 25 crore in the current account) as on September 30, 2024. Of the fund-based limit of Rs 250 crore, around Rs 160 crore (around 64%) has been utilised in the 12 months ending August 31, 2024. Net cash accrual of Rs 700-800 crore, expected per fiscal over 2025-27 should comfortably cover the annual debt obligation of Rs 300-350 crore.

Outlook: Stable

JKPL will continue to benefit from its leading position in the WPP industry and the paperboard segment. Healthy cash accrual and debt protection metrics should also aid liquidity and the financial risk profile.

Rating sensitivity factors

Upward factors

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

 

Downward factors

• Net debt to Ebitda ratio deteriorating to over 2.0 times, owing to lower-than-expected profitability or sizeable debt-funded acquisition or capex
• Decline in operating margin to less than 15% 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 Odisha 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 HPPL and SPPL (seven plants in all) for Rs 578 crore, and purchased the balance 15% stake in May 2024. These companies are engaged in the corrugated packaging business.

 

In November 2023, the company acquired Manipal Utility Packaging Solutions Pvt Ltd (renamed as JKPL Utility Packaging Solutions Pvt Ltd) for around Rs 90 crore. The company manufactures folding carton, corrugated boxes and labels and has four plants across India.

 

For the three months ended June 30, 2024, net profit was Rs 141 crore on sales of Rs 1805 crore, as against Rs 313 crore and Rs 1,664 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not Applicable