Rating Rationale
January 08, 2020 | Mumbai
JK Paper Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.2127 Crore (Enhanced from Rs.1752 Crore)
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
Long Term Rating CRISIL AA-/Stable (Withdrawn)
 
Non-Convertible Debentures Aggregating Rs.335 Crore    CRISIL AA-/Stable (Reaffirmed)
Rs.100 Crore Fixed Deposits FAA/Stable (Reaffirmed)
Rs.100 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities and debt Instrument of JK Paper Limited (JKPL) at 'CRISIL AA-/FAA/Stable/CRISIL A1+'.
 
CRISIL has withdrawn its rating on the Rs 378 crore long term bank facility of JKPL at the company's request (for unused facilities) and partial repayment of term loans. The withdrawal is in line with CRISIL's policy on withdrawal of bank loan ratings. Subsequently, CRISIL has reaffirmed its ratings of 'CRISIL AA-/Stable' on outstanding long term bank facility enhanced by Rs. 375 crore (please refer to Annexure - Details of Instrument(s) for details of the term loans rated by CRISIL).  
 
On December 18, 2019, CRISIL had upgraded its ratings on the long-term bank facilities, non-convertible debentures, and fixed deposit programme of JK Paper Ltd to 'CRISIL AA-/FAA/Stable' from 'CRISIL A+/FAA-/Stable' and reaffirmed the rating on the short-term bank facility and commercial paper programme at 'CRISIL A1+'.
 
The reaffirmation reflects sustained improvement in cost and operational efficiency coupled with healthy realisations, resulting in robust better-than-expected profitability. The short-term rating has been reaffirmed due to strong liquidity and ample cash and cash equivalents, undrawn bank lines, and healthy accrual. CRISIL expects the company to maintain minimum cash balance of about Rs 200 crore to meet any contingencies.
 
In the first half of fiscal 2020, JKPL's earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin was over 30%, up from 25% in the corresponding period of the previous fiscal and above expectations, driven by continued operational improvement and healthy realisations. The rating continues to factor in the strong operational efficiency at the Odisha plant, along with continued initiatives for wood plantation through the farm forestry programme, resulting in reduced operating costs. Operating efficiency arise on account of lower inputs used per tonne of paper produced and is a durable source of advantage. In January 2019, the central government had imposed a three-year anti-dumping duty with a threshold price of $855 per tonne towards the import of uncoated copier paper from Indonesia, Singapore, and Thailand. This, coupled with healthy demand and moderate domestic supply, should support prices and margin.
 
CRISIL expects net debt to EBITDA to remain below 2.5 times in fiscal 2021 despite the large capacity expansion plan due to solid EBITDA, which should also be boosted by incremental volumes from Sirpur Paper Mills (SPM), especially in fiscal 2021.   
 
The company's expansion plan in the virgin-based packaging board segment, at a capital expenditure (capex) of about Rs 1,935 crore over the next two fiscals, should help consolidate its leading market position while also driving margin improvement due to higher pulp integration for the CPM plant in Gujarat. Furthermore, the company is expected to benefit from the acquisition of SPM. The company is entitled to benefits such as capital subsidies, lower coal linkage prices, and cheaper power from the grid, which have been approved by the Government of Telangana.
 
The ratings also reflect JKPL's superior position in the domestic writing and printing (WPP) market and healthy product and geographical diversification. These strengths are partially offset by inherent cyclicality in the industry and project execution risks related to ramp-up of SPM and the packaging board capex.

Analytical Approach

The company has been assessed by combining the business and financial risk profiles of JKPL with SPM, which was acquired in fiscal 2019.

Key Rating Drivers & Detailed Description
Strengths:
* Leading position in the WPP market: JKPL is one of the largest players in the domestic WPP and paper board space, with installed capacity of 455,000 tonne per annum. The company's sustained market position is backed by its leadership in the copier segment, well-established brands offering premiums, a diversified product portfolio and clientele, and a robust distribution network. Acquisition of SPM and packaging board expansion should continue to aid the company's leadership position.
 
* Strong and improving operating efficiency: Cost benefits are accrued from the company's unit in Rayagada (commissioned in fiscal 2014), which operates at over 100% capacity utilisation. Consequently, operating margin has steadily increased over the last few fiscals. Improvement in margin should sustain over the medium term, as it is driven by underlying process efficiency that economises on inputs used per tonne of production. Also, JKPL has made efforts to ensure enhanced raw material security of hardwood, a key raw material, through increased sourcing from nearby catchment areas as well as improved yield by developing short-rotation clones. More than 90% of the total plantation is under catchment areas of less than 200 kilometres in the current fiscal, up from 49% in fiscal 2017.
 
* Healthy financial risk profile: Balance sheet has strengthened due to reduced leverage, lower debt servicing post refinancing, and healthier liquidity. Net debt to EBITDA improved sharply to 1.02 times as on March 31, 2019, from 1.71 times a year earlier. Leverage has steadily improved over the last few years, driven by higher EBITDA and prepayment of loans. Apart from improved profitability, the financial risk profile is also supported by refinancing with a longer tenure debt and efficient working capital management. Liquidity is adequate, with cash and liquid investments of Rs 673 crore as on March 31, 2019, prudent working capital management, and undrawn credit limit.
 
However, leverage is expected to increase over fiscals 2020-21 due to investment of about Rs 2,000 crore towards expansion and SPM. While SPM should contribute to operating profit by fiscal 2021, the packaging board capex is likely to contribute to profitability only from fiscal 2022 onwards, thus exposing the company to moderately higher leverage in the interim.   
 
Weaknesses:
* Exposure to implementation risk in capex and turnaround of SPM:
SPM is a sick unit, whose timely turnaround and ramp-up in operations could pose implementation risks. Additionally, JKPL's virgin-based packaging board capacity expansion is non-modular and fairly large capex given the size of JKPL's balance sheet. However, the brownfield nature of the capex and the company's execution track record mitigate these risks.
 
* 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 margin. 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

Cash and liquid investments were Rs 673 crore at the end of fiscal 2019. CRISIL expects the company to maintain a minimum cash and liquid assets balance of Rs 200 crore as contingency reserve. Net cash accrual adequately covers maturing debt. Undrawn bank lines of Rs 232 crore provide additional cushion to liquidity.

Outlook: Stable

CRISIL 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:
* Improvement in scale and healthy accrual due to continued operating efficiency, and
* Faster-than-expected deleveraging, resulting in sustained net debt to EBITDA of less than 1.25 times
 
Downward factors:
* Lower-than-expected profitability and accrual or delay in implementation of capex leading to net debt to EBITDA sustaining above 2.5 times  
* Sizeable debt-funded acquisition resulting in material increase in leverage and weakening of debt protection metrics
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 has annual capacity of 455,000 tonne of paper and paper boards.

In July 2018, JKPL acquired SPM with a capacity of 138 kt from the National Company Law Tribunal process for an enterprise consideration of Rs 750 crore, including incremental capex and working capital investments.

In fiscal 2019, JKPL's profit after tax was Rs 425 crore (Rs 260 crore the previous fiscal) on revenue of Rs 3,257 crore (Rs 2,877 crore the previous fiscal).

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs Crore 3,257 2,877
PAT Rs Crore 425 260
PAT margin % 13 9
Adjusted gearing times 0.75 0.64
Interest coverage times 7.4 4.5
Current ratio times 1.67 1.08

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs  Crore)		 Rating Assigned
with Outlook
INE789E07183 Debenture 27-Nov-18 NA 15-Jul-28 335 CRISIL AA-/Stable
NA Fixed Deposits Programme NA NA NA 100 FAA/Stable
NA Commercial Paper NA NA 7-365 days 100 CRISIL A1+
NA Proposed Rupee Term Loan NA NA NA 291.92 CRISIL AA-/Stable
NA Working Capital Facility NA NA NA 720 CRISIL AA-/Stable
NA Rupee Term Loan NA NA 31-Mar-24 206.07 CRISIL AA-/Stable
NA Rupee Term Loan NA NA 31-Mar-24 101.35 CRISIL AA-/Stable
NA Rupee Term Loan NA NA 15-Mar-23 30.78 CRISIL AA-/Stable
NA Rupee Term Loan NA NA 31-Mar-24 27.20 CRISIL AA-/Stable
NA Rupee Term Loan NA NA 31-May-22 8.4 CRISIL AA-/Stable
NA Rupee Term Loan NA NA 31-Mar-24 98.20 CRISIL AA-/Stable
NA Rupee Term Loan NA NA 30-Sep-27 128 CRISIL AA-/Stable
NA Rupee Term Loan NA NA 01-Sep-21 54.0 CRISIL AA-/Stable
NA Rupee Term Loan NA NA 27-Sep-31 375.0 CRISIL AA-/Stable
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100.00  CRISIL A1+      18-12-19  CRISIL A1+  27-08-18  CRISIL A1  31-10-17  CRISIL A1  -- 
            27-06-19  CRISIL A1+  03-07-18  CRISIL A1  12-07-17  CRISIL A1   
                14-03-18  CRISIL A1  17-04-17  CRISIL A1   
Fixed Deposits  FD  100.00  FAA/Stable      18-12-19  FAA/Stable  27-08-18  FAA-/Stable  31-10-17  FA+/Positive  -- 
            27-06-19  FAA-/Positive  03-07-18  FAA-/Stable       
                14-03-18  FA+/Positive       
Non Convertible Debentures  LT  335.00
08-01-20 		 CRISIL AA-/Stable      18-12-19  CRISIL AA-/Stable  27-08-18  CRISIL A+/Stable  31-10-17  CRISIL A/Positive  -- 
            27-06-19  CRISIL A+/Positive  03-07-18  CRISIL A+/Stable  12-07-17  CRISIL A/Stable   
                14-03-18  CRISIL A/Positive  17-04-17  CRISIL A/Stable   
Fund-based Bank Facilities  LT/ST  1749.00  CRISIL AA-/Stable      18-12-19  CRISIL AA-/Stable  27-08-18  CRISIL A+/Stable  31-10-17  CRISIL A/Positive/ CRISIL A1  -- 
            27-06-19  CRISIL A+/Positive  03-07-18  CRISIL A+/Stable/ CRISIL A1  12-07-17  CRISIL A/Stable/ CRISIL A1   
                14-03-18  CRISIL A/Positive/ CRISIL A1  17-04-17  CRISIL A/Stable/ CRISIL A1   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Rupee Term Loan 291.92 Withdrawn Proposed Rupee Term Loan 291.92 CRISIL AA-/Stable
Rupee Term Loan 1029 CRISIL AA-/Stable Rupee Term Loan 740.08 CRISIL AA-/Stable
Rupee Term Loan 86.08 Withdrawn Working Capital Facility 720 CRISIL AA-/Stable
Working Capital Facility 720 CRISIL AA-/Stable -- 0 --
Total 2127 -- Total 1752 --
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Paper Industry
Understanding CRISILs Ratings and Rating Scales

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