| N R Agarwal Industries Limited | ||
| Rating placed on 'Watch Developing' | ||
| 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 placed its short term rating on the commercial paper of N R Agarwal Industries Limited (NRAIL) on ‘Rating Watch with Developing Implications’.
The rating action follows the recent announcement regarding the closure notice received by the company for its manufacturing unit V located in Sarigam, Gujrat from the Gujrat Pollution Control Board due to non-adherence with the pollution’s norms. This facility currently accounts for approximately 35% of its capacity, however, NRAIL is under process to comply with the requirements of the Gujrat Pollution Control Board and do not expect any material impact on its operations. . The Rating Watch will get resolved once CRISIL Ratings gets adequate clarity on the potential closure of the facility and its impact on the company’s overall credit risk profile.
The rating continues to reflect NRAIL's established market position in the paper industry marked by longstanding relations with customers, the extensive industry experience of its promoters, healthy financial profile marked by and efficient working capital cycle. These strengths are partially offset by exposure to risks related to cyclicality in the paper industry, volatility in operating margin due to input prices and large, planned capital expenditure (capex). |
Key Rating Drivers & Detailed Description Strengths: Established market position in the paper industry: NRAIL has a strong market position marked by strong track record of operations, longstanding relations with majority of its customers and enhanced manufacturing capacities of 180000 MT per annum and 108000 MT per annum for duplex and writing & printing paper respectively. The company has a diversified customer base with top 10 customers account for less than 30% of revenue. The company caters to both domestic and export markets with exports accounting for 20-25% of revenue. The scale has increased to around Rs 1760-1770 crore in fiscal 2023 from Rs 1617 crore in fiscal 2022 and is expected to augment further with expansion in capacity and healthy demand for products over the medium term.
Extensive industry experience of the promoters: The promoters’ have an experience of nearly three decades in paper manufacturing industry which has provided them an understanding of the dynamics of the market and have established healthy relationships with suppliers and customers which should continue to support the business.
Healthy financial risk profile: Networth was strong and total outside liabilities to adjusted networth (TOLANW) ratio low at around Rs. 620-630 crore and 0.6-0.7 times respectively as on March 31, 2023 (as compared to Rs 524.9 crore and 0.89 time, a year ago). The capital structure has been healthy due to low reliance on external funds and steady accretion to reserve. Despite, the on-going expansion in the manufacturing facility at an estimated cost of Rs 650 crore, which is aggressively funded in a debt-equity ratio of 1.89 times, NRAIL’s capital structure is expected to remain comfortable over the medium term. Debt protection measures have also been adequate due to moderate leverage and healthy profitability. The interest coverage and net cash accrual to total debt ratios were around 14-14.5 times and 0.8-0.85 times respectively in fiscal 2023 (as compared to 6.1 times and 0.66 time, respectively, for fiscal 2022). Debt protection measures are expected to weaken slightly on account of higher debt levels but remain comfortable over the medium term.
Efficient working capital cycle: Gross current assets were at around 82 days as on March 31, 2023, driven by average debtors and inventory of 29 and 30 days, respectively. The company extends moderate credit period to customers and has been able to receive timely payments from them. Inventory requirement is average as raw materials are procured easily. The working capital cycle is expected to remain stable over the medium term.
Weakness: Exposure to cyclicality in the paper industry: The long gestation period in capacity addition among other factors, make the paper industry inherently cyclical. Demand for paper is also linked to the level of economic activity. Hence, cyclical downturns or adverse variability in the demand-supply balance may result in volatility in realisations. Furthermore, the risk to pass on the increase in raw materials prices to end customers, amidst demand-supply dynamics, would remain a key monitorable.
Susceptibility to volatility in waste-paper prices: Wastepaper, the key input, accounts for 65-70% of NRAIL’s total raw material costs. Price of wastepaper, which is a commoditised product, tends to fluctuate sharply and adversely affects profitability of paper manufacturers. The other key input for the entity is coal, which is largely imported and is also volatile. Operating margin has hence remained volatile in range of 9.5%-15.6% over past four fiscals ended March 2023. Sustenance of operating margin would remain a key monitorable.
Risks related to large, planned capex: The company is undertaking capacity expansion at a cost of Rs 650 crore, which is being funded through a term loan of Rs 425 crore and internal accruals. Timely completion and stabilisation of the new manufacturing facility is critical and would remain a key rating sensitivity factor. |
Liquidity: Strong Expected cash accrual of Rs125-150 crore is sufficient against term debt obligation of Rs 6 crore and Rs 21 crore in fiscals 2024 and 2025, respectively, and the surplus will support liquidity. Further capex is partially funded through debt, repayments of which would commence from fiscal 2025. Current ratio was healthy at 2.6 times on March 31, 2023 while cash and bank balance was around Rs 50 crore. Low gearing and moderate networth support the financial flexibility of the company. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company NRAIL was incorporated in 1993 by Late Mr N R Agarwal. It is currently headed by Mr Rajendra N Agarwal as Chairman and Managing Director. The company is listed on the National Stock Exchange and Bombay Stock Exchange.
NRAIL is engaged in the business of manufacturing various duplex paper boards, writing, printing paper. The company has four facilities located at Vapi and Sarigam, both in Gujarat. Also, it has a 26.65-megawatt captive co-generation power plant. Further, it is setting up a new manufacturing plant at Sarigam to increase the total installed capacity. The plant is expected to be commissioned in October 2023. |
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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 - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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Criteria Details
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