Detailed Rationale

CRISIL Ratings has downgraded its ratings on the bank facilities of Nath Industries Ltd (Nath Industries; formerly, Rama Pulp and Papers Ltd) to ‘CRISIL BBB/Stable/CRISIL A3+’ from ‘CRISIL BBB+/Stable/CRISIL A2’.

 

The rating action reflects moderation of business risk profile driven by lower-than-expected revival in operating margin and operating income. The delay in the execution of planned capital expansion has resulted in muted performance in fiscal 2024 and lower-than-anticipated net cash accrual. Revenue for fiscal 2024, is expected to be lower by 15-18% year on year, primarily due to halt in operations in one of the plants in the chemicals division due to planned capital expenditure (capex) and fall in price realisation on account of 25-30% decline in raw material prices such as sulphur and wastepaper. Operating margin is projected to improve from 3% in fiscal 2023 to 5-6% this fiscal, with improved capacity utilisation and lower power costs, though will remain much lower than historical levels of 9-10%.

 

Despite the weakened operating performance, financial risk profile is likely to remain adequate with the expected benefits from operationalisation of the recent capex. Debt protection metrics, which is expected to be impacted this fiscal, will gradually improve from next fiscal. Interest cover which is likely to reduce to ~2 times this fiscal from 2.3 times last fiscal, will improve to ~4 times in fiscal 2025. Similarly net cash accrual to adjusted debt, which remained flat at 8-9% this fiscal, is expected to improve to above 15% in fiscal 2025 while gearing may remain under 0.5 time over the medium term despite additional debt of Rs 40.5 crore for capex in the fiscal 2023 and Rs 7.1 crore loan under the Guaranteed Emergency Credit Line (GECL) in fiscal 2022.

 

Liquidity will be supported by average unutilised bank line of Rs 11-12 crore (in the 12 months ending October 23) and expected annual cash accrual of Rs 20-25 crore that will cover yearly debt obligation of Rs. 12-13 crore in the medium term.

 

The ratings continue to reflect the diversified revenue profile of the company, its longstanding market presence and adequate financial risk profile. These strengths are partially offset by susceptibility to volatility in input prices and demand cyclicality.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of Nath Industries.

Key Rating Drivers & Detailed Description

Strengths:

• Diversified revenue profile: Nath Industries derives about 75% of its revenue from the paper division and the balance from the chemicals division. Within the paper business, the company has diverse product offerings—laminates and absorbent paper, speciality paper and core board paper. In the chemicals segment, products include sulphuric acid, sulphur dioxide, oleum and chlorosulphuric acid. The company caters to diverse industries such as textiles, banking (automated teller machine (ATM) rolls) and pharmaceuticals, and is focusing on exports to improve geographical diversification.

 

The company has also undertaken capex during fiscals 2023 and 2024 for increasing the capacity of the chemicals division from 280 tonne per day (TPD) to 500 TPD. Moreover, Nath Industries has installed an online coating machine that is expected to increase the efficiency of thermal paper production, which is expected to boost revenue going ahead.

 

• Longstanding market presence: The company has a leading position in certain niche segments and longstanding client relationships. It is a leader in tube grade paper and thermal paper used in ATM slips, and among the few players in the absorbent paper segment. In the chemicals business, it has an established market position in sulphur dioxide, sulphuric acid, and oleum, with customer relationships of over two decades.

 

• Adequate financial risk profile: The financial risk profile should remain adequate over the medium term. Networth is expected to increase to Rs 246 crore as on March 31, 2024, from Rs 243 crore a year earlier. The total debt of Rs 120 crore comprises long-term debt of Rs 75 crore including interest-free sales tax loans from the government of Rs 30 crore and short-term debt accounting Rs 46 crore, approximately.

 

Therefore, due to the low cash accrual and capex, debt protection metrics are expected to be impacted this fiscal but will gradually improve from next fiscal. Interest cover that is likely to reduce to ~2.0 times this fiscal from 2.3 times last, will improve to ~4 times in fiscal 2025. Similarly net cash accrual to adjusted debt, which remains flat at 8-9% this fiscal may improve to above 15% in fiscal 2025 while gearing is expected to remain under 0.5 time over the medium term

 

Weaknesses:

• Susceptibility to volatility in input prices: Nath Industries uses wastepaper to produce laminate paper and special grade paper. Wastepaper prices are highly volatile as they are driven by the global demand-supply scenario. As the company imports a large part of its requirement, operating margin is also vulnerable to fluctuations in foreign exchange rates. However, Nath Industries has largely maintained its operating margin by passing on increase in wastepaper prices to customers. Sulphur and chlorine are key inputs for the chemicals business, prices of which are also volatile.

 

• Vulnerability to demand cyclicality: In the paper segment, the company derives sizeable revenue from laminate grade paper used in the real estate industry. Cyclicality in the end-user industry impacts demand, though this is mitigated by diversity in product profile. Profitability remains constrained by the commoditised nature of paper and chemicals. While Nath Industries does partially pass on the price variation, any steep downturn or adverse change in demand-supply balance may result in lower realisations, thereby affecting profitability.

Liquidity: Adequate

Cash accrual is expected at Rs 10-15 crore in fiscal 2024 and above Rs 20 crore in fiscal 2025 against yearly debt obligation of Rs 10-12 crore. The company has enhanced its working capital limit to Rs 60 crore from Rs 41 crore of which ~80% was utilised on average during the 12 months through October 2023. Internal accrual and unutilised bank limit would be largely sufficient to meet debt obligation as well as incremental working capital requirement.

Outlook: Stable

Nath Industries will continue to benefit from its diversified product profile, established market position, increasing scale of operations and operational synergies. The financial risk profile should remain comfortable, supported by steady cash accrual, moderate capex and prudent working capital management.

Rating Sensitivity factors

Upward factors:

• Higher-than-expected revenue growth and improvement in operating profitability to over 10%
• Sustained improvement in the financial risk profile with healthy debt protection metrics 

 

Downward factors:

• Operating margin falling below 4% leading to lower net cash accrual on a sustained basis
• Large, debt-funded capex or significant stretch in working capital cycle, resulting in weakening of debt metrics, gearing increasing to over 1 time

About the Company

Nath Industries was incorporated as a private limited company in 1980 and reconstituted as a public limited company in 1983. In 1993, Mr Nandkishor Kagliwal and entities in which he held stakes bought 51.41% of Nath Industries’ equity. The company manufactures writing and printing paper (WPP), absorbent paper and special-grade paper, with WPP and absorbent paper capacity of 21,600 TPA and speciality paper capacity of 8000 TPA in Vapi, Gujarat. In fiscal 2017, the company started its LABSA manufacturing plant in Vapi.

 

On October 30, 2017, Nath Industries announced a scheme of arrangement and amalgamation between Nath Pulp and Paper Mills Ltd (NPPL), Nath Industrial Chemicals Ltd (NICL) and Nath Industries along with their respective shareholders. The National Company Law Tribunal’s approval for the same was received on August 22, 2019.

 

About NPPL

NPPL, incorporated in April 1975 and promoted by Mr Nandkishor Kagliwal, manufactures high-strength core board and thermal grade paper, and caters to a pan-India clientele. Based in Aurangabad, Maharashtra, the company has capacity to manufacture 68,400 TPA of core board paper and 6,000 TPA of thermal paper.

 

About NICL

NICL was incorporated as a private limited company and reconstituted as public limited company in 1983. In 1993, Mr Nandkishor Kagliwal bought the entire stake in NICL from its shareholders. NICL manufactures and trades in industrial chemicals. The key product, sulphuric acid, is used in pharmaceuticals, dyes, and textiles. The company has a 2 megawatt (MW) captive thermal power plant, which has been upgraded to 3.3 MW. Also, it has undertaken capex to enhance its chemical plant capacity from 280 TPD to 500 TPD.

 

During the six months ended September 30, 2023, Nath Industries reported a net profit of Rs 0.31 crore on operating income of Rs 165.31 crore, against Rs 1.77 crore and Rs 235.22 crore, respectively, in the corresponding period of the previous fiscal.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Cash credit*	NA	NA	NA	60	NA	CRISIL BBB/Stable
NA	Bank guarantee	NA	NA	NA	5	NA	CRISIL A3+
NA	Non fund-based limit	NA	NA	NA	0.5	NA	CRISIL A3+
NA	Term loan	NA	NA	Feb-24	1.38	NA	CRISIL BBB/Stable
NA	Term loan	NA	NA	Mar-28	12.5	NA	CRISIL BBB/Stable
NA	Term loan	NA	NA	Mar-28	22.5	NA	CRISIL BBB/Stable
NA	Term loan	NA	NA	Dec-26	7.7	NA	CRISIL BBB/Stable
NA	Term loan	NA	NA	Aug-28	5.5	NA	CRISIL BBB/Stable

*Bank guarantee sublimit of Rs 3.50 crore

EPC/FBD/EBD sublimit of Rs 20.00 crore

PCFC/EBR sublimit of Rs 20.00 crore

Full interchangeability within the overall cash credit limit