Rating Rationale
November 05, 2020 | Mumbai
Nath Industries Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.15.23 Crore
Long Term Rating CRISIL BBB+/Stable (Reaffirmed)
Short Term Rating CRISIL A2 (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 of Nath Industries Limited (Nath, formerly, Rama Pulp and Papers Ltd) at 'CRISIL BBB+/Stable/CRISIL A2'.
 
Revenue and operating profitability of the amalgamated business in fiscal 2020 were lower than expectations following maintenance closure in the company's paper and chemical units during the third quarter and decline in realisations of the chemical division. There was further loss of sales in March 2020 due to the nationwide lockdown following Covid-19. Consequently, revenue and operating profitability were lower at Rs 299 crore and 9.8%, respectively, in fiscal 2020. However, despite this, cash accrual of Rs 24 crore in fiscal 2020 is higher than the scale of standalone cash generation before the merger.
 
Operating performance is likely to remain subdued in fiscal 2021 due to the pandemic-induced economic slowdown. While pent-up demand and better export sales for paper products provide some respite, overall revenue is likely to decline by 15-17% in fiscal 2021, while operating profitability is expected to moderate by around 100 basis points. Business levels should improve from fiscal 2022 given the anticipated demand recovery in laminate paper, speciality paper, board paper and end-user industries such as pharma, agrochemicals and dyes & intermediates for the chemical division.
 
Financial risk profile is expected to remain adequate, driven by healthy networth of Rs 213 crore and comfortable gearing of 0.31 time, as on March 31, 2020. Besides, most of the debt pertains to promoter loans and interest-free sales tax loans.
 
The ratings continue to reflect Nath's diversified revenue profile, longstanding market presence and adequate financial risk profile. These strengths are partially offset by exposure to volatility in input prices, demand cyclicality and limited pricing flexibility.

Analytical Approach

For arriving at its ratings, CRISIL has considered the standalone business and financial risk profiles of Nath.

Key Rating Drivers & Detailed Description
Strengths
* Diversified revenue profile
Nath derives about 71% of the revenue from the paper division and the balance from the chemical division. Within the paper business, the company has diverse product offerings namely 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 also caters to diverse end users such as textiles, banking (ATM rolls) and pharmaceuticals. Besides, increasing focus on exports will improve geographical diversification.
 
* Longstanding market presence
The company has a leading position in certain niche segments and longstanding client relationship. It is a leader in tube grade paper and thermal paper used in ATM slips and is one of the few players in the absorbent paper segment. In the chemical business, it has an established market position in sulphur dioxide, sulphuric acid and oleum; besides customer relationships of over two decades.
 
* Adequate financial risk profile
The financial risk profile should remain adequate over the medium term. Networth increased to Rs 213 crore as on March 31, 2020, from Rs 51 crore (pre-merger) as on March 31, 2019. Most of the outstanding debt pertains to promoter loans and interest-free sales tax loans. Annual cash accrual is expected to be over Rs 15 crore, which will be largely sufficient to fund moderate capital expenditure (capex) of under Rs 10 crore each in fiscals 2021 and 2022.
 
Weaknesses
* Exposure to volatility in input prices
Nath uses waste paper as an input for the production of laminate paper and special grade paper. Waste paper prices are highly volatile as they are driven by global demand-supply scenario. As the company imports a large part of its requirement, operating margin is exposed to any fluctuation in waste paper prices and foreign exchange rates. Sulphur and chlorine are key inputs for the chemical business, prices of which are also volatile.
 
* Part vulnerability to demand cyclicality and limited pricing flexibility
In the paper segment, the company derives sizeable sales from laminate grade papers used in the real estate industry. Cyclicality in the end-user industry will impact the demand potential during downturns. This is mitigated by diversity in revenue. Profitability remains exposed to commoditised nature of paper and linear alkyl benzene sulfonic acid (LABSA). While Nath does partly pass on price variation, any steep cyclical downturn or adverse change in demand-supply balance may result in lower realisations, thereby constraining operating margin.
Liquidity Adequate

Cash accrual is expected to be more than Rs 15 crore each in fiscals 2021 and 2022 against yearly debt obligation Rs 3-5 crore and moderate annual capex of under Rs 10 crore. Average utilisation of fund-based limit during the six months through July 2020 was 52%. Internal accrual and unutilised bank limit would be largely sufficient to meet debt obligation as well as incremental working capital requirement.

Outlook: Stable

CRISIL believes Nath will continue to benefit from a diversified product profile, established market position, and operational synergies derived from merged entities even as performance will remain subdued in fiscal 2021 due to the pandemic. Financial risk profile is expected to 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 sustained improvement in operating profitability to over 10-12%
*Further improvement in gearing and debt protection metrics
 
Downward Factors
*Large, debt-funded capex or significant stretch in working capital cycle , leading to weakening of credit metrics, gearing increasing to over 1.5 times
*Steep decline in revenue or profitability leading to lower cash generation
 
About Nath
Nath 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's equity. The company manufactures writing and printing paper (WPP), absorbent paper, and special-grade paper, with WPP and absorbent paper capacity of 50 tonne per day (tpd); and speciality paper capacity of 18 tpd in Vapi, Gujarat. In fiscal 2017, the company started its LABSA manufacturing plant in Vapi.
 
On October 30, 2017, Nath announced scheme of arrangement and amalgamation between Nath Pulp and Paper Mills Ltd (NPPL), Nath Industrial Chemicals Ltd (NICL) and Nath 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. The Aurangabad (Maharashtra)-based company has capacity to manufacture 50,000 tonne of paper per annum.
 
About NICL
NICL, set up in July 1978 by Mr Nandkishor Kagliwal, manufactures and trades in industrial chemicals. The key product, sulphuric acid, is used in pharmaceuticals, dyes, and textiles. It has a 2-megawatt captive thermal power plant.
 
During the three months ended June 30, 2020, Nath reported a net loss of Rs 29 lakh on operating income of Rs 38.33 crore, against a net profit of Rs 1.61 crore on operating income of Rs 29.95 crore (pre-merger) in the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs crore 299 350
Profit After Tax (PAT) Rs crore 18 17
PAT Margin % 6.08 4.86
Adjusted debt/adjusted networth Times 0.31 1.14
Interest coverage Times 6.46 4.33

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity Date Issue size
(Rs.Crore)		 Complexity Level Rating assigned
with outlook
NA Cash Credit* NA NA NA 12.50 NA CRISIL BBB+/Stable
NA Bank Guarantee NA NA NA 1.1 NA CRISIL A2
NA Term Loan** NA NA NA 1.63 NA CRISIL BBB+/Stable
*Letter of credit sublimit of Rs 1.50 crore
*Bank guarantee sublimit of Rs 1.50 crore
*Export packaging credit sublimit of Rs 2.00 crore
*Foreign bill discounting sublimit of Rs 1.00 crore
*Letter of undertaking for bank guarantee sublimit of Rs 3.00 crore
*Full interchangeability among non-fund-based limits
**Term loan not yet availed
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
Fund-based Bank Facilities  LT/ST  14.13  CRISIL BBB+/Stable      01-11-19  CRISIL BBB+/Stable  22-10-18  CRISIL BBB/Watch Developing  07-11-17  CRISIL BBB/Watch Negative  CRISIL BBB/Stable 
            03-10-19  CRISIL BBB/Watch Developing  25-07-18  CRISIL BBB/Watch Negative  13-06-17  CRISIL BBB/Stable   
            11-07-19  CRISIL BBB/Watch Developing  27-04-18  CRISIL BBB/Watch Negative       
            22-04-19  CRISIL BBB/Watch Developing  02-02-18  CRISIL BBB/Watch Negative       
            17-01-19  CRISIL BBB/Watch Developing           
Non Fund-based Bank Facilities  LT/ST  1.10  CRISIL A2      01-11-19  CRISIL A2  22-10-18  CRISIL A3+/Watch Developing  07-11-17  CRISIL A3+/Watch Negative  CRISIL A3+ 
            03-10-19  CRISIL A3+/Watch Developing  25-07-18  CRISIL A3+/Watch Negative  13-06-17  CRISIL A3+   
            11-07-19  CRISIL A3+/Watch Developing  27-04-18  CRISIL A3+/Watch Negative       
            22-04-19  CRISIL A3+/Watch Developing  02-02-18  CRISIL A3+/Watch Negative       
            17-01-19  CRISIL A3+/Watch Developing           
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
Bank Guarantee 1.1 CRISIL A2 Bank Guarantee 1.1 CRISIL A2
Cash Credit* 12.5 CRISIL BBB+/Stable Cash Credit* 12.5 CRISIL BBB+/Stable
Term Loan 1.63 CRISIL BBB+/Stable Term Loan 1.63 CRISIL BBB+/Stable
Total 15.23 -- Total 15.23 --
*Letter of credit sublimit of Rs 1.50 crore
*Bank guarantee sublimit of Rs 1.50 crore
*Export packaging credit sublimit of Rs 2.00 crore
*Foreign bill discounting sublimit of Rs 1.00 crore
*Letter of undertaking for bank guarantee sublimit of Rs 3.00 crore
*Full interchangeability among non-fund-based limits
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Paper Industry
CRISILs Criteria for rating short term debt

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