Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL BBB-/Stable' rating on the long-term bank facilities of Riddhi Siddhi Gluco Biols Limited (RSGBL).

 

Revenue from the paper manufacturing segment has declined around 18% in fiscal 2021 from the previous year, with a dip in operating margin to negative 6% from 2-3% previously, on account of subdued demand and lower realisation during the Covid-19 pandemic for newsprint. However, in the fourth quarter of fiscal 2021, sales increased around 52% year-on-year and achieved operating margin of 11% since the company changed its product mix to mostly include kraft paper, which has better demand and higher operating margin than newsprint or writing and printing paper. Part of this is also attributed to higher raw material (waste paper) prices, which in turn increased the realisation of kraft paper but this is now corrected. Kraft paper is expected to be the major driver for growth, driven by steady demand from end-user industries, such as fast-moving consumer goods (FMCG), pharmaceuticals and e-commerce over the medium term. The operating margin is expected to improve to 7-8% from 2-3% previously.

 

Inter-corporate deposits (ICDs) to external parties have reduced to Rs 186 crore as on March 31, 2021 from Rs 395 crore as on March 31, 2020, thus reducing the counterparty risk. The cash from reduced ICDs from external parties, along with other proceeds, were extended as ICDs to group companies. Despite this, liquidity continues to remain healthy in the form of unencumbered funds of Rs 133 crore as on March 31, 2021. The ICDs and liquidity will continue to remain key monitorables.

 

The rating continues to reflect the extensive experience of the promoters in the starch business and RSGBL’s strong financial flexibility and moderate financial risk profile. These strengths are partially offset by exposure to counterparty risk associated with ICDs, susceptibility to competition and volatility in the paper industry, and vulnerability to counterparty risk in the windmill division.

Analytical Approach

For arriving at the rating, CRISIL Ratings has combined the financial and business risk profiles of RSGBL and its subsidiaries - Shree Rama Newsprint Limited (SRNL), Riddhi Siddhi Estate Creators LLP and Riddhi Siddhi Infraspace LLP. RSGBL has extended financial support to SRNL in the form of loans and has also provided corporate guarantee to a portion of the latter’s debt. RSGBL owns 74.76% stake in SRNL.

 

In the case of limited liability partnerships (LLPs), while RSGBL does not hold more than half the voting rights, it directs relevant business activities by virtue of LLP agreements. Also, RSGBL contributes to over 99% of capital in the LLPs and shares profit and loss in the proportion of capital. A list of all the subsidiaries being consolidated is provided in the annexure.

 

As per IndAs accounting, Rs 86.13 crore of zero coupon bonds (in SRNL) as on March 31, 2021, were reported after discounting as their repayment starts only in fiscal 2026. CRISIL Ratings made adjustments such that the debt reflects the full quantum of these zero coupon bonds with a corresponding reduction in equity.

 

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

• Extensive experience of the promoters

Presence of more than four decades in the starch business, has enabled the promoters to have a successful track record in reviving sick units (including the Gokak starch manufacturing plant acquired from Glaxo in Karnataka and a biopolymer unit acquired from Hindustan Unilever in Puducherry). Since RSGBL has been manufacturing and supplying special starches to the paper industry, the promoters have gathered sufficient insight into the paper business and subsequently acquired the stressed company, SRNL. Since acquisition, capital expenditure (capex) has been incurred to include manufacturing of writing and printing paper and kraft paper, apart from newsprint, thus improving and diversifying its product mix.

 

• Financial flexibility from liquid assets

Liquid assets, which are unencumbered, have reduced to Rs 133 crore as on March 31, 2021 from Rs 158 crore as on March 31, 2020. However, the company has also lowered its debt obligation with gross debt decreasing to Rs 192 crore as of March 2021 from Rs 237 crore in the previous fiscal. Thus, net debt has reduced as per expectation. Sale of land for Rs 140 crore, which was expected to be completed in fiscal 2021, has been shifted to fiscal 2022 and will remain a key monitorable. 

 

• Moderate financial risk profile

Consolidated debt reduced to Rs 260 crore as on March 31, 2021, from Rs 323 crore as on March 31, 2020. Gearing and total outside liabilities to tangible networth ratio were healthy at 0.19 time and 0.29 time, respectively, as on March 31, 2021. Interest coverage ratio had reduced in fiscal 2021 to 1.75 times from 4.32 times in fiscal 2020, on account of weaker performance of the paper processing division. However, it is expected to improve to 3.0-4.5 times, over the medium term, with improvement in operating margin.

 

Weaknesses

• Susceptibility to competition and volatility in the paper industry

The paper industry is highly fragmented, largely commoditised and cyclical. Newsprint prices are significantly volatile, constraining operating performance. Furthermore, because of low tariff barriers, newsprint prices of domestic players are exposed to pressure from cheap imports. Besides, SRNL depends on waste paper import, which accounts for nearly 40% of the total raw material cost. This exposes the operating margin to any increase in waste paper prices and fluctuations in foreign exchange rates.

 

• Exposure to counterparty risk associated with ICDs

ICDs extended to unrelated and undisclosed parties decreased to Rs 186 crore as on March 31, 2021, from Rs 395 crore as on March 31, 2020 and is further expected to reduce to around Rs 150 crore. However, since the credit profile of these entities are unknown, the counterparty risk associated with the ICDs continues to remain. The reduced ICDs from external parties have been provided as loans to group companies and will remain closely monitored.

 

• Vulnerability to counterparty risk in the windmill division

As a significant portion of wind power generation capacities are located in Tamil Nadu, risks related to stretched receivables persist, given the weak financial risk profile of the key customer, Tamil Nadu Electricity Board.

Liquidity: Adequate

Cash and cash equivalent were Rs 8 crore as on March 31, 2021. Bank limits of Rs 50 crore (for RSGBL) and Rs 56 crore (for SRNL) were utilised at 70% and 96%, respectively, on average over the 12 months through March 2021. Liquidity is supported by unencumbered liquid investment of Rs 133 crore as on March 31, 2021. Internal accrual, cash and cash equivalent, and undrawn bank lines should be sufficient to meet debt obligation of Rs 10-18 crore over the medium term.

Outlook: Stable

CRISIL Ratings believes RSGBL's liquidity should remain adequate over the medium term. 

Rating Sensitivity Factors

Upward factors:

• Sustained improvement in revenue and profitability of SRNL with earnings before interest, tax, depreciation and amortisation (EBITDA) margin of over 8%
• Substantial decrease in ICDs (including that to related parties) leading to improvement in return on capital employed (ROCE)

Downward factors

• Reduction in liquid assets or large, debt-funded capex or expansion, with net debt increasing to more than Rs 150 crore
• Increase in ICDs to external parties to over Rs 400 crore
• Decline in revenue or profitability, leading to lower-than-expected cash accrual

About the Company

RSGBL was set up in 1994 by Mr Ganpatraj L Chowdhary and his family members to manufacture starch and starch derivatives. It sold its starch segment to Roquette India Pvt Ltd (‘CRISIL AA-/Negative/CRISIL A1+’) for Rs 950 crore in 2012. RSGBL currently generates wind energy and trades in agricultural and metal commodities. The company also undertakes investment activities. It has installed windmill capacity of 33.15 megawatt across multiple locations and has entered into power purchase agreements with state electricity boards at fixed tariffs.

About the Group

SRNL manufactures newsprint and writing and printing paper at its plant in Surat, Gujarat. RSGBL acquired majority stake in SRNL from West Coast Paper Mills Ltd in June 2015. SRNL has installed capacity, based on virgin pulp and recycled fibre, to manufacture either 0.14 million tonne per annum (MTPA) of newsprint or 0.18 MTPA of printing and writing paper, or a mix of both using the swing facility.

Any other information: Not applicable