Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established market position, supported by extensive experience of promoters: SPBL is an established player in the domestic WPP and paper board segments, especially in south India. The company has an installed capacity of 255,000 tonne per annum (TPA). Longstanding presence in the pulp and paper segment; wide product portfolio comprising WPP, packing and wrapping grade papers, and specialty grade papers; and well-known brands such as Sprint, Sprint Plus, Swift and Success, have helped the company cater to a diversified clientele and set up a vast distribution network.

Integrated operations and healthy operating efficiency: The company manufactures pulp used for producing paper products at its Erode unit, and thus, enjoys cost benefits. The Erode unit is self-sufficient on pulp; any excess pulp is transferred to the Tirunelveli unit (in Tamil Nadu), which reduces cost and offers synergy. On combined basis, 85% of the pulp requirement for both the units is met through in-house wood/bagasse pulp. Integrated operations, consistent investment in backward integration and high captive power consumption (with about 70% of energy requirement in the Erode unit met via green sources) resulted in healthy net margin and return on capital employed ratio of more than 13% and 18%, respectively, over the five fiscals through 2024 (except during the Covid-19 pandemic); this trend is expected to continue in the current fiscal despite ongoing pressure in the paper industry.

The company, both units combined, meets about 80% of its power requirement in-house through its captive power plant (21 MW) in Erode equipped to use both coal and biofuels, black liquor dry solids-fueled captive power plant (16 MW) in Erode and captive power plant (6 MW) in Tirunelveli, wherein both coal and biofuels can be used.

To enhance pulp and paper production capacities in phases in Erode, the management has announced project MDP-IV-P1 at a Project Cost of Rs.405.0 crores (Rs.350.0 crores, net of GST ITC), to be executed over 18 months from October 2024. The first phase of the project MDP-IV is likely to be funded entirely through cash accrual. The company is awaiting environmental clearance for project MDP-IV phase 1. Paper Production, Pulp Production, Black Liquor Dry Solids and Power generation capacity will increase by 12,500 TPA, 35,000 TPA, 1500 TPD and 11 MW (Green energy), respectively.

The company acquired assets of M/s Servalakshmi Paper Ltd (corporate debtor under liquidation) via the electronic-auction held under IBC Rules in September 2022 on a going-concern basis. This acquisition (Rs.105.0 crores funded through cash accrual) should add another 75,000 TPA of paper manufacturing capacity under SPBL. The Hon'ble National Company Law Tribunal (NCLT), Chennai bench vide its order dated May 12, 2023, approved the above electronic-auction in favour of SPBL, which then received the sales certificate and took possession of the Unit-III of SPBL. A few appeals challenging the Hon'ble NCLT's order have been filed in Hon'ble National Company Law Appellate Tribunal, which are being contested by the company. Meanwhile, the company has taken steps to restore electricity, water supply and for plant refurbishment. The company is planning to incur Rs.100 crores for expeditious repair, refurbishment and upgradation of the assets (comprising of Land, Building and Plant & machinery) of Unit-III.

Robust financial risk profile: Despite consistent capital expenditure (capex), the capital structure remained healthy aided by steady accretion to reserve and low reliance on external debt. Total outside liabilities to adjusted networth ratio was strong at 0.26 time as on March 31, 2024, owing to minimal debt and strong networth of Rs 1,836 crore. The financial risk profile will remain robust over the medium term, driven by steady cash accrual and adequate networth.

Weakness:

Susceptibility to volatility in raw material prices: Long gestation period for capacity addition and lead time in raw material generation, among other factors, make the paper industry inherently cyclical. Prices of wood pulp have been volatile. Steep rise in raw material prices, which cannot be fully passed on to customers, will affect profitability; thus, EBIDTA margin declined to 19.03% in fiscal 2024 from 25.7% in fiscal 2023. Strong operational capability, healthy diversification and continued investment in strategic initiatives such as tree farming, contract farming and augmenting green energy sources mitigate the risks.