Detailed Rationale

CRISIL Ratings has revised the rating outlook on the long term bank facilities of Tamil Nadu Newsprint and Papers Limited (TNPL) to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A’.

 

The revision in outlook follows CRISIL Ratings expectation that recovery in TNPL’s business performance will be slower than anticipated, due to impact of the second wave of the pandemic, and continued sluggish demand for writing and printing paper (WPP), from offices, educational institutions and government sectors. This along with continuing high debt levels, and addition of further debt to fund ongoing capacity expansion at its multi layered coated paper board (MCPB) facility, will lead to debt metrics remaining at moderate levels over the medium term.

 

In fiscal 2022, TNPL’s performance is expected to improve driven by slightly higher sales volumes of WPP, and better realisations, including from its packaging board business. Operating profitability will also improve to 14% driven by high capacity utilisation and further thereafter, post expected commissioning of the pulp mill in the fourth quarter of fiscal 2022. The pulp mill will reduce the dependance on imported pulp and is expected to offer cost benefit of Rs.100-120 crores annually. Earlier, TNPL’s revenue decreased by 15% in fiscal 2021 driven by decrease in volumes and realizations due to subdued end market demand. Operating profitability was also impacted due to low capacity utilisation, high raw material costs and subdued realisations, in keeping with tepid end market demand. The MCBP segment nevertheless recorded improved profitability driven by strong market demand, decrease in global pulp costs, higher operational efficiencies and one time GST benefit of Rs.19 crore.

 

The company is undertaking large capacity expansion at its MCPB facility for setting up a captive pulping unit and a packaging board manufacturing unit considering the advantage of the strong market demand in the packaging board segment. Total capital expenditure (capex) is about Rs 2520 crore and phase 1 of the project is expected to be completed by December 2021, and phase 2 by fiscal 2024. While the project will be 80% debt funded, expected improvement in profitability and progressive large repayments on existing debt, will lead to gearing sustaining moderate levels of 1.4-1.5 times, while the ratio of debt to earnings before interest, tax, depreciation and amortization (EBITDA) is expected at ~4.5 times, over the medium term. Further the company is also planning to increase its production capacity at both the units which is under final stage of approval. This would be achieved from the existing plant by debottlenecking and minimum capital investment.

 

The rating continues to reflect TNPL’s leading position in the domestic WPP market, product diversity with presence in both WPP and MCPB, and healthy operating capabilities, including through increasing integration with expansion of captive pulp facilities. These strengths are partially offset by TNPL’s modest financial risk profile, due to continued large debt funded capital spending, refinancing risk due to sizeable long-term debt obligations over the medium term, and partial susceptibility of operating profitability to volatile imported pulp prices. Besides, the company is also exposed to project implementation risks.

Key Rating Drivers & Detailed Description

Strengths:

• Leading position in the domestic WPP market: TNPL is the second largest player in the domestic WPP segment, with an installed capacity of 400,000 tonne per annum (tpa). Despite intense competition, the company has sustained its strong market position backed by its established brand, diversified product portfolio and customer base, robust distribution network and regular capacity expansions. Besides, it use bagasse to manufacture WPP, which adds to its operating efficiencies. Post the onset of the pandemic in March 2020, WPP volumes tapered due to sluggish demand from end-users, which has also impacted realisations in fiscal 2021. Nevertheless, with the economy expected to recover in fiscal 2022, WPP sale volumes are expected to fare better, while realisations too are expected to increase moderately, with input price increases being passed on.

 

• Strong operating capabilities resulting from integrated operations: TNPL’s operating margins in WPP, have been healthy owing to strong efficiencies arising out of backward integration, long-term supply tie-ups and captive power plant. Furthermore, operating from the country's largest single location paper plant gives TNPL significant economies of scale. However, in fiscal 2021, the operating margins were impacted due to low capacity utilisation and decrease in prices of WPP. Recovery in profitability is expected to be gradual over the medium term with in demand.

 

The MCPB unit has achieved cash breakeven in fiscal 2019. It was dependent largely on imported pulp as excess pulp available post consumption by WPP at Pugalur, is not sufficient to meet entire requirements. However, with the expected commissioning of the pulping unit at the MCPB unit in the last quarter of fiscal 2022, dependence on imported pulp is expected to reduce, which will boost profitability. The product mix has moved towards a higher value added segment and overall this unit caters to the fastest growing packaging board segment in the paper industry.

 

• Expanded product portfolio, with presence in both WPP and MCBP: TNPL has presence in both WPP and MCBP which provides diversity to its revenue profile. TNPL’s greenfield MCPB project has a capacity of 200,000 tpa and caters to diverse end-user segments - MCBP is used by industrial players for packaging consumer products, while WPP is used for making notebooks, textbooks, copier paper and diaries. With higher utilization at MCBP, the contribution to revenue has increased, and to some extent helped buttress the impact of sluggish WPP sales.

 

Weaknesses:

• Modest financial risk profile; exposure to refinancing risk: TNPL’s financial risk profile is marked by moderate gearing and debt protection metrics, even as net worth remains healthy at about Rs 1593 crore as on March 31, 2021. Debt funded capacity expansions in the past and suboptimal performance in fiscal 2021 have impacted debt protection metrics. Interest coverage reduced to 1.61 times from 2.90 times in fiscal 2020, while gearing was at 1.43 times at March 31, 2021, compared to 1.29 times at March 31, 2020. The ratio of debt/EBITDA deteriorated materially in fiscal 2021, due to lower operating profits and higher debt, due to capex.

 

The phase 1 of the proposed capex of R. 2520 crore is expected to be completed by the last quarter of fiscal 2022. Phase 2 is expected to begin after phase 1 is completed. Total debt is expected to be range between Rs.2300-2500 crore over the medium term. Expected improvement in profitability and cash generation and progressive sizeable debt repayments, will help partially mitigate the net debt addition on account of capex. This will lead to improvement in debt metrics, though they will still remain moderate. For instance, the ratio of debt/EBITDA is expected at ~4.50 times over the medium term.

 

• High dependence on imported pulp for MCPB: As TNPL currently doesn’t have adequate captive pulping capacity to cater to both its units, it imports pulp to meet a large portion of the raw material requirement in the MCPB unit. This exposes the company to volatility in the movement of global pulp prices, which were on an increasing trajectory in fiscal 2021. Commissioning of pulp mill towards the end of   December 2021, will help in lowering dependence on imported pulp, and also result in substantial cost savings.

 

• Exposure to risks related to project implementation and stabilization: The company is undertaking a large capex of Rs 2,520 Cr. Phase I involves a capex of Rs 1100 crore towards expansion of its pulp capacity by 140,000 tonnes per annum (tpa) and is expected to be completed in fiscal 2022.  Capex in phase II will be Rs 1420 crore towards setting up new packaging board plant  with additional captive pulp capacity and will be implemented between fiscals 2022 and 2024 (post commencement of phase I).  This large project in turn exposes TNPL to project-related risks over the medium term; pre-commissioning risks will include time or cost overruns, while post commissioning risks will include stabilization and ramp up in operations.

 

These risks however are partly offset by the fact that the company has executed large projects of similar scale earlier, phased spending on the project, funding through long maturity loans with spaced-out debt obligations. Nevertheless, any significant delays in project implementation and stabilization can impact ability to generate cash flows and will remain a key rating sensitivity factor.

Liquidity: Adequate

TNPL’s long term debt repayment obligations are sizeable at Rs.413 crore in fiscal 2022 and Rs.282 crore in fiscal 2023, and the company is also implementing capex of ~Rs.1200 crore in these 2 fiscals. Annual accruals estimated at around Rs 250-300 crore annually, will not entirely suffice to service debt repayments, especially in fiscal 2022. 

 

Nevertheless, CRISIL Ratings derives comfort from TNPL's strong refinancing capabilities and established relationship with lenders, which will enable it to arrange for financing to bridge any shortfalls in accruals for servicing debt obligations, as has been amply demonstrated in the past. Besides, these loans have been raised at extremely competitive interest rates. TNPL also has headroom in its fund based working capital limits, which have been utilized on average at about 70-75% over the past 12 months ended June 2021.

 

The company had earlier opted for moratorium on the principal payments on its term loan facility falling due between June 2020 and August 2020 as permitted by the Reserve Bank of India regulation, considering the loss of business, due to the pandemic induced lockdowns.

Outlook Negative

CRISIL Ratings believes that TNPL’s business performance will witness slower than expected recovery in the near term, in line with the demand for WPP, while demand for MCBP continues to remain strong. Further, ongoing large debt funded capex will keep key debt metrics at moderate levels, despite better cash generation and progressive debt repayment.

Rating Sensitivity factors

Upward factors:

• Better than business performance, leading to strong recovery in cash generation
• Improvement in debt metrics, supported by improved cash generation; for instance, debt to EBITDA of under ~3.50 times
• Implementation of expansion project without material time and cost overruns
   

Downward factors:

• Weaker than anticipated revenue growth and operating profitability, impacting cash generation
• Slower than anticipated improvement in debt metrics due to additional capex, project cost overruns or weaker cash generation; for instance, debt to EBITDA of over 4.75 times on sustained basis

About the Company

TNPL was promoted by the Government of Tamil Nadu (GoTN) and the Industrial Development Bank of India (IDBI) in 1979 to manufacture newsprint and WPP using bagasse as the principal fibre source. GoTN is currently the single largest shareholder with a stake of 35.3% stake.

 

TNPL has a total production capacity of 600,000 tpa. TNPL’s Unit 1 has a production capacity of 400,000 tpa at its plant at Pugalur in Kagithapuram (TN), which is the largest single location paper plant in India. The company possesses manufacturing capability for both newsprint and WPP; however, because of better product profitability -, TNPL has been manufacturing only WPP. The Pugalur plant is backward integrated and has a pulp production capacity of 880 tonnes per day (tpd). Furthermore, TNPL has a 300-tpd de-inking pulp plant to produce pulp from wastepaper. Also, the residue generated from the Pugalur plant is combined with limestone to produce cement at its 900-tpd cement plant. The company also has captive power facilities of 103.62 megawatts (MW), of which about 7 MW is available to be sold to the state grid after meeting its entire in-house requirement. Besides, the company also has wind farms with a capacity of 35.5 MW (as on March 31, 2016) in Tirunelveli district of TN. TNPL also implemented a 200,000-tpa greenfield project (Unit 2) in the value-added pacakaging board segment in 2016 . This unit, established at Mondipatti in Trichy, sources a part of its pulp requirements from the Pugalur unit.

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs. Cr.	2819	3872
Profit After Tax (PAT)	Rs. Cr.	(65)	130
PAT Margins	%	(2.3)	3.4
Adjusted Debt/ Adjusted Net worth	Times	1.43	1.28
Interest coverage	Times	1.61	2.90

 

Any other information: Not applicable