Detailed Rationale

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

 

The revision in the outlook is driven by the improving business performance of TNPL and sustenance of the same going forward, supported by the overall increase in demand for writing and printing paper owing to the gradual reopening of educational institutions/offices. Growth in the packaging board segment will also improve further driven by increasing penetration of e-commerce in many sectors such as fast-moving consumer goods, readymade garments, pharmaceuticals and household appliances.

 

TNPL achieved 48% growth in writing & printing paper(WPP) volumes and a 6% growth in packaging board volumes during fiscal 2022, over the corresponding period, amidst the overall slowdown in the paper industry as educational institutions/offices were shut down during the first half of fiscal 2022 on account of Covid-19 pandemic. Revenue growth was significantly higher at 44% by end of the fiscal, aided by increase in volumes and realisations as demand gradually improved during the second half of fiscal 2022. The partial absorption of increase in raw material cost due to subdued demand in a major part of fiscal 2022 led to the overall operating margin declining to 10.0% in fiscal 2022 from 11.2% in the same period of fiscal 2021.

 

Revenue growth of 10-15% per annum is expected in the near to medium term, on the back of expected improvement in demand from educational institutes/corporates completely resuming operations and increased demand for packaging board from packaging industry for e-commerce supplies. Operating margins will benefit from higher volumes as well as various cost control measures including backward integrating for pulp manufacturing. The new pulp mill which is commencing operations from the end of the first quarter of fiscal 2023 will enable TNPL to substitute its imported pulp and help reduce cost. Further, the pulp mill enables the company to produce better-quality products such as folding box board(FBB) and cup stock varieties, which have high realisation compared to grey back boards produced earlier. Accordingly, the overall margin should improve to 14% in fiscal 2023 and gradually to 17-18% over the medium term.

 

The rating also factors the adequate financial risk profile of TNPL, marked by improvement in debt protection metrics. Although gearing was high at 1.4 times as on March 31, 2022, deferment of Phase II of the capital expenditure (capex) to fiscal 2024 will improve debt metrics in the current fiscal. Liquidity will continue to be adequate over the medium term, supported by sufficient cash accrual to meet term debt obligation per annum and prudent working capital management.

 

The rating continues to reflect the leading position of TNPL in the domestic WPP market, product diversity with presence in both WPP and Packaging Board(MCPB), and improving  operating capabilities, through increasing integration with expansion of captive pulp facilities. These strengths are partially offset by modest financial risk profile, capital intensive operations, sizeable repayment obligations over the medium term, and partial susceptibility of operating profitability to volatile imported pulp prices.

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 installed capacity of 400,000 tonne per annum (TPA). Market position has been strong, despite intense competition, backed by the established brand, diversified product portfolio and customer base, robust distribution network and regular capacity expansions. Besides, the company uses bagasse to manufacture WPP, which adds to its operating efficiencies. Post gradual resumption of educational institutions from the second half of fiscal 2022, WPP sale volumes increased by a significant 48% (on-year basis) due to robust demand, thereby also improving overall realisations in the fiscal 2022

 

Improving operating capabilities resulting from integrated operations

Although the operating margin of TNPL has reduced in FY 2022 due to continuous rise in raw material cost and subdued demand amid the second wave of the Covid-19 pandemic, it is expected to improve owing to improving volumes given the normalization of demand and backward integration for wood pulp. The pulp unit, which is expected to commence operations from the end of the first quarter of fiscal 2023 will also enable the company to produce better-quality products such as FBB and cup stock, which have high realisations compared to grey back boards produced earlier. Operating from the country's largest single location paper plant continues to give TNPL significant economies of scale. Profitability is expected to improve gradually from fiscal 2023 onwards, with increasing demand, better product mix towards a higher value-added Packaging Board segment and backward integration benefits.

 

Expanded product portfolio, with presence in both WPP and Packaging Board

TNPL has presence in both WPP and packaging board segments, which provides diversity to its revenue profile. Its greenfield MCPB project has capacity of 200,000 TPA and caters to diverse end-user segments. Packaging Board is used by industrial players for packaging consumer products, while WPP is used for making notebooks, textbooks, copier paper and diaries. With higher utilisation at packaging board segment, the contribution to revenue increased, and to some extent helped buttress the impact of sluggish WPP sales.

 

Weaknesses

Modest financial risk profile

Financial risk profile is marked by moderate gearing and debt protection metrics, even as networth remains healthy at about Rs 1,587 crore as on March 31, 2022. Debt-funded capacity expansions in the past have impacted debt protection metrics. Interest coverage ratio improved to 2.60 times from 1.61 times in fiscal 2021. Gearing was at 1.40 times as on March 31, 2022, compared to 1.43 times a year ago. The ratio of debt/EBITDA (earnings before interest, taxes, depreciation, and amortisation), although high, has improved to 5.66 in fiscal 2022, from 6.92 in fiscal 2021 due to higher operating profits

 

Total debt is expected at Rs 2,000-2,400 crore over the medium term. Improvement in cash generation and progressive sizeable debt repayment will help obviate net debt addition on account of capex. This should boost debt protection metrics, with the ratio of debt/EBITDA expected at around 3 times over the medium term.

 

Dependence on imported raw materials

As TNPL presently does not 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 raw material prices, which were on an increasing trajectory in fiscal 2022. Although the commissioning of the pulp mill from the end of the first quarter of fiscal 2023, will help in lowering the dependence on imported pulp, and also result in substantial cost saving, still the company will depend on imports for ~40% of overall raw material requirement in MCPB unit.

 

Exposure to risks related to project implementation and stabilisation

TNPL is undertaking a large capex of Rs 2,750 crore. Phase I involves a capex of Rs 1,330 crore towards expansion of its pulp capacity by 140,000 TPA, which is already completed and expected to start commercial operations by end of the first quarter of fiscal 2023. Capex in Phase II will be Rs 1,420 crore -- which TNPL is still contemplating between setting up a new packaging board plant with additional captive pulp capacity and a WPP plant; this will be implemented between fiscals 2024 and 2025. This large project in turn exposes TNPL to project-related risks over the medium term; pre-commissioning risks comprise time or cost overruns, while post-commissioning risks will include stabilisation and ramp up in operations.

 

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

Liquidity: Adequate

Cash accrual is projected at Rs 300-400 crore per annum, sufficient to meet the repayment obligation of Rs 236 crore in fiscal 2023 and Rs 340 crore in fiscal 2024. As the company deferred the Phase-II capex to fiscal 2024, cash accrual will be able to comfortably service debt repayment, especially in fiscal 2023 

 

Nevertheless, CRISIL Ratings derives comfort from the strong refinancing capabilities and established relationship with lenders, which will enable TNPL to arrange for funds during any shortfall in cash accrual 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 limit, which has been utilised at 70-75% on average over the six months through May 2022.

Outlook: Stable

The credit risk profile of TNPL will continue to benefit from the healthy demand outlook for WPP and MCPB over the medium term, and reducing pulp prices due with commissioning of captive pulp mill, thereby boosting cash generation. Further, the moderate financial risk profile will gradually improve over the medium term, supported by better cash generation, and progressive debt repayment, which will help it absorb impact of the large, proposed capex.

Rating Sensitivity Factors

Upward Factors

• Better business performance, leading to strong recovery in cash generation
• Improvement in debt metrics, supported by improved cash generation; for instance, debt/ EBITDA of less than 2.5
• Implementation of expansion project without material time and cost overruns
   

Downward Factors

• Subdued 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/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 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 total production capacity of 600,000 TPA. Unit 1 has production capacity of 400,000 TPA at its plant at Pugalur in Kagithapuram (Tamil Nadu), 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 tonne 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 has captive power facilities of 103.62 megawatt (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 has wind farms with capacity of 35.5 MW (as on March 31, 2016) in Tirunelveli (Tamil Nadu). TNPL implemented a 200,000-TPA greenfield project (Unit 2) in the value-added packaging board segment in 2016. This unit, established at Mondipatti in Trichy (Tamil Nadu), sources a part of its pulp requirement from the Pugalur unit.

 

Revenue was reported at Rs 4,069 crore in fiscal 2022, with PAT of Rs 14 crore

Any other information: Not applicable