­To arrive at the rating, Acuité has consolidated the business and financial risk profiles of Gayatrishakti Paper and Boards Limited (GPBL) and Kherani paper and mills private limited(KPMPL), hereinafter referred to as G.N. Agarwal group. The consolidation is on account of common management, significant crossholdings, a similar line of business and significant financial linkages among the two entities.

Extensive experience of promoters, established position in the paper industry and established dealer network
GPBL is the flagship company of the G. N. Agarwal group, which is engaged into manufacturing of Premium Coated Paper Boards (duplex board). The Chairman and Managing Director of the company, Mr. G. N. Agarwal has been associated with the paper industry for more than three decades. The extensive experience of the promoters and the management has helped the company build strong presence in the market. GPBL and KPMPL have diversified presence on a pan-India basis with more than 150 distributor and dealer networks. The sales for duplex boards and kraft paper are through dealers to reputed clients for manufacturing of packaging products. GPBL and KPMPL have tied up with the printing companies who in turn carry out printing jobs for the end user. The group has a healthy relationship with the dealers over two decades that further reduces the counter party risk. The group has an advantage of the distribution network as dealers provide access to wide range of packing industries such as Food Products, Personal Care, FMCG products, Oral Care & Hygiene Products, e-commerce industry among others. The group caters to healthy portfolio of end consumers including AMUL, Hindustan Unilever Ltd, Colgate Palmolive India Ltd, Kellogg Company, Anchor Health and Beauty Care Pvt Ltd among others. 
Acuité believes that the group will continue to benefit from its extensive experience in the paper industry and established market presence through a healthy network of dealers and distributors. In addition, the business risk profile of the group will continue to derive support from strong dealer network.­

Location advantage
The group’s manufacturing units are located in Vapi and Sarigam (Gujarat) which is one of the most developed Industrial Zone of Gujarat connected by rail and road. Also, the distance from nearest port i.e. Adani Hazira port is 142 kms for Unit I in Vapi and 160 kms from Unit II in Sarigam. As the group imports waste paper and exports finished goods, the location of the units provides an advantage of low transportation cost upto the ports. The presence of unit in GIDC provides competitive advantage in terms of proximity to raw material, trained work force and marketing. Further, the group has a pan-India presence and caters to international markets through exports.

Augmentation in revenues
The revenue of the group increased by ~58 percent and stood at Rs.1289.73 crore in FY22(Prov) compared to revenue of Rs.812.28 crores in FY21. The increase in the revenue is majorly due to the increase in the price realization for the products. The revenues for Q1FY23 stood at ~Rs.398 crores. This shows further revenue visibility for FY23. However even with the increase in the revenues the operating profit margin of the group declined and stood at 8.45 percent in FY22(Prov) compared against 13.00 percent in FY21. The decline in the operating margin is on account of increase in raw material costs. The PAT margin stood at 2.13 percent in FY22(Prov) against 2.92 percent in FY21.
Acuité believes that the group will be able to benefit from the augmentation in the revenues in near to medium term if enough capacity is available. The ability of the group to maintain its margins will remain a key sensitivity in near to medium term.

Moderate financial risk profile
The group has a moderate financial risk profile marked by moderate tangible networth, high gearing levels and moderate debt protection metrics. The tangible net worth of the group stood moderate at Rs.179.73 crore as on 31 March 2022(Prov). The networth has improved sequentially from Rs.152.33 crore as on 31 March 2021 due to accretion of profits in reserves. The group has followed a moderately aggressive financial policy in the past as reflected by the peak gearing levels of 2.92 times as on 31 March 2020. The current gearing level of the group has improved yet remains high at 2.30 times as on 31 March 2022(Prov) as against 2.62 times as on 31 March 2021. The total debt of the company comprised of long term debt of Rs.251.18 crores, unsecured loans of Rs.14.59 crores and short term debt of Rs.98.93 crore as on 31 March 2022(Prov). The coverage ratios of the company remained moderate with Interest Coverage Ratio (ICR) of 2.57 times for FY22(Prov) as against 2.41 times for FY21. The Debt Service Coverage Ratio (DSCR) stood at 1.24 times for FY22(Prov) as against 1.38 times for FY21. The total outside liabilities to tangible net worth (TOL/TNW) of the company stood at 3.81 times as on 31 March 2022(Prov) as against 3.24 times as on 31 March 2021.­
Acuité believes that the financial risk profile of the group will remain a key sensitivity in the near to medium term considering the capital intensive nature of industry.

Working capital intensive operations
The group’s operations are working capital intensive as evident from Gross Current Asset (GCA) of 90 days as on March 31, 2022(Prov), as against 117 days as on March 31 2021. The inventory days stood at 31 days for FY22(Prov) compared against 39 days for FY21. The company receives advance orders and hence the inventory is kept on the basis of the advance orders. Average 30-45 days inventory is kept by the group. The debtor days has improved and stood at 53 days for FY22(Prov) as against 71 days for FY21. Average debtor days are 45-55 days. The creditor days of the group stood at 57 days for FY22(Prov) as against 81 days for FY21. The raw materials, waste paper and pulp are procured by taking a LC for 60-90 days. The average utilization of the working capital limits of the company remained high at ~77 percent in last six months ended July’ 22 for KPML and ~81 percent in last six months ended July’22 for GPBL.
Acuité believes that efficient working capital management will be crucial to the group in order to maintain the financial risk profile.

Susceptibility of margins to fluctuations in raw material prices
The duplex board and kraft paper manufacturers in India are exposed to the risk of volatility in waste paper prices, largely due to intense competition. On account of competitive pressures, players face challenges in passing on increased costs to end users. This is reflected by the decline in the operating profit margins to 8.45 percent for FY22(Prov) as against 13.00 percent for FY21. In addition, the profitability of players with power plants is exposed to fluctuation in the prices of coal. Business risk profile will remain constrained by exposure to the downturn in the paper industry. The rise in the prices of duplex paper over that of waste paper is expected to be gradual, rendering the profitability susceptible to volatility in the price of paper.