| Augmentation of profitability and diversification of revenue streams with new capex
The revenue of the group improved and stood at Rs. 1333.81 crore in FY23 (prov), compared to a revenue of Rs. 1289.77 crore in FY22. The increase in revenue is mainly due to the increase in price realised for the products. The revenue of the group has remained range-bound around the current revenue levels as the existing capacity has remained utilised in the range of 90–100% for the last three years through FY 2023. The group, however, has now undertaken a capital expansion plan to set up a tissue manufacturing unit with a capacity of 36,000 TPA. This capacity is expected to lead to incremental revenues in the range of Rs. 200–250 crore in its first full year of operation. The capacity for the same is expected to be completed by H1FY25, and the additional revenues are likely to accrue from FY2025 onwards. The company plans to export 50% of the produce from the new unit.
The profitability of the group has also remained range-bound over the last two years through FY 2023. While the group has demonstrated the ability to pass on the increase in raw material prices to the end customers, the profitability per tonne has remained in the range of Rs. 4,000–4,300 per MT over the last three years through FY 2023. Acuite expects the new tissue manufacturing capacity to contribute significantly to the group’s profitability, as the profitability per tonne for tissue manufacturing units is estimated to remain in the range of Rs. 15,000–18,000 per MT. This is likely to result in a better operating margin for the group.
Extensive experience as promoters, an established position in the paper industry, and an established dealer network.
GPBL is the flagship company of the G. N. Agarwal group, which is engaged in the manufacturing of premium coated paper boards (duplex boards). 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 a strong presence in the market. GPBL and KPMPL have a diversified presence on a pan-India basis, with more than 150 distributor and dealer networks. The sales of duplex boards and kraft paper are made through dealers to reputed clients for the manufacturing of packaging products. GPBL and KPMPL have tied up with the printing companies, which in turn carry out printing jobs for the end user. The group has had a healthy relationship with the dealers for two decades, which further reduces the counterparty risk. The group has the advantage of the distribution network, as dealers provide access to a wide range of packing industries such as food products, personal care, FMCG products, oral care and hygiene products, and the e-commerce industry, among others. The group caters to a healthy portfolio of end consumers, including AMUL, Hindustan Unilever Ltd., Colgate Palmolive India Ltd., Kellogg Company, and 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 a strong dealer network.
Working capital and efficient operations
The group’s operations are working capital efficient, as reflected by the GCA days that have remained in the range of 90–100 days over the last three years. The inventory days stood at 42 days for FY23 (prov) against 31 days for FY22. The company receives advance orders, and hence the inventory is stocked up on the basis of the advance orders received, thereby partly mitigating commodity price risk. Average inventory holding days are around 30–45 days. The debtor days improved and stood at 46 days for FY23 (Prov) as against 56 days for FY22. The average credit period allowed to customers is around 45–55 days. The average utilisation of the working capital limits of the company stood at 75 percent in the last six months ended March’ 23 for KPML and 75 percent in the last six months ended March 23 for GPBL. Acuité believes that the ability of the group to maintain efficient working capital management will remain a key rating sensitivity in the medium term.
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| Average financial risk profile
The group’s financial risk profile is average, marked by healthy net worth, moderate debt levels, and average debt coverage indicators. The tangible net worth of the group stood at Rs. 242.32 crore as of March 31, 2023 (prov). The net worth has improved from Rs. 152 crore in FY 2021 as a result of healthy accretion to reserve and an equity infusion of Rs. 40 crore in FY 2023 as part of the group equity contribution towards the new capacity expansion. The group is currently undertaking capex of Rs. 265 crore to install a tissue manufacturing unit under a new entity, GTPL. The capex will lead to a new tissue manufacturing capacity of 36,000 TPA. The capex is expected to be completed by September 2024. The capex is funded by a term loan of Rs. 210 crore and equity of Rs. 55 crore (of which Rs. 40 crore has already been infused). The group has followed a moderately aggressive financial policy in the past, and its debt/EBITDA levels have consistently remained upwards of 3.75 times over the last three years through FY 2023. The peak gearing levels have also remained high at around 2.63 times as of March 31, 2021. The capex is likely to lead to a moderate deterioration in the leverage and coverage indicators over the medium term. Acuite expects the peak debt/EBITDA levels to remain within 4.2–4.5 times over the medium term and gradually decline once the capacity comes onstream. A project of this magnitude remains sensitive to cost and time overruns. While the capex is critical for the group to improve its business and financial risk profiles, any unexpected increase in leverage levels or delay in the commencement of capacity is likely to impart a negative basis to the rating.
The coverage indicators are also expected to moderate marginally over the medium term in line with incremental debt levels. The interest coverage ratio is expected to remain below 3.0 times over the medium term, and the debt service coverage ratio is expected to moderate to around 1.2 times. Acuite believes that the scope for further moderation in the coverage indicators is limited, and any incremental deterioration is likely to impart a negative bias to the rating.
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 wastepaper 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 8.57 percent for FY23 (prov) compared to 8.45 percent for FY22 as against 13.00 percent for FY21. The business risk profile will remain constrained by exposure to the downturn in the paper industry. The rise in the price of duplex paper over that of wastepaper is expected to be gradual, rendering profitability susceptible to volatility in the price of paper.
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