September 28, 2017

JK Paper Limited
Summary of rated instruments
Instrument* Rated Amount Rating Action
(in Rs. crore)
Long-term fund-based 122.0 [ICRA]A (Stable);
bank facilities upgraded from [ICRA]BBB+(Positive)
Long-term unallocated 28.0 [ICRA]A (Stable);
upgraded from [ICRA]BBB+(Positive)
Total – Bank Facilities 150.0
*Instrument details are provided in Annexure-1

Rating action
ICRA has upgraded the long-term rating on the Rs. 150.0-crore1 bank facilities of JK Paper Limited (JK
Paper) to [ICRA]A (pronounced ICRA A)2 from [ICRA]BBB+ (pronounced ICRA triple B plus) earlier.
The outlook on the long-term rating has been revised to Stable from Positive.

Rationale
The rating upgrade takes into account the stronger-than-expected improvement in JK Paper’s operational
performance as well as its financial profile. The improvement in operating performance has been driven
by the company’s ability to consistently increase its production volumes, despite operating at full
capacity, which supported efficiency gains. Further, favourable industry factors such as improved supply-
demand dynamics and raw material availability in proximity have also improved the contribution margins
and hence profitability, as reflected in the operating margin of ~24% in Q1 FY2018 compared to 19.5%
in FY2017 and 16.0% in FY2016.

The strengthening of the financial profile has been driven by the conversion of Foreign Currency
Convertible Bonds (FCCBs), totalling Rs. 114 crore, to equity during the last one year, which besides
strengthening the company’s capital structure has also eased the repayment burden. This together with
refinancing of some of its project loans with longer-tenure loans, will reduce the average annual
repayment burden for FY2018-FY2020 to less than Rs. 200 crore from more than Rs. 300 crore earlier.
Improved profitability coupled with lower repayment burden is expected to result in stronger debt
coverages—Net Debt/OPBDITA of 2.0 times and DSCR of 1.6 times in FY2018(E) (compared to ~2.8
times and 1 times respectively in FY2017). Further, the company continues to enjoy healthy liquidity not
only on account of large liquid investments of Rs. 242 crore (as on March 2017), but also because of
moderate utilisation (~60%) against sanctioned working capital facilities, with adequate drawing power.

The rating continues to derive strength from JK Paper’s strong market position with presence in high-
quality paper segments, established brand name, wide distribution network and integrated production
capacities. The credit profile, however, continues to be constrained by the company’s inherent exposure
to cyclicality and raw material price volatility, and threat from imports (though it is limited in the copier
paper segment). These risks apart, ICRA notes that ~30% of the company’s term liabilities are foreign-
currency denominated. While the liabilities falling due in near term are hedged against the forex
volatilities, ~60%-70% of forex liabilities are unhedged. Hence, significant depreciation of Indian rupee
on a sustained basis can be a risk in the absence of foreign currency denominated revenues.

1
100 lakh = 1 crore = 10 million
2
For complete rating scale and definitions, please refer to ICRA’s website www.icra.in or other ICRA Rating Publications.
Going forward, higher-than-expected improvement in profitability, leading to faster improvement in
capital structure and debt metrics, will be a positive for JK Paper’s credit profile. However, a sustained
deterioration in profitability or any large debt-funded organic/inorganic growth plan that impacts the
capital structure and/or liquidity will be a negative and hence will remain the key rating sensitivity.

Key rating drivers

Credit strengths
 Strong market position with presence in high quality paper segments, established brand name,
wide distribution network and integrated production capacities: JK Paper is an established player
in the domestic paper industry with presence in high-quality paper segments such as copier paper,
coated paper and flexible box board, which are relatively less fragmented as compared to general
paper industry. JK Paper’s established brand name and wide distribution network provide some
competitive advantage against threats from imported paper as a significant share of sales comes from
copier paper, which is an end-consumer product (Business to consumer or B2C) unlike other paper
segments, which largely cater to Business to Business (B2B) segments. Further, JK Paper enjoys
operating efficiencies because of its integrated production capacities. Additionally, a significant
portion of wood-pulp and power requirements (major cost components) are met through captive
production.

 Improvement in capital structure and debt coverage: JK Paper had raised FCCBs totaling Euro 35
million in May 2011 for part funding the capex of Rs. 1,775 crore. Given the favourable share price
movement during the past one year, FCCBs totalling Rs. 114 crore have been already converted into
equity. Besides strengthening the capital structure, the conversion has also eased the annual
repayment burden for FY2018 and FY2019. This together with tie-up of longer-tenure funding for
refinancing the project loans, will reduce the company’s average annual repayment burden for
FY2018-FY2020 by ~35% to less than Rs. 200 crore from more than Rs. 300 crore earlier. Further,
the company continues to benefit from the reduction in the wood purchase costs due to lower
competition in wood sourcing from local peers as no new wood-based paper manufacturing capacities
have been added subsequent to JK Paper’s expansion in FY2014. This apart, efficiency gains caused
by higher captive pulp production and higher paper production have led to better economies of scale,
lowering per ton cost of paper production and thereby facilitating a 70% improvement in contribution
margins over FY2015-FY2017. Improved profitability coupled with lower repayment burden is
expected to result in stronger debt coverages such as Net Debt/OPBDITA of 2.0 times and DSCR of
1.6 times in FY2018(E) (compared to ~2.8 times and 1 times respectively in FY2017).

 Favorable outlook for paper industry: The demand-supply scenario in writing & printing paper
segment should remain favourable in the near to medium term as no new capacity has been added/
announced in the last three years. This lends pricing power to players, though threat of imports will
always keep significant price increases under check.

 Healthy liquidity and financial flexibility: JK Paper enjoys healthy liquidity not only on account of
large liquid investments of Rs. 242 crore (as on March 2017), but also because of moderate utilisation
(~60%) of the sanctioned working capital facilities, with adequate drawing power. Further, the
company has demonstrated ability to tap domestic and international capital markets.
Credit weaknesses
 Exposure to cyclicality and raw material price volatility: The paper industry is characterised by
cyclicality on account of bunching up of capacity additions, which can not only distort demand-
supply dynamics for end products, but also for raw materials, especially given the lead time in raw
material generation. Thus, JK Paper’s profitability will remain vulnerable to these characteristics of
the industry. ICRA notes that while cost pressures on JK Paper have eased during the past two years
with reduced wood procurement cost following the easing out of demand-supply environment for
wood amid increased tree plantations in proximity and no new wood-based paper capacity additions,
a sustained reduction in wood prices will be a challenge given high competition between mills amid
wood scarcity.

 Threat from imports, though limited in copier paper segment: While the profitability of paper
companies has been improving during the past two years, the threat of imports will keep domestic
paper prices and hence profitability under check. In this regard, ICRA notes that ASEAN free trade
agreement, which has been effective from January 2014, allows duty-free paper imports into India
from ASEAN countries.

 Large unhedged forex loans: ICRA notes that ~30% of JK Paper’s term liabilities are foreign
currency denominated. While as a policy, the company hedges the liabilities falling due in the near
term against the volatilities in foreign exchange rates, ~60%-70% of forex liabilities remain
unhedged. Hence, a significant depreciation of Indian rupee on a sustained basis can be a risk in
absence of foreign currency denominated revenues.

Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated
below.

Links to applicable criteria

 Corporate Credit Rating Methodology
 Rating Methodology for Paper Industry

About the company:

JK Paper Limited is one of the largest wood-based paper manufacturers in India with two manufacturing
facilities – JK Paper Mills (JKPM) located at Jaykaypur in Rayagada district of Odisha and Central Pulp
Mills (CPM) located in Songadh district in Gujarat. Both the units are integrated for their pulp and power
requirements. JK Paper’s annual production capacities include ~3.46 lakh ton of writing paper and 0.9
lakh ton of board. This apart, it has captive pulping capacities of ~2.76 lakh ton and 85 MW of power
generation for captive requirements. JK Paper’s product portfolio includes value-added products such as
copier paper, coated paper and folding box board for high-end packaging purposes.
JK Paper is a part of the JK Group (late Lakshmipati Singhania family) and is led by Mr. Bharat Hari
Singhania (Chairman) and Mr. Harsh Pati Singhania (Managing Director). It was incorporated as a
separate corporate entity with a focus on manufacturing paper as a part of the restructuring exercise
undertaken by JK Corporation in the year 2000.
 Table 1: Key Financial Indicators (Audited)
FY2016 FY2017 Q1 FY2018
Operating Income (Rs.
2,437 2,629 632
crore)
PBT (Rs. crore) 89 232 90
OPBDIT/ OI (%) 16.0% 19.5% 24.4%
RoCE (%) 9.2% 13.6% NA

Total Debt/ TNW (times) 1.7 1.3 1.1

Total Debt/ OPBDIT
4.8 3.3 2.6
(times)
Interest coverage (times) 2.0 2.7 3.9
NWC/ OI (%) 11% 6% NA
OI: Operating Income; PBT: Profit before Tax; OPBDIT: Operating Profit before Depreciation, Interest,
Taxes and Amortisation; ROCE: TNW: Tangible Net Worth; PBIT/Avg (Total Debt + Tangible Net-Worth
+ Deferred Tax Liability - Capital Work - in Progress); NWC: Net Working Capital; NA: Not Available

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History for the last three years:

Table: Rating History
Current Rating Chronology of Rating History for the past 3 years
Rated Date & Date &
Name of Date &
S. No. Type amount Rating Date & Rating Rating
Instrument Rating
(Rs. in in FY2017 in
in FY2016
Crore) FY2018 FY2015
Sep Dec Jun May -
2017 2016 2016 2015
Fund-based -
Long- [ICRA]A [ICRA]BBB+
1 bank 122.0 - -
term (Stable) (Positive)
facilities
Unallocated -
Long- [ICRA]A [ICRA]BBB+ [ICRA]BBB+ [ICRA]BBB+
2 bank 28.0
term (Stable) (Positive) (Positive) (Stable)
facilities

Complexity level of the rated instrument:

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly
Complex". The classification of instruments according to their complexity levels is available on the
website www.icra.in
Annexure-1
Details of Instruments
Size of the
Name of the Date of Coupon Maturity Current
ISIN No. issue
instrument issuance Rate Date Rating
(Rs. Cr)
Term loan - - - Q4 FY2024 122.0 [ICRA]A
Unallocated - - - - 28.0 (Stable)
Source: JK Paper
Name and contact details of Rating Analyst(s):

Jayanta Roy Nidhi Marwaha

+91 33 7150 1100 +91 124 4545 337
jayanta@icraindia.com nidhim@icraindia.com
Deep Inder Singh
+91 124 4545 830
deep.singh@icraindia.com

Name and contact details of Relationship Contact:

L. Shivakumar
+91 22 6114 3406
shivakumar@icraindia.com

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