ICRA : reaffirms long-term rating of BBB- and short-term rating of A3 on bank facilities of Silvertoan Papers Limited; outlook revised to stable

June 09, 2017

Silvertoan Papers Limited

Summary of rated instruments

Instrument*	Rated Amount (in crore)	Rating Action
Long-term fund based	47.12	[ICRA]BBB-/Stable; Reaffirmed
Short-term non-fund based	1.00	[ICRA]A3; Reaffirmed
Total	48.12

*Instrument details are provided in Annexure-1

Rating action

ICRA has reaffirmed the long-term rating of [ICRA]BBB- (pronounced ICRA triple B minus)1and short- term rating of [ICRA]A3 (pronounced ICRA A three) on the Rs. 48.12-crore bank facilities of Silvertoan Papers Limited (SPL). The outlook on the long-term rating has been revised to stable from positive.

Rationale

ICRA's rating reaffirmation and outlook revision takes into account the timely completion of a capacity expansion project in FY2017, which resulted in an increase in the capacity to 108,900 metric tonne per annum (MTPA) from 30,000 MTPA. Higher production driven by additional capacity is expected to boost the utilisation of the chemical recovery plant. ICRA's ratings continue to factor in the healthy top- line performance of the company in FY2017 on the back of robust sales volume growth. However, moderation in the realisations and inflationary pressure on inputs have exerted pressure on operating profit margins in FY2017.

Nevertheless, the company continues to maintain a favourable capital structure with gearing of 0.83 times as on March 31, 2017. Also, an increased scale of operations resulted in an improvement in the coverage indicators, despite moderation in operating margin. Furthermore, the company plans to replace its existing 4.00-MW co-generation power plant with the new 6.00MW co-generation power plant to reduce its dependence on the state government's power supply through the grid and support the cost structure. The proposed capex is likely to increase the company's debt levels further. The ratings continue to remain constrained on account of the intense competition in the industry along with commoditised nature of the products that restrict realisation growth. Additionally, the company remains susceptible to the fluctuations in raw material prices (as witnessed in FY2017) along with foreign exchange volatility.

Going forward, company's ability to ramp up capacity utilisation through sustained profit margins and efficient working capital management will be the key rating sensitivities. Any sizeable debt-funded capex beyond the proposed one will be monitored.

1 For complete rating scale and definitions, please refer to ICRA's websitewww.icra.in or other ICRA Rating Publications

Key rating drivers Credit strengths

• Proven track record of promoters in kraft paper manufacturing industry

• Capacity addition in FY2017 in both the plants of the company to help in scaling up the business along with optimum utilisation of the chemical recovery plant

• Proximity to the NCR region, which is a major marketing hub for finished products as well as sourcing hub for waste paper; presence in the agricultural belt provides easy accessibility to agro- based raw material.

• Debt coverage indicators are likely to improve on account of increased capacity utilisation; debt repayments likely to remain unchanged till FY2020

  Credit weaknesses

• Declining operating margin in spite of an increase in the overall operating profit; enhanced the scale of operations in FY2017

• Profitability is susceptible to fluctuation in raw material prices; limited flexibility in terms of increasing realisations

• Limited bargaining power due to high fragmentation and intensely competitive industry with the presence of a large number of kraft paper manufacturers

Description of key rating drivers

The rating reaffirmation has been driven by the consistent increase in the company's operating income backed by healthy volumetric growth. The ratings also factor in the successful commencement of the additional capacity in May 2016, wherein the company's manufacturing capacity was increased to 108,900 MTPA from 30,000 MTPA - well within the estimated costs. The expansion will help the company further the scale of operation in the near to medium term.

The ratings also consider the proven track record of the promoters in kraft paper industry. Proximity of manufacturing plants to finished good markets and raw material sources, and favourable demand from end-user industries are the other positives.

However, the ratings continue to be constrained by the contraction in operating profit margins in the past couple of years owing to inflationary pressure on input. Limited scope of increasing the realisation owing to intense competition is another negative. This apart, the commoditised nature of the product (kraft paper) and volatility in raw material prices remain challenges for the industry.

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

Rating Methodology for Paper Company

About the company

SPL was established as a private limited company in 1990 and commenced its business activities from 1993. SPL manufactures kraft paper and kraft board in its two factories at Muzaffarnagar, Uttar Pradesh. The company has expanded its manufacturing capacity to 108,900 MTPA in FY2017 from its earlier capacity of 30,000 MTPA. SPL is spearheaded by Mr. Amrish Kumar Singhal. It also set up a 4MW power plant in May 2011 and a chemical recovery plant in June 2013.

SPL reported an Operating Income (OI) of Rs. 62.5 crore and a profit after tax (PAT) of Rs. 2.4 crore in FY2016. It had recorded an OI of Rs.62.2 crore and a PAT of Rs. 2.3 crore in the previous year.

On a provisional basis, SPL registered an OI of Rs. 112.0 crore in FY2017 and PAT of Rs. 3.5 crore.

Status of non-cooperation with previous CRA: Not applicable

S.N o	Name of Instrument	Current Rating (FY2018)			Chronology of Rating History for the past 3 years
		Type	Rated amount (Rs. Crores)	Month-year & Rating	Month- year & Rating in FY2017	Month- year & Rating in FY2016	Month- year & Rating in FY2015
				June 2017	September 2016	October 2015	December 2014
1.	Cash Credit	Long Term	15.50	[ICRA]BBB- /Stable	[ICRA]BBB- /Positive	[ICRA]BBB- /Stable	[ICRA]BBB- /Stable
2.	Term Loan	Long Term	31.62	[ICRA]BBB- /Stable	[ICRA]BBB- /Positive	[ICRA]BBB- /Stable	[ICRA]BBB- /Stable
3.	Non-fund based limit	Short Term	1.00	[ICRA]A3	[ICRA]A3	[ICRA]A3	[ICRA]A3
4.	Unallocated	Long/ Short Term	Nil	-	[ICRA]BBB- /Positive & [ICRA]A3	[ICRA]BBB- /Stable& [ICRA]A3	[ICRA]BBB- /Stable& [ICRA]A3

Any other information: Not applicableRating history for last three years: Table: 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 websitewww.icra.in

Annexure-1 Details of Instrument

Name of the instrument	Date of issuance	Coupon rate	Maturity Date	Size of the issue (Rs. Cr)*	Current Rating and Outlook
Cash Credit	-	MCLR+3.65%	-	15.50	[ICRA]BBB-/Stable
Term Loan	2015	MCLR+4.15%	2024	31.62	[ICRA]BBB-/Stable
Letter of Credit/Bank Guarantee	-	-	-	1.00	[ICRA]A3

Source: Silvertoan Papers Limited