(The following statement was released by the rating agency)
July 02 - Fitch Ratings has revised India-based Shree Shyam Pulp and Board Mills Limited's (SSPBML) Outlook to Negative from Stable. Its National Long-Term rating has been affirmed at 'Fitch BBB+(ind)'. A list of additional rating actions is provided at the end of this commentary.
The Outlook revision reflects Fitch's view of a further increase in SSPBML's financial leverage in the medium term due to any time or cost overruns on its ongoing INR3,638m debt-funded capex and a continued decline in its profitability. Net adjusted debt/ operating EBIDTAR increased beyond expectations to about 3.9x in FY12 from 3.3x in FY11 (FY10: 3.2x) due to the capex and a significant decline in operating profitability to 25.9% from 35.5% due to increased input prices, primarily coal. The capex is being funded in a debt:equity ratio of 70:30 and likely to be commissioned by end-FY13.
The ratings continue to derive strength from SSPBML's partially integrated manufacturing processes, the close proximity of its production facility to raw material sources, its consistently high operating profitability compared with peers and an inclusion of value-added products in its portfolio. The high operating and net profitability is also attributed to various incentives under the Industrial Policy 2003 for Uttarakhand. Incentives are available for 10 years from the commencement of commercial production and are likely to terminate in a phased manner post 2014 and 2018 for plant I (64% of current installed capacity) and plant IV (36% of current installed capacity), respectively. Fitch notes that the ongoing capex shall also be eligible for tax incentives till 2018.
Revenue increased 68% yoy to INR4,997.5m in FY12 due to benefits accrued from SSPBML's capacity expansion by 25,000 MTPA in March 2011.
The ratings are, however, constrained by the cyclical nature of the domestic paper industry and SSPBML's high working capital cycle of 186 days in FY12, though improved from 273 days in FY11. The high working capital cycle is a result of high inventory levels due to the seasonal nature of raw materials (primarily bagasse) and the end-product. The company mitigates raw material availability risks to a large extent through the use of different input materials such as wheat straw, wild grass, and waste paper.
The ratings may be downgraded if there are any time or cost overruns on the capex or a further decline in profitability, resulting in net financial leverage sustained above 3.5x from FY13 onwards. Conversely, project commissioning within the estimated cost and time schedule resulting in financial leverage below 3.5x on a sustained basis would result in the Outlook being revised back to Stable.
Incorporated in 1994, SSPBML manufactures writing and printing paper with a capacity of 125,000 MTPA at its facility in in Kashipur (Uttrakhand). It also has auxiliary facilities for pulping operations, coal/agri-residue-based captive power generation and chemicals recovery. SSPBML markets copier paper under its own brands (E-square, Axiom and Natural Green) and has a direct sales team to tap institutional customers. The company is enhancing its paper capacity by 35,000 MTPA and power capacity by 7.5MW, besides installing a solids recovery boiler and improving the efficiency of its pulp mill.
Rating actions on SSPBML's bank loans:
- INR3,943.2m long-term loans (enhanced from INR1839.4m): affirmed at National Long-Term 'Fitch BBB+(ind)'
- INR1,759.8m fund-based limits (enhanced from INR1281.2m): affirmed at National Long-Term 'Fitch BBB+(ind)'
- INR350m non-fund based limits: affirmed at National Short-Term 'Fitch A2(ind)'.