India Ratings has downgraded JK Paper (JKPL) National Long-Term rating to `IND BBB+` from `IND A-`. The Outlook is Negative. A list of additional rating actions is provided at the end of this commentary.
The downgrade reflects JKPL`s higher-than-expected increase in financial leverage (net adjusted debt/EBIDTAR) to 6.4x in FY12 (year end March) from 2.1x in FY11 due to its higher-than-expected decline in operating profitability to 11.4% from 20.9%, which has continued in FY13 till date (Q1FY13: 12.4%). Higher input costs along with pricing pressures exerted by new capacity additions in the domestic market in FY12 led to the fall in operating profitability.
The increase in financial leverage is partly on account of the company`s on-going capex of INR16.5bn for expanding its paper capacity. The agency however notes that the capex plan is largely progressing on schedule and would likely get commissioned by FY13.
The Negative Outlook reflects Indian Ratings` expectations that the company`s deleveraging would be delayed and liquidity position would remain stretched over the short term due to its weak profitability. About INR6.3bn of capex was incurred in FY12. The remaining capex of about Rs 10 billion in FY13 is likely to lead to a further increase in financial leverage over the short term. The timely commissioning of capex bringing about operational efficiencies and improved profitability margins would lead to an improvement in JKPL`s financial profile only over the medium term.
JKPL`s revenue grew 8% yoy to Rs 13.3 billion in FY12 primarily on account of a modest increase in sales realisation as volumes have stagnated due to capacity constraints. India Ratings is of the view that the current capex should strengthen JKPL`s business profile over the medium-to-long term, and help it regain its declining market share in the copier segment due to its capacity constraints over the last four years.
JKPL`s ratings factor in its continued strong position in the high value-added segments of the domestic paper and paper board industry such as copier and folding box board (FBB) segments, its consistently high capacity use (above 100% across paper board and paper divisions), and its wide distribution network.
Shares of the company gained Rs 1.85, or 5.12%, to trade at Rs 37.95. The total volume of shares traded was 167,971 at the BSE (3.47 p.m., Wednesday).