JK Paper share price gains 3% on rating upgrade by CRISIL

"The upgrade reflects sustained improvement in cost and operational efficiency coupled with healthy realisations, resulting in robust better-than-expected profitability. The short-term rating has been reaffirmed due to strong liquidity and ample cash and cash equivalents, undrawn bank lines, and healthy accrual," CRISIL said.

The rating agency expects the company to maintain a minimum cash balance of about Rs 200 crore.

In the first half of the fiscal 2020, JKPL's earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin was over 30 percent, up from 25 percent in the corresponding period of the previous fiscal, driven by continued operational improvement and healthy realisations.

The rating factored in a strong operational efficiency at the Odisha plant, along with initiatives for wood plantation, resulting in reduced operating costs, CRISIL said, adding operating efficiency arise on account of lower inputs used per tonne of paper produced and is a durable source of advantage.

In January 2019, the Centre imposed a three-year anti-dumping duty with a threshold price of $855 per tonne towards the import of uncoated copier paper from Indonesia, Singapore, and Thailand.

This, coupled with healthy demand and moderate domestic supply, should support prices and margin, the rating agency said.

It expects net debt to EBITDA to remain below 2.5 times in fiscal 2021.

The company's expansion plan in the virgin fibre-based packaging board segment, at a capital expenditure (capex) of about Rs 1,935 crore over the next two fiscals, should help consolidate its leading market position, the agency said.

"Furthermore, the company is expected to benefit from the acquisition of SPM. The company is entitled to benefits such as capital subsidies, lower coal linkage prices, and cheaper power from the grid, which have been approved by the Government of Telangana," it added.

Inherent cyclicality in the industry and project execution risks related to ramp-up of SPM and the packaging board capex were the concerns flagged by the company.