July 24, 2012 / 11:48 IST
Fitch Ratings has revised the Outlook on India-based Ballarpur Industries Limited (BILT) to Negative from Stable while affirming its Long-Term Foreign-Currency Issuer Default Rating (LT FC IDR) at 'BB-' and National Long-Term rating at 'Fitch AA-(ind)'.
Fitch has also revised the Outlook on BILT's subsidiaries - Ballarpur International Graphic Paper Holdings (BIGPH) and BILT Graphic Paper Products Limited's (BGPPL) - to Negative from Stable. The agency has affirmed BIGPH's LT FC IDR at 'BB-' and BGPPL's National Long-Term rating at 'Fitch AA-(ind)'. A list of additional rating actions is provided at the end of this commentary.
The Outlook revision reflects Fitch's view that BILT's net financial leverage (net adjusted debt/operating EBIDTAR) would likely increase to about 5.3x (estimated) in FY12 (year end June) from 4.3x in FY11. The view is driven by the decline in operating EBIDTA margins to 16.9% 9MFY12 from 19.7% in 9MFY11 due to delays in pulp integration plans - exposing it to volatile global pulp prices, and an increase in other input costs and USD-denominated debt (about 70% of total borrowings including perpetual hybrid bonds) on account of INR depreciation.
Fitch notes that the enhanced pulp capacities at Sabah Forest Industries (SFI) were commissioned in June 2012 after a delay of eight months, while the expansion at Ballarpur is still underway (earlier planned by June 2012). The company remains exposed to ramp-up issues on these projects; hence, its operating profitability could remain subdued during FY13 as well, particularly if the current weak operating environment persists.
The ratings are based on a consolidated view of BILT's business and financial profiles. BIGPH's and BGPPL's ratings reflect their strong operational and strategic linkages with the ultimate parent, BILT, on the back of their similar business profiles, common treasury and management team. BIGPH, which holds a 99.99% stake in BGPPL and a 97.8% stake in SFI, contributed 76.6% to BILT's overall revenue and 84% to its EBITDA in 9MFY12. BIGPH holds 76.5% of BILT's consolidated paper capacity and high-value added rayon-grade pulp facilities.
BILT has an established leadership position in the Indian writing and printing paper segments, a large distribution network to cater to the fragmented paper market and a vertically integrated business model from wood to pulping, chemicals and captive power. However, its operating profitability has been consistently declining since FY09 (FY08: 25.0%, FY09: 23.1%, FY10: 21.5%, FY11: in 19.1%) due to volatile pulp prices and lower pulp integration at about 60%-65% in the wake of the expansion of paper capacity. BILT is now undertaking capex towards expanding its pulp capacity and expects to achieve full integration into hard-wood pulp post FY13.
Fitch notes that though the backward integration into hardwood pulp would improve BILT's cost structure; the timely completion and ramp-up of these facilities remain a key concern. Moreover, the industry risk of overcapacity and higher input costs could undermine the benefits of pulp integration on operating profitability. BILT has deferred the plans to list its international subsidiary in the wake of economic uncertainty and subdued financial markets. The next round of expansion of paper capacity by 685,000 tpy at a cost of USD511m has also been deferred.
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WHAT COULD TRIGGER A RATING ACTION? Negative: Future developments that may, individually or collectively, lead to negative rating action could be BILT's inability to commission and ramp up the pulp mill, weaker operating profitability or new-debt funded capex resulting in net financial leverage above 4x in FY13.
Positive: The current Rating Outlook is Negative. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. However, timely commissioning of capex plans resulting in an improvement in operating profitability and thus causing net financial leverage to remain below 4x from FY13 onwards could result in Outlook being revised back to Stable.
BILT, on a consolidated basis, has one production facility in Malaysia and six facilities in India, of which Ballarpur, Bhigwan and Kamalapuram units are under BGPPL. BILT intends to undertake further organisational restructuring by transferring two of its paper producing units, Ashti and Sewa, to BGPPL, while acquiring the Kamalapuram unit. The company also proposes to completely acquire (currently a 26% stake) the captive power assets at its domestic production facilities from Avantha Power Infrastructure Limited. While the swap of paper units will not affect the consolidated financials, re-acquiring the captive power plants would improve profitability and increase capital employed. These proposals are still awaiting regulatory approvals and hence Fitch has not factored them into its assessment. In 9MFY12, BILT registered consolidated revenue (unaudited) of INR35.2bn, EBITDA of INR5.9bn and net income of INR1.1bn.
Rating actions on BILT and BGPPL's instruments: BILT - INR272m term loans: 'Fitch AA-(ind)'; rating withdrawn as the facility has been repaid in full
- INR1,500m commercial paper (within working capital limits): affirmed at 'Fitch A1+(ind)'
- INR3,500m non-convertible debenture programme: affirmed at 'Fitch AA-(ind)'
- INR3,500m fund- and non-fund-based working capital limits: affirmed at 'Fitch AA-(ind)'/'Fitch A1+(ind)'
BGPPL - INR1,500m commercial paper (within working capital limits): affirmed at 'Fitch A1+(ind)'
- INR7,500m non-convertible debenture programme: affirmed at 'Fitch AA-(ind)'
- INR7,500m fund- and non-fund-based working capital limits: affirmed at 'Fitch AA-(ind)'/'Fitch A1+(ind)'
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