Fitch Downgrades India's Ballarpur to 'B+', Outlook Stable

Ballarpur Industries

26/11/2013 09:13

(The following statement was released by the rating agency)

MUMBAI/SINGAPORE, November 26 (Fitch) Fitch Ratings has today downgraded the 
Long-Term Issuer Default Ratings on India-based Ballarpur Industries Limited 
(BILT) and its subsidiary Ballarpur International Graphic Paper Holdings B.V 
(BIGPH) to 'B+' from 'BB-'. The Outlook is Stable. 

The downgrade reflects BILT's heightened debt levels. Although the company has 
planned debt reduction measures, its net leverage (Net adjusted debt/ Operating 
EBITDAR) is likely to remain high around 5x.

KEY RATING DRIVERS

High Debt Levels: The downgrade reflects weakening of BILT's consolidated 
financial profile in FY13 (year ended 30 June 2013), with its net leverage 
increasing to 7.0x from 5.7x in FY12. 

This was primarily driven by a rise in  BILT's adjusted net debt to INR60.8bn 
(Fitch has applied 50% equity credit to the perpetual debt) during FY13 from 
INR44.9bn a year earlier, driven by the acquisition of captive power plants in 
India, the increase in its equity stake in  BIGPH and capex. The financial 
profile was also hurt by BILT's weak liquidity, with cash balances declining to 
INR740.2m in FY13 from INR860.1m a year earlier. However the agency notes that 
the company has refinanced large part of its debt that matures in FY14.

Fitch expects BILT's financial profile to improve, supported by higher 
profitability, lower debt levels, and improved free cash flows in the absence of 
any major capex. Consequently the agency expects BILT's net leverage to improve 
to around 5x by FY15. BIGPH has also announced plans to explore and evaluate 
various fund raising options, including raising fresh equity capital at BIGPH 
and/or its subsidiaries, which if successful, will further help reduce BILT's 
debt levels.

Delay in Capex: The paper manufacturer also faced significant delays in making 
capex, primarily for enhancing its pulp capacities, in India and Malaysia. The 
two projects were delayed by almost a year, with the company starting operation 
at its Malaysian plant in June 2012 and the Indian facility being completed in 
June 2013. The company also faced cost overruns of INR4bn. This resulted in 
accrual of cost benefits to BILT at a later date than Fitch expected. 

Integrated Operations: BILT's operations are highly integrated with captive 
power and pulp capacities. BILT's level of integration in hardwood pulp is 
expected to increase to 100% from around 75% currently with the completion of 
enhanced pulp capacities in Malaysia and India. Fitch expects the benefits from 
higher vertical integration to result in higher profitability and improved cash 
flows for the company. This is likely to support BILT's debt reduction efforts. 

Strong Market Position: BILT has a strong market position in the Indian writing 
and printing paper market, with large shares of the coated paper and uncoated 
paper (hi-bright) segments. BILT through its subsidiary Sabah Forest Industries 
Sdn. Bhd. (SFI) has significant share in Malaysia's non-surface sized uncoated 
paper sub-segment. The strong market shares are, supported by BILT's strong 
brand presence and large distribution network to cater to the fragmented paper 
market. 

Paper Price Volatility: The volatility in paper and pulp prices impacts the 
company's profitability. This is reflected in BILT's EBITDA margins improving to 
17.7% in FY13 from 16.3% in FY12 (FY11:19.1%). Although the higher level of pulp 
integration will improve BILT's cost structure, the company will continue to be 
impacted by volatility in paper prices.

Strategic Linkages with Subsidiaries: Fitch continues to take a consolidated 
view of BILT. The agency's rating on BIGPH's continues to reflect its strong 
operational and strategic linkages with its parent, BILT. BIGPH is in the same 
line of business as BILT and has common treasury and management teams. BIGPH 
holds a 99.99% stake in Ballarpur Graphic Paper Products Ltd. (BGPPL) and a 
97.8% stake in SFI. BIGPH contributes to about 80% of BILT's overall revenue and 
about 75% to its EBITDA. 

RATING SENSITIVITIES

Positive: A rating upgrade is unlikely in the forseeable future because it will 
continue to be constrained by its high debt levels. Future developments that 
may, individually or collectively, lead to positive rating action on include 

- Significant improvement in BILT's profitability resulting in EBITDA margin 
sustained at over 20% 

- Substantial reduction in debt levels resulting in BILT's net leverage falling 
below 4x on a sustained basis 

- Improvement in BILT's liquidity

Negative: Future developments that may, individually or collectively, lead to 
negative rating action include

- Any weakening in performance or additional capex resulting in BILT's net 
leverage exceeding 5.5x from FY15 or beyond

- EBITDA fixed charge cover sustained at below 2x (FY13:1.84x)

- Any weakening in liquidity

Contact: 

Primary Analyst

Nandini Vijayaraghavan, CFA

Director

+65 6796 7216

Fitch Ratings Singapore Pte Ltd

6 Temasek Boulevard

#35-05 Suntec Tower Four

Singapore 038986

Secondary Analyst

Muralidharan R

Associate Director 

+91 22 4000 1732 

Committee Chairperson

Vicky Melbourne

Senior Director

+61 2 8256 0325

Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: 
bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: 
leslie.tan@fitchratings.com.

Additional information is available at www.fitchratings.com.

Applicable criteria, Applicable criteria, "Corporate Rating Methodology: 
Including Short-Term Ratings and Parent and Subsidiary Linkage", dated 5 August 
2013 , and "Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT 
Credit Analysis", dated 13 December 2012 are available on www.fitchratings.com

Applicable Criteria and Related Research: 

Corporate Rating Methodology: Including Short-Term Ratings and Parent and 
Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit 
Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670

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