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 INR 60.8bn (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