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 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.
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