OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term Issuer Default Ratings on India-based paper maker Ballarpur Industries Limited (BILT) and its subsidiary Bilt Paper B.V. (formerly known as Ballarpur International Graphic Paper Holdings B.V) at 'B+'. The Outlook is Stable.

KEY RATING DRIVERS
Decreasing Debt Levels: BILT has been taking steps to reduce its high net debt levels. The company's net debt at the end of the financial year to 30 June 2014 (FYE14) was INR64bn, including a 50% equity credit for the perpetual debt of INR12.9bn issued at its subsidiary Bilt Paper. The company raised USD100m from an equity issuance to International Finance Corporation (IFC) at its subsidiary Bilt Paper in October 2014, which BILT used to reduce debt. Fitch expects BILT's net debt to reduce to below INR58bn by FYE15. BILT is also in the process of raising additional equity by way of an IPO of Bilt Paper, which if successful, will lead to a further reduction in its debt levels.

Financial Profile to Improve: Fitch expects BILT's financial profile to benefit from the reduction in its indebtedness as well as improvements to its cost structure and benefits of vertical integration. The agency expects BILT's net leverage (measured by net adjusted debt/ EBITDA) to reduce to around 5.5x by FYE15 and below 5.5x by FYE16 (FYE14: 6.8x) after incorporating the equity issuance to IFC but before any additional equity it may raise from the IPO of Bilt Paper.

BILT's liquidity has improved from FYE13; the company had cash balances of INR2.57bn as of FYE14, up from INR740.2m at FYE13. Further, IFC has extended a long-term loan of USD150m to BILT, which it plans to use to refinance most of the current debt at its Malaysian subsidiary, Sabah Forest Industries Sdn. Bhd. (SFI). The new debt comes with easier covenants and longer maturity, adding to its overall liquidity.

Improved Vertical Integration: Fitch expects the greater vertical integration from expanded pulp capacities to support improvement in BILT's profitability from FY15. More vertical integration during 2HFY14 resulted in a better cost structure and EBIT margin for the paper division rising to 11.4% in FY14 from 10% in FY13.

BILT vertical integration has improved after it completed the expansion of its pulp mill at the Ballarpur unit in FY14. The expanded pulp capacities in India and at SFI will result in BILT being fully integrated for its Hardwood Pulp requirements (from around 75% in FY13) in addition to being almost fully integrated for its power requirements.

Weak Rayon Grade Pulp Business: BILT's rayon grade pulp business has been impacted by the weakness in the pulp prices, generating EBITDA losses in FY14 of about INR300m. Its rayon grade pulp business only accounts for about 5% of revenue; the majority of revenue and EBITDA is generated from the profitable writing and printing paper business. BILT has consequently shut its rayon grade pulp plant in May 2014 and has been taking steps to reduce its fixed costs. With the continuing weak prices for rayon grade pulp, Fitch expects the division to continue to make EBITDA losses during FY15.

Strong Market Position: BILT has a strong market position in India's writing and printing paper markets, with dominant positions in the coated paper segment (market share of about 40%) and uncoated paper (hi-bright market share of about 25%). Further, its subsidiary SFI has over 50% 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.

Strategic Linkages with Subsidiaries: Bilt Paper's ratings reflect its strong operational and strategic linkages with the ultimate parent, BILT. Bilt Paper is in the same business as BILT and has a common treasury and management team. Bilt Paper holds a 99.99% stake in Ballarpur Graphic Paper Products Ltd. (BGPPL) and a 97.8% stake in SFI. Bilt Paper contributes to over 85% of BILT's overall revenue and about 80% to its EBITDA.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Failure by BILT to reduce its net leverage comfortably below 5.5x by FY16.
- EBITDA fixed charge cover sustained at below 2x (FY14:1.63x)
- Any weakening in liquidity

Positive: A rating upgrade is unlikely in the medium term. However, 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% (FY14: 17.7%)
- Substantial reduction in debt levels resulting in BILT's net leverage falling below 4x on a sustained basis