Rationale

 The revision in the rating outlook to stable considers the improvement in operational and financial profile of Tamil Nadu Newsprint & Papers Limited (TNPL) in FY2022 and Q1 FY2023 with expectations of sustained improvement in its performance, going forward. This was aided by a healthy recovery in demand for the writing and printing paper (PWP) and board segments, and sharp rise in realisations. The demand growth was led by the opening up of schools, colleges and other related endconsumer segments after Covid-led disruptions. With favourable demand, higher realisations, cost saving measures, and better working capital management, the company's earnings and cashflows improved in FY2022 and Q1 FY2023, which resulted in sharp reduction in the debt levels of the company. While the operating margins were restricted at 9.3% in FY2022 owing to high input prices, the company took price hikes in Q1 FY2023 resulting in improved margins to 14.9%. The operating margins in FY2023 are expected to be supported by improved demand and change in product mix with higher share of high margin products. The ratings remain supported by TNPL's long operational history, strong management profile, dominant market position in the domestic PWP segment, diversified sales and distribution network, likely improvement in efficiency parameters given its integrated operations with adequate in-house capacity to manufacture pulp from diversified sources and the availability of captive power plants, thus providing cost advantages. The strengths are, however, offset by TNPL's moderate capital structure because of the large debt-funded capex incurred in the past. However, the gearing has improved to 1.4 times as on March 31, 2022 over 1.7 times as on March 31, 2021 owing to sizeable reduction in debt levels in FY2022. Moreover, the coverage indicators remain moderate due to contracted margins in FY2022; however, interest coverage improved to 2.4 times in FY2022 over 1.4 times in FY2021 owing to lower interest expense. Given the company's continued debt-funded capex, the capital structure and coverage indicators shall remain moderate in the near to medium term. The first phase of the capex (towards pulping unit at the existing board plant) is expected to be commercialised in Q2 FY2023, which should provide cost savings, as it will enable in-house pulp production, against imports. ICRA notes that the profitability remains vulnerable to cyclicality in the paper business, availability of water and raw materials, and volatility in bagasse, pulp, chemicals, international coal prices and exchange rates. The elevated prices of coal and other raw materials will restrict the expansion in profit margins in FY2023 to an extent; however, the sustenance of high realisation is expected to support the margins. The ratings also consider TNPL's large repayment obligation and debt-funded capex during FY2024–FY2025, which exposes it to refinancing and project execution risks. The quantum of debt funding remains a sensitivity. However, the absence of any major capex plans in FY2023, moderate buffer in working capital limits and healthy flexibility with lenders are expected to support the company's liquidity profile. The Stable outlook on the rating reflects ICRA's opinion that TNPL will continue to benefit from its established position, competitive advantages in the PWP segment and healthy financial flexibility with the lenders. The Stable outlook also factors in the anticipated improvement in demand for PWP and the expected improvement in profitability after completion of the planned pulping unit.