9 October 2024
Rating Agency “Expert RA” has affirmed the credit rating of the non-financial company Volga JSC at ruA+ level, the rating outlook is stable.
The credit rating of Volga JSC is contingent on sensitivity analysis of risk profile of the branch where the company operates, average market and competitive positions, low debt burden, high liquidity and profitability, as well as low corporate risks.
Volga JSC, Balakhna Paper Mill (hereinafter referred to as the Company, Mill) is one of the largest manufacturers of paper products in Russia. The Company focuses on manufacture of packaging papers, paper made from 100% thermomechanical pulp for printing newspapers, books, manuals and printed products.
Credit rating of the Company rating was assigned based on Volga JSC consolidated statements according to IFRS.
Rating justification
sensitivity analysis of risk profile of the branch where the company operates. The branch is subject to significant price fluctuations for each type of paper depending on the current demand. At the same time, the demand level is sensitive to changes in macroeconomic environment. Global demand for newsprint tends to decrease due to increasing digitalization of all spheres of life, and active development of e-commerce sector supports the growth of demand for packaging papers. In addition to volatility of prices for each type of paper product, the business profile assessment is constrained by high dependence of marginality level within the branch on prices for raw materials used for manufacture, i.e. wood and waste paper. The Company has a broad sales territory; in particular, according to 2023 results, 73% of revenue was generated through exports. In addition to the Russian market, the Mill supplies paper products to the Middle East, Africa, Asia, Türkiye and the CIS, and the largest consumer of products is China. When exporting, margin levels may fluctuate depending on exchange rates and delivery cost. Strong marketing positions of the Company in both markets and process capability to switch to manufacture of a certain paper type depending on marginality make it possible to significantly reduce the risks of changes in the global paper market, which is positively assessed by the agency. Barriers for new players to entry into the branch are assessed as moderately high due to significant capital expenditures required to build facilities.
Average market and competitive positions. The Company is on the list of strategic companies in the Russian timber processing complex and ranks among Top 3 manufacturers of newsprint in the Russian market; it has a moderately diversified product portfolio. Based on 2023 results (hereinafter referred to as the Reporting Period), the share of standard newsprint in total revenue remained at the level of the previous year and amounted to 61%, the share of packaging paper decreased to 18% (24% a year earlier). Despite Company's plans to increase the share of packaging paper, continued unfavorable pricing environment in the Chinese market in 2023 contributed to reorientation of production operations to higher-margin newsprint. According to H1 2024 results, the standard newsprint sales volume is inclined to increase, the share of revenue from the sale of this product type amounted to 63%. Counting bulk printing paper, the share of revenue from paper types other than packaging paper, was 81%. The only operating unit of the Company is the Mill. At the same time, it is insured against all property risks, which reduces the concentration risk. Within the framework of the current investment project, the Company continues to upgrade its production facilities, whereby the average level of capital consumption has decreased since the last analysis and is assessed by the agency as medium. The Company is fully self-sufficient in electricity. Since the last rating update, the level of self-sufficiency in timber raw materials, taking into account counter deliveries, has increased from 30% to 45%, but is still assessed as moderately low according to the agency’s benchmarks. The Company targets on further increase of its self-sufficiency level in timber raw materials by taking measures to enter into new contracts for implementation of the priority forest exploitation investment project.
High profitability. In 2023, EBITDA margin was 25%, which corresponds to a high level of marginality for the branch. However, the agency expects a decrease in the level of profitability over a two-year horizon from the reporting date, including in connection with the indexation of tariffs of natural monopolies, which will put pressure on the forecast EBITDA margin.
The agency notes that the Company’s foreign currency debt is fully covered by export earnings. In H1 2023, available limits on credit lines in euros were converted into yuan, which currently dominates the structure of Company export revenue. Thus, taking into account the existing natural hedging, currency risks are assessed as moderately low.
Low debt burden. As of 31.12.2023 (hereinafter referred to as the “Reporting Date”), the Company net debt to 2023 EBITDA ratio, taking into account finance lease obligations, was 0.6. Low level of debt burden as of the Reporting Date is maintained due, among other things, to carryover of a significant amount of capital expenditure on the launch of new production facilities for manufacture of corrugated paper and testliner. Rescheduling of large-scale investment program implementation has led to a shift in attraction of funds with a concentration on 2024, which, according to agency forecasts, will entail a temporary increase in the net debt to EBITDA ratio above 3.0 over a 12-month horizon from the Reporting Date. At the same time, by the end of 2025, the indicator is expected to stabilize at a level of about 1.5, which is assessed positively according to the agency benchmarks.
The level of the Company interest burden is assessed positively by the agency: the coverage of interest payments by EBITDA for all analyzed periods exceeds the agency's benchmark for the maximum estimate of 5.6. Such positive metric values are due to the predominance in the credit portfolio of loans received at concessional interest rates within the framework the export loan interest rate subsidy program, availability of preferential borrowing from the FER, as well as availability of loans at a low rate in foreign currency.
High liquidity. The agency assesses the level of projected liquidity as moderately positive: the cash flow from operations and cash balance, with account for undrawn limits on credit lines as of the Reporting Date, cover all key use areas over the year. Parameters of quality liquidity are also assessed as strong due to a comfortable repayment schedule for the long-term loan portfolio and high diversification of funding sources.
Low level of corporate risks. The agency notes the transparency of the company ownership structure and representativity of its financial statements, due to zero transactions with related parties. The Company has a Board of Directors consisting of four members, which includes three independent directors. The agency notes high level of strategic planning and risk management. At the same time, assessment of corporate governance quality is somewhat constrained by absence of a collective executive body. Within the framework of the transparency level assessment, absence of publication of semi-annual reports according to IFRS is noted.
Rating forecast
The rating has a stable outlook, which implies a high probability of maintaining the credit rating at the current level over a 12-month horizon.
