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NIMISHA AGARWAL
2013173
CREDIT
RISK
ANALYSIS-
A CASE
STUDY
APPROACH
INTRODUCTION
 Established in 1985
 Indian bank and financial service firm
BASEL II
THREE PILLARS
MINIMUM
CAPITAL
REQUIREMENTS
•Credit risk
•Operational risk
•Market risk
SUPERVISORY
REVIEW
•Principles of
internal control
•Corporate
governance
practices
•Risk management
framework
MARKET
DISCIPLINE
•Capital adequacy
•Risk assessment
methods
•Promote stability
in the financial
system
CREDIT APPRAISAL
 While appraising a borrower, the following questions
need to be answered:
Is the borrower credit worthy?
What should be the overall exposure to the borrower?
Whether the borrower should be extended short term
facilities or long term facilities based on his requirement?
What security or other credit enhancement measures
should be stipulated to safeguard our facilities in case of
default?
What should be the key monitor able parameters to
identify any deterioration in credit profile of the
borrower subsequent to our disbursement?
LEGAL DOCUMENTS
 Application/ request letter for the facility
 Accepted sanction letter
 Constitutional documents
 Master facility agreement and the relevant product
schedules
 Demand Promissory Note (DPN)
 Letter of continuing security
 Facility/ product specific documents
CREDIT RISK
 The inability or
unwillingness of a borrower
to repay his liability on due
date
 Lack of churn in the
working capital account for
a period of more than 90
days or shortfall in drawing
power or occurrence of
events of default as per
contractual terms.
CREDIT RISK ASSESSMENT
INDUSTRY
RISK
FINANCIAL
RISK
BUSINESS
RISK
MANAGEMENT
RISK
CASE STUDY
 Name of the Company: Prestige Industries Limited
(PILT)
 Group: Amba Group
 Location: New Delhi
 Year of incorporation: 1945
 Constitution: Public Limited Company
 Industry & Activity: Paper & wood (Manufacturer of
paper & paper products)
 Banking Arrangement: Multiple Banking
Arrangement
 Proposal for: Renewal of credit facilities
ABOUT THE COMPANY
 Operates in five segments:
 Coated wood free paper
 Uncoated hi-bright paper(maplitho)
 Business stationary
 Copier paper and specially fine paper
 Rayon grade pulp
 3 manufacturing facilities at Haryana, Orissa and
Maharashtra
 Acquisition of SFI, Malaysia in 2007 i.e. First
overseas acquisition by an Indian paper company
BUSINESS MODEL
RISKS
 Industry outlook is weak
 High input costs
 Declining profitability of
the rayon grade pulp
segment
 High group leverage and
impacted profitability of
the major group
companies
STRENGTHS
 Brand Retail: Market
leader in Indian writing
and printing paper
industry
 Wide distribution
network
 Geographic
diversification
FINANCIAL STATEMENT
CREDIT RISK
ASSESSEMENT
INDUSTRY RISK
 In 2012, Raw material price increases partly driven
by rupee depreciation
 Pricing pressures due to low demand and excess
capacity
 As per industry estimates, the domestic demand
growth slowed down to about 4% in 2012 from 6% in
2011
 Increase in power costs due to erratic domestic coal
supplies
 Significant borrowings for capex to keep credit
metrics stretched
BUSINESS RISK
 Market leader in writing and printing paper
 Restructuring in manufacturing assets
 Merging CPPs of Amba group in PILT and PGPPL
 Three basic risk:
 a) Digitisation but penetration rate in primary
markets of PILT is low
 b) Production based on wood and risk of
unavailability of right raw material due to depletion
of forest resources
 c) Expanded capacity (30-40%) builds pressure to
penetrate markets with products in order to absorb
over supply
FINANCIAL RISK
 Turnover stagnant over the last 2-3 years.
 PBDIT margin fell due to high power cost
 Profitability expected to improve due to incoming of
more profitable AP unit
 TNW fell due to dividend payment from reserves
 Required to pay Rs. 115 crores to PGPPL and Rs.17
crores to APIL.
 Group debt of Rs. 16753 crores as per info available
 High capital expenditure lead to negative impact on
free operating cash flows
 Low repayment capacity depicted by Total debt/
Cash Profit of 7.71 as on June 30, 2012. DSCR below
1.
MANAGEMENT RISK
 JP Morgan exited its step down subsidiary PIGPH at
Rs.450 crores, funded by additional loan.
 Selling bromine business of Sunlight Chemtech
Industries ltd
 Promoter’s vintage helps in raising debt to fund its
expansions
 The share prices of both the major group’s
companies are trading at and around their 52 week
lows thereby leading to higher pledge of promoter’s
holding for loans against shares.
FACILITIES ASSESSMENT
Assessment of fund based working capital
limits
S.No. Particulars Amt(Rs cr)
A Turnoverachieved in FY12 1094.35
B Turnoverestimated forFY13 1023
C Increase in turnoverestimated overthe previous year(%) -6.52%
D Working capitalrequirement estimated @30% ofestimated turnoverforthe current year 306.9
E MaximumPossible BankFunding-4/5th ofworking capitalas assessed underD 245.52
F Working capitallimits enjoyed by the borrowerfromotherbanks 740
G Buyer's credit limits availed fromotherbanks NA
H MaximumPossible Funding fromKotakBank(E-F-G) -
I Limits proposed 125
J Buyer's credit limits proposed ifany at the end ofLCtenor 15
Comment : Based on the availability of sufficient drawing power
Assessment of Purchase bill discounting
S.No. Particulars Amt.(Rs.Cr)
1 Domestic purchase estimated forFY13 249
2 Totalpurchase undercredit (80%) 119.2
3 Maximumtenor 180days
4 No.ofrotations (360/(3)) 2.03
5 Eligible limit (2/5) 98.12
6 Proposed limits 100
Comment : For purchase of wood and bamboo from the domestic market.
Though the average payment period is around 101 days, a higher tenor is proposed
to cater to occasional requirements.
Assessment of sales bill discounting
S.No. Particulars Amt.(Rs.Cr)
A Totaldomestic sales estimated forFY13 1023
B Average domestic debtors realization period 90days
C Rotations in a year(365/90) 4.05
D Limit required 252.59
E Limit recommended 100
Assessment of Non Fund based facilities
 Letter of Credit  Forex
S. No. Particulars Amt(Rs. Cr)
1 Imports estimated for FY13 53.06
2 Maximumusance period 180 days
3 Average Lead Time 30 days
4 No. of rotations (365/(2+3)) 1.74
5 Eligible limit (1/4) 30.49
6 Proposed limits (renewal) 15
S. No. Particulars Amt(Rs. Cr)
1 Imports projected for FY13 50
2 Forexloan as on 30.06.12 111.21
3 Total 161.21
4 LEV 15%
5 Eligible limit (3*4) 24.18
6 Proposed limits- renewal 5
ACCOUNT MONITORING
 PBDIT/ Net sales shall be at a minimum of 16%
verifiable at quarterly intervals
 Reduction of shareholding of promoter group below
30%. The same should be verified annual intervals
 TOL/TNW not to exceed 2 times. The ratio be
checked at annual intervals
SECURITY/ COMFORTS
 Post dated cheque for disbursed WCDL/ STL and
PBD facility (beyond Rs.25 cr). UDC for OD and
disputed BG.
RECOMMENDATIONS
 Integration of pulp within house mills coming up in
MFI and Maharashtra unit, the consolidated
profitability is expected to improve in the coming
years.
 Renewal of the existing facilities in view of the
promoter’s vintage
 Satisfactory account conduct with the bank (group
relationship since 2004)
 FB facilities are disbursed based on the company’s
DP availability
 Submission of quarterly stock statement
SIP presentation

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SIP presentation

  • 2. INTRODUCTION  Established in 1985  Indian bank and financial service firm
  • 3. BASEL II THREE PILLARS MINIMUM CAPITAL REQUIREMENTS •Credit risk •Operational risk •Market risk SUPERVISORY REVIEW •Principles of internal control •Corporate governance practices •Risk management framework MARKET DISCIPLINE •Capital adequacy •Risk assessment methods •Promote stability in the financial system
  • 4. CREDIT APPRAISAL  While appraising a borrower, the following questions need to be answered: Is the borrower credit worthy? What should be the overall exposure to the borrower? Whether the borrower should be extended short term facilities or long term facilities based on his requirement? What security or other credit enhancement measures should be stipulated to safeguard our facilities in case of default? What should be the key monitor able parameters to identify any deterioration in credit profile of the borrower subsequent to our disbursement?
  • 5. LEGAL DOCUMENTS  Application/ request letter for the facility  Accepted sanction letter  Constitutional documents  Master facility agreement and the relevant product schedules  Demand Promissory Note (DPN)  Letter of continuing security  Facility/ product specific documents
  • 6. CREDIT RISK  The inability or unwillingness of a borrower to repay his liability on due date  Lack of churn in the working capital account for a period of more than 90 days or shortfall in drawing power or occurrence of events of default as per contractual terms.
  • 8. CASE STUDY  Name of the Company: Prestige Industries Limited (PILT)  Group: Amba Group  Location: New Delhi  Year of incorporation: 1945  Constitution: Public Limited Company  Industry & Activity: Paper & wood (Manufacturer of paper & paper products)  Banking Arrangement: Multiple Banking Arrangement  Proposal for: Renewal of credit facilities
  • 9. ABOUT THE COMPANY  Operates in five segments:  Coated wood free paper  Uncoated hi-bright paper(maplitho)  Business stationary  Copier paper and specially fine paper  Rayon grade pulp  3 manufacturing facilities at Haryana, Orissa and Maharashtra  Acquisition of SFI, Malaysia in 2007 i.e. First overseas acquisition by an Indian paper company
  • 10. BUSINESS MODEL RISKS  Industry outlook is weak  High input costs  Declining profitability of the rayon grade pulp segment  High group leverage and impacted profitability of the major group companies STRENGTHS  Brand Retail: Market leader in Indian writing and printing paper industry  Wide distribution network  Geographic diversification
  • 13. INDUSTRY RISK  In 2012, Raw material price increases partly driven by rupee depreciation  Pricing pressures due to low demand and excess capacity  As per industry estimates, the domestic demand growth slowed down to about 4% in 2012 from 6% in 2011  Increase in power costs due to erratic domestic coal supplies  Significant borrowings for capex to keep credit metrics stretched
  • 14. BUSINESS RISK  Market leader in writing and printing paper  Restructuring in manufacturing assets  Merging CPPs of Amba group in PILT and PGPPL  Three basic risk:  a) Digitisation but penetration rate in primary markets of PILT is low  b) Production based on wood and risk of unavailability of right raw material due to depletion of forest resources  c) Expanded capacity (30-40%) builds pressure to penetrate markets with products in order to absorb over supply
  • 15. FINANCIAL RISK  Turnover stagnant over the last 2-3 years.  PBDIT margin fell due to high power cost  Profitability expected to improve due to incoming of more profitable AP unit  TNW fell due to dividend payment from reserves  Required to pay Rs. 115 crores to PGPPL and Rs.17 crores to APIL.  Group debt of Rs. 16753 crores as per info available  High capital expenditure lead to negative impact on free operating cash flows  Low repayment capacity depicted by Total debt/ Cash Profit of 7.71 as on June 30, 2012. DSCR below 1.
  • 16. MANAGEMENT RISK  JP Morgan exited its step down subsidiary PIGPH at Rs.450 crores, funded by additional loan.  Selling bromine business of Sunlight Chemtech Industries ltd  Promoter’s vintage helps in raising debt to fund its expansions  The share prices of both the major group’s companies are trading at and around their 52 week lows thereby leading to higher pledge of promoter’s holding for loans against shares.
  • 18. Assessment of fund based working capital limits S.No. Particulars Amt(Rs cr) A Turnoverachieved in FY12 1094.35 B Turnoverestimated forFY13 1023 C Increase in turnoverestimated overthe previous year(%) -6.52% D Working capitalrequirement estimated @30% ofestimated turnoverforthe current year 306.9 E MaximumPossible BankFunding-4/5th ofworking capitalas assessed underD 245.52 F Working capitallimits enjoyed by the borrowerfromotherbanks 740 G Buyer's credit limits availed fromotherbanks NA H MaximumPossible Funding fromKotakBank(E-F-G) - I Limits proposed 125 J Buyer's credit limits proposed ifany at the end ofLCtenor 15 Comment : Based on the availability of sufficient drawing power
  • 19. Assessment of Purchase bill discounting S.No. Particulars Amt.(Rs.Cr) 1 Domestic purchase estimated forFY13 249 2 Totalpurchase undercredit (80%) 119.2 3 Maximumtenor 180days 4 No.ofrotations (360/(3)) 2.03 5 Eligible limit (2/5) 98.12 6 Proposed limits 100 Comment : For purchase of wood and bamboo from the domestic market. Though the average payment period is around 101 days, a higher tenor is proposed to cater to occasional requirements.
  • 20. Assessment of sales bill discounting S.No. Particulars Amt.(Rs.Cr) A Totaldomestic sales estimated forFY13 1023 B Average domestic debtors realization period 90days C Rotations in a year(365/90) 4.05 D Limit required 252.59 E Limit recommended 100
  • 21. Assessment of Non Fund based facilities  Letter of Credit  Forex S. No. Particulars Amt(Rs. Cr) 1 Imports estimated for FY13 53.06 2 Maximumusance period 180 days 3 Average Lead Time 30 days 4 No. of rotations (365/(2+3)) 1.74 5 Eligible limit (1/4) 30.49 6 Proposed limits (renewal) 15 S. No. Particulars Amt(Rs. Cr) 1 Imports projected for FY13 50 2 Forexloan as on 30.06.12 111.21 3 Total 161.21 4 LEV 15% 5 Eligible limit (3*4) 24.18 6 Proposed limits- renewal 5
  • 22. ACCOUNT MONITORING  PBDIT/ Net sales shall be at a minimum of 16% verifiable at quarterly intervals  Reduction of shareholding of promoter group below 30%. The same should be verified annual intervals  TOL/TNW not to exceed 2 times. The ratio be checked at annual intervals
  • 23. SECURITY/ COMFORTS  Post dated cheque for disbursed WCDL/ STL and PBD facility (beyond Rs.25 cr). UDC for OD and disputed BG.
  • 24. RECOMMENDATIONS  Integration of pulp within house mills coming up in MFI and Maharashtra unit, the consolidated profitability is expected to improve in the coming years.  Renewal of the existing facilities in view of the promoter’s vintage  Satisfactory account conduct with the bank (group relationship since 2004)  FB facilities are disbursed based on the company’s DP availability  Submission of quarterly stock statement