The NCD programme has been downgraded to double-B from A while the FD programme has been scaled down to FB from FA+. The ratings show the pressures on the financial performance of the company as reflected by an erosion in operating margins on account of the competitive business scenario in the paper board market. This coupled with a high level of interest costs and debt repayment obligations has led to significant pressures on the cash flow position of the company.

At present, the company is in the process of reschedulement of its debt-repayment obligations with financial institutions, indicating definite pressure on liquidity. The substantially increased risks on the business and financial position of thecompany are partly offset by the demonstrated support of a strong parent. ITC Ltd is expected to infuse Rs 150-cr funds into the company in the form of equity and preference capital.

Crisil, in its outlook on the paper industry, has said that the paper industry in India is affected by low consumption levels, capital intensive nature of operations, fragmented market and uneconomic scale of operations. "The industry also witnesses high degree of cyclicality more on account of bunching up of capacity additions. These constraints hamper the global competitiveness of the Indian paper industry and consequently Indian exports have been minimal."

The newsprint segment had been affected by a significant increase in imports since early 1996 resulting from a considerable drop in international prices as well as the removal of actual end-user condition. Crisil has said that despite a drop in duty on newsprint imports in the last budget, imports are expected to be low on account of relatively higher international pricelevels and uncertainty in rupee movement. In the short term, Crisil expects newsprint manufacturers to be better placed compared with manufacturers in other segments.

The paperboard segment has been facing a considerable demand-supply imbalance over the last six months after the commissioning of the 1.2 lakh tonnes per annum capacity by ITC Bhadrachalam Paper Boards. This coupled with the drop in domestic demand growth owing to poor industrial performance has resulted in a considerable drop in prices.

The printing and writing paper segment is also facing a significant oversupply situation over the last two years on account of large surplus domestic capacity and a drop in exports owing to the impact of the south-east Asian crisis.