| Huhtamaki India Limited | ||||
| Long term rating downgraded to 'CRISIL A+/Stable; Short term rating reaffirmed | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has downgraded its rating on the long-term bank facilities of Huhtamaki India Limited (HIL) to ‘CRISIL A+/Stable’ from 'CRISIL AA-/Stable' and reaffirmed its rating on the commercial paper programme at ‘CRISIL A1+’
The revision in the long-term rating reflects continued weak operating performance of the company. For 9MCY22, while HIL reported double digit revenue growth driven by higher realisations and sustained orders from existing customers, operating margin was subdued at 4.7% significantly lower than historical levels of 9-11%. This is owing to sustained high raw material prices due to current geo-political tensions as well the competitive intensity in the industry. Weak operating margins have also led to subdued RoCEs for CY21 and expected for CY22 which is lower than RoCE of over 15% previously.
The reaffirmation of the short term rating takes into account the comfortable liquidity position owing to modest capex requirements, no term debt repayments before December 2025 and unutilized bank lines.
The ratings continue to reflect HIL's established position in the flexible packaging industry, healthy financial risk profile and operational and financial support from the parent, Huhtamaki Oyj (Huhtamaki; rated by S&P Global Ratings at ‘BB+’ with Stable outlook), Finland. These strengths are partially offset by exposure to intense competition in the fragmented flexible packaging industry, regulatory risks related to environment, and susceptibility of profitability to volatility in raw material prices. |
Analytical Approach CRISIL Ratings has amortised the goodwill on acquisition of Ajanta Packaging (Ajanta) of around Rs. 47 crores over a period of five years commencing June 2018.
CRISIL Ratings has also applied the parent notch-up criteria to factor in the operational and financial support from the parent Huhtamaki, which owns near 67.73% stake in HIL. |
Key Rating Drivers & Detailed Description Strengths:
HIL is a leading converter in the domestic flexible packaging industry. Its established market position is supported by diversified product range, which comprises flexibles, labels, and metallised and polythene films. CRISIL Ratings believes HIL’s strong and diverse customer profile will continue to support its strong business risk profile over the medium term. HIL’s innovation and product development capabilities are further enhanced by its parent, Huhtamaki providing support in product development.
The debt protection metrics moderated in 2021 with interest coverage ratio of 4.4 times and net cash accrual to total debt ratio of 0.20 time from 8.9 times and 0.70 time, respectively, in 2020, on account of moderation in operating margin and one-time expenses pertaining to relocation of Thane plant, Management Consulting and voluntary retirement expenses together amounting to around Rs 70 crore.
However, the financial risk profile is supported by healthy networth of Rs 671 crore and debt of Rs 499 crore (including Rs 200 crore external commercial borrowings from Huhatamki Oyj) as on June 30, 2022, resulting in gearing below 0.75 time. Additionally healthy cash accrual over the medium term will be sufficient to meet capital expenditure (capex) and incremental working capital requirements.
HIL receives support from its parent, Huhtamaki, on product development along with operational and financial support. The parent has provided financial support to the company in the form of external commercial borrowings amounting to Rs 200 crore at competitive rates and has also provided corporate guarantees to the bankers of HIL.
Weaknesses:
Operating margins dipped by over 500 bps to 4.5% in CY2021 due to continued increase in the prices of raw materials and lag in fully passing on these escalations to customers. The margins continued to remain subdued at 4.7% for 9MCY2022 after rising in Q1 owing to volatility in crude prices as well as competitive pressures. This has also resulted in RoCE declining to below 10% in CY2021. Operating margins will continue to be a key monitorable.
The fragmented nature of the flexible packaging industry puts pressure on profitability of the converters. Though the industry is highly consolidated in terms of catering to the fast moving consumer goods (FMCG) and pharmaceutical customers, there is intense competition among the players, which restricts pricing flexibility. Also, these companies have limited bargaining power against large FMCG and pharmaceutical players. The company is also exposed to regulatory risks due to increasing focus on environmental issues. Any adverse regulatory changes, impacting the credit profile of HIL, is a monitorable.
Raw material cost accounts for 65-75% of the company’s operating income. The prices of key raw materials, such as films, polyethylene granules, and biaxially-oriented polyethylene, are linked to crude oil prices, which are volatile and are factored into pricing under terms with customers. CRISIL Ratings believes the company’s operating margin will remain susceptible to volatility in input cost |
Liquidity: Strong HIL enjoys strong liquidity with unutilised fund based bank lines of ~Rs 200 crore as on October 31, 2022 and cash and cash equivalents of ~Rs. 14 crore as on September 30, 2022. Net cash accrual for 2023 to 2025 will be sufficient to meet annual capex and incremental working capital requirements. |
Outlook: Stable CRISIL Ratings believes HIL will maintain a healthy business risk profile over the medium term and will continue to benefit from the operational and financial support from its parent, Huhtamaki. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Founded in 1935, HIL is an established player in India’s flexible packaging industry. The company manufactures printed laminates of plastic, aluminum foil, and paper-based films. Its parent, Huhtamaki holds 67.73% equity stake in HIL as on December 31, 2022.
HIL has 14 manufacturing facilities in Maharashtra, Dadra & Nagar Haveli, Telangana, Uttarakhand, Sikkim, Assam, Karnataka, Daman, Andhra Pradesh and Himachal Pradesh |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Amount (Rs.Crore) | Name of Lender | Rating |
| Proposed Term Loan | 87 | Not Applicable | CRISIL A+/Stable |
| Working Capital Facility | 88 | Axis Bank Limited | CRISIL A+/Stable |
This Annexure has been updated on 13-Mar-2023 in line with the lender-wise facility details as on 23-Feb-2023 received from the rated entity.
Criteria Details
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