Rating Rationale
January 31, 2024 | Mumbai
Huhtamaki India Limited
Ratings reaffirmed at 'CRISIL A+/Stable/CRISIL A1+'
 
Rating Action
Total Bank Loan Facilities RatedRs.175 Crore
Long Term RatingCRISIL A+/Stable (Reaffirmed)
 
Rs.150 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
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 reaffirmed its rating on the long-term bank facilities and commercial paper programme of Huhtamaki India Limited (HIL) at ‘CRISIL A+/Stable/CRISIL A1+’.

 

Revenue degrowth in calendar year 2023 was owing to primarily lower volumes. Operating margin is expected to improve to around 7% against over 4.9% in calendar year 2022, but still lower than historical levels of 9-11%. This is driven by the lower volatility in raw material prices, favorable customer and product mix further contributed by improvement in productivity.

 

Operating income stood at Rs 1,946 crore and operating margin at about 7% for the first nine months of calendar year 2023. The operating margin recovered to ~7% during the four quarters through September 2023 from 4-5% over the last couple of years.

 

HIL has concluded two land sales at Thane and Ambernath (in Maharashtra), enhancing liquidity. Utilisation of the proceeds received is yet to be decided and will be closely monitored.

 

The reaffirmation of the short-term rating considers comfortable liquidity owing to modest capital expenditure (capex), no term debt repayment before December 2025 and unutilised bank lines.

 

The ratings continue to reflect established position of HIL in the flexible packaging industry, healthy financial risk profile and operational and operational and financial support from the parent, Huhtamaki Oyj, Finland (Huhtamaki; rated by S&P Global Ratings at ‘BB+’ with Stable outlook). These strengths are partially offset by exposure to intense competition, regulatory risks related to environment volatility in raw material prices.

Key Rating Drivers & Detailed Description

Strengths:

  • Established market position in the premium flexible packaging market: HIL is an established player in the domestic flexible packaging industry. Its established market position is supported by diversified product range, which comprises flexibles, labels and cylinders. 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.

 

  • Healthy financial risk profile: Debt protection metrics moderated in 2021 and 2022 owing to decline in the operating margin with interest coverage ratio of 4.4 times and and 4.94 times respectively. However, the financial risk profile is supported by healthy reported networth of Rs 792 crore and debt of Rs 372 crore (including Rs 200 crore external commercial borrowings from Huhatamki Oyj) as on June 30, 2023, resulting in gearing below 0.5 time. Additionally healthy cash accrual over the medium term will be sufficient to meet capital expenditure (capex) and incremental working capital requirements.

 

  • Operational and financial support from the parent: 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 also provided corporate guarantees to the bankers of HIL.

 

Weaknesses:

  • Decline in the margin profile and subdued return indicators: For the first nine months of calendar year 2023, operating margins have improved to ~7% but are still lower than historical levels of 9-11% seen before calendar year 2021. This improvement in margin is owing to lower volatility in raw material prices, favorable customer and product mix further contributed by improvement in productivity. Operating margins had dipped by over 500 bps to 4.5% in calendar year 2021 due to continued sharp increase in the prices of raw materials and lag in fully passing on these escalations to customers. The margins continued to remain subdued at 4.9% for calendar year 2022 owing to volatility in crude prices as well as competitive pressures. Operating margin will continue to be a key monitorable.

 

  • Exposure to intense competition in the fragmented flexible packaging industry and regulatory risks related to environment: The fragmented nature of the flexible packaging industry puts pressure on profitability of the players. 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.

 

  • Susceptibility to volatility in raw material prices: 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. Susceptibility to fluctuations in input cost is likely to persist.

Liquidity: Strong

HIL enjoys strong liquidity with unutilised fund based bank lines and healthy cash and liquid surplus led by consideration received from sale of land and building in Thane and Ambernath. Net cash accrual for 2024 to 2026 will be sufficient to meet annual capex and incremental working capital requirements. The utilisation of proceeds from sale of land parcels will be a key monitorable.

 

ESG profile

The environment, social and governance (ESG) profile of HIL supports its credit risk profile.

 

The packaging sector has moderate environmental and social impact, driven by its raw material sourcing strategies, waste-intensive processes and direct impact on the health and wellbeing of customers.

 

Key ESG highlights

  • HIL aims to be carbon neutral by 2030. The company is working on several projects to reduce energy use and the consequent greenhouse gases emissions, while increasing the proportion of renewable energy.
  • The company undertakes measures for water conservation and optimal use of water through measures like reuse, recycle, treatment and discharge. The company is working towards reaching zero-liquid discharge at all its sites, with four of its facilities already operating at that level. Ten of company’s sites have a water management plan in place.
  • The company is focused on sustainable sourcing. HIL has mentioned its commitment to sourcing materials sustainably and currently, 45% of the materials are obtained from sustainable sources. Additionally, the company undertakes ESG monitoring of suppliers.
  • HIL  governance structure is characterised by 38% of the board comprising independent directors, split in chairman and CEO position, and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Continued commitment of HIL to ESG principles will play a key role in enhancing stakeholder confidence given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

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:

  • Substantial improvement in business performance leading to improvement in operating profitability to above 7-8% on a sustainable basis
  • Improvement in the credit profile of the parent

 

Downward factors:

  • Sustained weakening in operating performance, for instance operating margin remaining below 3.0-3.5%.
  • Large, debt-funded capex/acquisition or any adverse regulatory change

About the Company

Founded in 1935, HIL is one of the market and technology innovation leaders in the domestic flexible packaging industry. The company manufactures flexibles, labels and cylinders. Its parent, Huhtamaki holds 67.73% equity stake in HIL as on September 30, 2023.

 

HIL has 10 manufacturing facilities in Maharashtra, Dadra & Nagar Haveli, Uttarakhand, Assam, Karnataka, Andhra Pradesh and Himachal Pradesh.

Key Financial Indicators

As on / for the period ended December 31

Units

2022

2021

Revenue

Rs Crore

2917

2625

Profit after tax

Rs Crore

35

-23

PAT margin

%

1.2

-0.9

Adjusted Debt/Adjusted Networth

Times

0.67

0.54

Interest coverage

Times

5.44

4.49

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs. Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Proposed Term Loan NA NA NA 87 NA CRISIL A+/Stable
NA Working Capital Facility NA NA NA 88 NA CRISIL A+/Stable
NA Commercial Paper NA NA 7-365 days 150 Simple CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 175.0 CRISIL A+/Stable   -- 01-02-23 CRISIL A+/Stable 24-03-22 CRISIL AA-/Stable 29-04-21 CRISIL AA-/Stable CRISIL AA-/Stable
      --   --   --   --   -- CRISIL AA-/Stable
Non-Fund Based Facilities ST   --   --   --   --   -- CRISIL A1+
Commercial Paper ST 150.0 CRISIL A1+   -- 01-02-23 CRISIL A1+ 24-03-22 CRISIL A1+ 29-04-21 CRISIL A1+ CRISIL A1+
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
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for rating short term debt

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