| Huhtamaki India Limited | ||||
| Rating outlook revised to 'Positive'; Ratings Reaffirmed | ||||
| Rating Action | ||||
| ||||
| ||||
| 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 revised its outlook on the long-term bank facilities of Huhtamaki India Ltd (HIL) to ‘Positive’ from ‘Stable’ while reaffirming the 'CRISIL A+’ rating. The rating on the commercial paper programme has been reaffirmed at ‘CRISIL A1+' rating.
The revision in outlook follows a similar rating action on the ultimate parent, Huhtamaki Oyj, Finland (Huhtamaki), by S&P Global Ratings (S&P). On August 29, 2024, S&P revised its outlook on the rating of Huhtamaki to ‘Positive’ while reaffirming the rating at ‘BB+’ owing to improving credit metrics. Any rating action on Huhtamaki has a bearing on the rating of HIL.
Revenue saw a decline in 2023 owing to lower volumes. However, operating margin improved to 7.7% in 2023, as against over 5.5% in 2022. This improvement was driven by lower volatility in raw material prices and favourable customer and product mix, contributed by improvement in productivity. Operating income stood at Rs 1,250 crore and operating margin at 5.8% in the first six months of 2024. The operating margin was affected by sales mix as well as supply chain issues arising out of the Red Sea situation.
HIL concluded two land sales at Thane and Ambernath (in Maharashtra), enhancing liquidity. Utilisation of the proceeds will remain monitorable.
The ratings continue to reflect the company’s established position in the flexible packaging industry, healthy financial risk profile and operational and financial support from Huhtamaki. These strengths are partially offset by exposure to intense competition, regulatory risks and volatility in raw material prices. |
Analytical Approach CRISIL Ratings has applied the parent notch-up criteria to factor in the operational and financial support from Huhtamaki, which owns 67.73% stake in HIL. |
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 a diversified product range, which comprises flexibles, labels and cylinders. Strong and diverse customer profile will continue to support the business risk profile over the medium term. The company’s innovation and product development capabilities are enhanced by its parent providing support in product development.
Healthy financial risk profile The financial risk profile is supported by healthy networth of Rs 1,177 crore and debt of ~Rs 209 crore (external commercial borrowing from Huhtamaki including accrued intetrest) as on June 30, 2024, resulting in gearing below 0.2 time. Additionally, healthy cash accruals will be sufficient to meet capital expenditure (capex) and working capital requirement over the medium term.
Operational and financial support from the parent HIL receives support from Huhtamaki for product development, along with operational and financial support. The parent has provided financial support to the company in the form of external commercial borrowing amounting to Rs 200 crore at competitive rates and also provided corporate guarantees to the bankers of HIL.
Weaknesses Decline in the operating margin and subdued return indicators In 2023, the operating margin improved to 7.7% but remained below 9-11% seen in 2021. This improvement in margin was owing to lower volatility in raw material prices, favourable customer and product mix, and improvement in productivity. Operating margin dipped by over 500 basis points to 4.5% in 2021 owing to continued sharp increase in the prices of raw materials and lag in fully passing on these escalations to customers. The operating margin was subdued at 5.5% in 2022 owing to volatility in crude prices as well as competitive pressures. For the first half of 2024, operating margin moderated to ~5.8% owing to unfavorable sales mix, higher competition and issues owing to the geopolitical tensions in the Red Sea. The operating margin will continue to be a key monitorable.
Exposure to intense competition in the fragmented flexible packaging industry and regulatory risks The flexible packaging industry puts pressure on the profitability of players. Though the industry is highly consolidated in terms of catering to the fast-moving consumer goods (FMCG) and pharmaceutical customers, intense competition restricts pricing flexibility. Also, these players 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. Adverse regulatory changes, impacting the credit risk profile of HIL, will be monitorable.
Susceptibility to volatility in raw material prices Raw material cost accounts for 65-75% of the 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 terms with customers. Susceptibility to fluctuations in input cost is likely to persist.
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:
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. |
Liquidity: Strong HIL enjoys strong liquidity supported by 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. Expected net cash accrual for 2024 to 2026 will be sufficient to meet annual capex and working capital requirement. The utilisation of proceeds from sale of land parcels will be a key monitorable. |
Outlook Positive 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
|
About the Company Set up 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, held 67.73% equity stake in HIL as on June 30, 2024.
HIL has 10 manufacturing facilities in Maharashtra, Dadra and Nagar Haveli, Uttarakhand, Assam, Karnataka, Andhra Pradesh and Himachal Pradesh. |
Key Financial Indicators
Note – owing to exceptional income arising out of sale of land parcels |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
|
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||
|
Criteria Details
|