| JPFL Films Private Limited | ||||||
| Rating outlook revised to 'Negative'; Ratings 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 revised its rating outlook on the long-term bank facilities of JPFL Films Private Limited (JPFL Films) to ‘Negative’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL AA-’; the rating on the short-term facilities has been reaffirmed at ‘CRISIL A1+’.
The outlook revision factors in the weak operating performance of the company due to adverse demand-supply scenario in the flexible packaging industry. The industry is witnessing excess supply as new capacities came on stream in both Biaxially Oriented Polyethylene Terephthalate (BOPET) and Biaxially Oriented Polypropylene (BOPP) segments, leading to sharp correction in prices from Q2 FY23 onwards. The industry performance is expected to remain muted in the current fiscal as well. Furthermore, incidence of fire at its largest single location manufacturing plant at Nashik also impacted the revenues and profitability of the company in Q4 fiscal 2023.
The revenue of JPFL Films, the operating company for packaging division, declined by over 25% during fiscal 2023 to Rs 3,869 crores from Rs 5,271 crores during fiscal 2022 impacted by both lower realisations as well as volumes due to slow export orders. The operating margins of JPFL has seen a significant decline to 10% in fiscal 2023 from 26% fiscal 2022. The margins have been on a declining trend over the last few quarters and the pressure is expected to continue in the next fiscal as well. Consequently, the margins and net cash accruals of the company for fiscal 2024 are estimated to be weaker than the earlier expectations.
The company’s financial risk profile continues to be supported by strong liquidity position with cash and cash equivalent of over Rs 3,600 Crs as of March 31, 2023, at Jindal Poly Films Limited (JPFL, the parent, rated CRISIL AA-/Negative/ CRISIL A1+). JPFL Films liquidity position was supported by unsecured loan of Rs.300 crore given by JPFL in fiscal 2023. Going forward as well, JPFL Films will continue to benefit from financial flexibilities being subsidiary of JPFL.
Revenue are expected to be slightly lower in fiscal 2024 by 5-7% y-o-y due to muted realisations. The operating profitability is expected to improve to 12-14% in fiscal 2024 and consequently the debt coverage ratios are expected to improve in fiscal 2024 and remains a monitorable.
The rating assigned reflects the market leadership of JPFL Films, in the domestic flexible packaging industry, and its healthy operating efficiencies. These strengths are partially offset by vulnerability to volatility in raw material prices and demand-supply dynamics, and continued debt-funded capacity expansion. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has analyzed the standalone business risk and financial risk of JPFL Films.
The compulsory convertible preference shares to be subscribed by Brookfield SPV has been considered as equity considering mandatory conversion over the medium term.
The promoter loan in the company has been considered as no debt no equity due to bank linked interest rate of the loan and repayment only after 6 years. |
Key Rating Drivers & Detailed Description Strengths: Leading position in the domestic market JPFL Group is the largest flexible packaging player in India – the business which has been placed under JPFL Films. JPFL Films has BOPET and BOPP capacities of 173,000 tonne per annum (TPA) and 294,000 TPA, respectively. It also has a strong position in the high-value-added metallised films market, with consolidated capacity of 100,000 TPA, and in coated products, with capacity of 11,000 TPA. JPFL undertakes regular capital expenditure (capex) to expand capacities and will likely maintain its leadership position over the medium term.
Healthy efficiencies due to integrated operations Operating efficiency in the domestic flexible packaging business is driven by a single-location manufacturing capacity in Nashik, Maharashtra, which results in economies of scale and low per-unit cost of production. Moreover, as the market leader, the group enjoys flexibility in raw material procurement because of its ability to choose between foreign and local suppliers, depending on the price quoted. The BOPET operations are backward integrated into polymer chips, which mitigates inherent volatility in raw material cost.
Weaknesses: Vulnerability to volatile raw material costs and demand-supply dynamics The BOPP and BOPET business are cyclical in nature. Product realisations have fluctuated in the past depending on the demand-supply gap. Also, the players tend to add large capacities when prices improve, leading to a fall in product realisations. The EBIT margins, which remained around 10% historically, rose to 16% in fiscal 2020, 23% in fiscal 2021 and to 25 % in fiscal 2022 backed by healthy realisations across product segments. Due to capacity addition in the industry in fiscal 2023 leading to oversupply and correction in product prices, the EBIT (adjusted for one-off expenses) margins declined to 6.5%. While the industry scenario is expected to remain muted in the current fiscal, EBIT margins are expected to improve to 10 – 12% in fiscal 2024 (EBITDA margins of 12-14%). Improvement in supply demand dynamics and prices of BOPET and BOPP will remain a monitorable going forward.
Profitability is vulnerable to volatility in raw material prices as raw material cost accounts for 55-60% of sales.
Continued debt-funded capacity expansion The group regularly undertakes capacity expansion, which is largely debt funded. The company has incurred capex of over Rs. ~850 crores over the last four fiscals, primarily for capacity addition. The group started a new capacitor and a new BOPP line in fiscal 2022 at capex of Rs 550 crore. The group is planning to further invest Rs 400 crore in the coming 3 fiscals to add on value added and new product segment i.e BOPA (Biaxially Oriented PolyAmide), Metallizers, Specialized BOPP Line, Sheeter, Coater etc. The ability of the company to earn enough accruals to repay debt remains monitorable. |
Liquidity: Strong The liquidity at JPFL Films continues to be supported by strong liquidity of Rs 3500 Crs at JPFL consolidated level. Unutilised bank lines and adequate cash accrual and cash and equivalent should be sufficient to meet debt obligation as well as incremental working capital requirement in the near term. |
Outlook: Negative CRISIL Ratings believes JPFL Films’s operating performance may remain impacted over the near to medium term as adverse demand-supply situation impacted operating profitability and coverage ratios. The outlook may be revised to 'Stable' in case of significant improvement in profitability against expectations and healthy revenue growth. |
Rating Sensitivity Factors Upward Factors
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About the Company JPFL Films Private Limited (JPFL Films or the company) (formerly known as J. and D. Specialty Films Pvt Ltd) was incorporated in October 2018 is a wholly owned subsidiary of Jindal Poly Films Ltd and engaged in the business of manufacturing and trading of flexible packaging materials, however JPFL Films didn’t have any material operations before fiscal 2022. |
About the Group JPFL, a part of the BC Jindal group, was incorporated in 1974 to manufacture partially oriented yarn (POY). In 1996, the company diversified into packaging films by manufacturing BOPET. It stopped manufacturing POY in fiscal 2006 to focus on the packaging films division. It now manufactures polyester chips and the complete range of packaging films comprising BOPET and BOPP and non-Woven fabrics. It has capacities of 173,000 TPA and 294,000 TPA for BOPET and BOPP, respectively. In February 2014, it acquired 60.45% stake in GNL and increased the stake to 100% in fiscal 2017. GNL has a unit at Nashik with capacity of 60,000 TPA of nonwoven products for hygiene and medical applications and has a reputed customer base.
During August 2022, the company demerged its packaging division to its subsidiary JPFL Films. This subsidiary is to be jointly held by JPFL and Brookfield SPV. |
Key Financial Indicators
#Transactions from August 2, 2022, after business transfer |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Fully interchangeability allowed between FB and NFB WC limits at banks discretion. |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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