Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Negative/CRISIL A1+’ ratings on the bank loan facilities of Jindal Poly Films Limited (JPFL).

 

on July 25, 2023 CRISIL Ratings has revised its rating outlook on the long-term bank facilities of (JPFL) 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 continued negative outlook on the long-term rating factors in weak operating performance over the last five quarters. The revenue of JPFL declined ~38% on-year to ~Rs 1865 crore in H1 fiscal 2024 from ~Rs 3006 crore in H1 fiscal 2023. This is after over 20% decline in fiscal 2023. The performance was impacted by lower realisations due to the adverse demand-supply scenario in the industry as well as lower volumes due to slow exports orders. The flexible 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 operating margins of JPFL fell to 3.15% in H1 fiscal 2024 from 9.6% in fiscal 2023. The same stood at 25.7% in fiscal 2022. The margins have been on a declining trend over the last few quarters. The company has taken several measures to improve operating performance and the same is expected to be reflected in material improvement in operating profitability starting from Q4 of fiscal 2024. Consequently, the operating profitability is expected to be 8-9% in fiscal 2024 and improve in fiscal 2025 thereafter. The reaffirmation of the ratings factors in expected significant improvement from Q4 along with strong liquidity position of the company. Going forward, recovery trajectory in operating profitability remains a key monitorable.

 

The company’s financial risk profile continues to be supported by strong liquidity position with cash and cash equivalent of over Rs 3800 crore as of September 30, 2023. The capital structure of JPFL remains comfortable with gearing less than 0.4 time as of September 30, 2023. However, the debt coverage ratios have moderated with interest coverage declined to ~3 times in fiscal 2023 from more than 50 times in fiscal 2022 and debt to ebitda (adjusted for one-off items) ratio increased to 4.8 times in fiscal 2023 due to lower profitability.

 

The ratings continue to reflect market leadership of the company in the domestic flexible packaging and nonwovens fabric business and healthy operating efficiency. 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 its ratings, CRISIL Ratings has combined the business and financial risk profiles of JPFL and its subsidiaries on account of managerial, operational, and financial linkages among the entities. The company will continue to hold majority shareholding in JPFL Films and strong management linkages as well as shared name will ensure fungibility of funds between JPFL and JPFL Films.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Leadership position in the domestic market: JPFL Group is the largest flexible packaging player in India – the packaging 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. The company has non-woven business where the capacity is at 58,000 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. Also, the non-woven business remains profitable amid healthy demand for medical and hygiene products.

 

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 operating margins, which remained around 12-14% historically, rose to 19.2% in fiscal 2020, 27.6% in fiscal 2021 and to 25.2 % 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 margins (adjusted for one-off expenses) declined to 9.5% and to 3.2% in H1 fiscal 2024. Since the industry scenario is expected to remain muted in the current fiscal, the operating margins are expected to remain low at 8 – 9% in fiscal 2024 with recovery expected from Q4 fiscal 2024 onwards. Improvement in supply demand dynamics and prices of BOPET and BOPP will remain 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 a capex of over Rs. 1,500 crores over the last four fiscals, primarily for capacity addition. The group started two new BOPP lines (including 1 specialized BOPP) in fiscal 2022 at capex of Rs 550 crore. Furthermore, the group has added a new non-woven line in fiscal 2023. The group is planning to further invest over Rs 400 crore in the coming 3 fiscals 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

Liquidity remains robust with cash and liquid investments of around Rs 3,800 crore as on September 30, 2023, on consolidated basis. 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’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.

 

The ESG profile of JPFL supports its strong credit risk profile

The flexible packaging manufacturers have a high impact on environment primarily driven by high power consumption done during their manufacturing process. The sector also has a significant social impact because of its large workforce across its own operations and value chain partners, and due to its nature of operations affecting local community and health hazards involved. JPFL has been focusing on mitigating its environmental and social risks.

 

Key ESG highlights:

• ESG disclosures of the company are evolving; and it is in the process of further strengthening the disclosures going forward.
• During the year under review, Company has taken various steps that maximized the conservation of energy like Installation of energy efficient fans, increased usages of LED Lights, Installation of Air Compressors, Turbo Ventilators, Energy efficient pumps etc.
• Motion sensors and Plant Ambient temperature monitoring systems were installed, Air cooling and pumping system operation sequence was optimized. These initiatives led to reduction in energy consumption.
• The gender diversity has improved with the percentage of women improving from 10.17% in fiscal 2021 to 13.92% in fiscal 2023
• The governance structure is characterized by 33% independent director, effectiveness in board functioning and enhancing shareholder wealth, presence of investor grievance redressal mechanism and extensive financial disclosures.

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

Rating Sensitivity factors

Upward factors:

• Significant and sustained improvement in operating performance, leading to higher-than-expected cash accrual which maintaining a healthy product diversity
• Maintaining a healthy Gross debt to EBITDA ratio of below 1.5 times on a sustained level

 

Downward factors:

• Weakening of business and/or financial risk profile (including liquidity) due to investments in new businesses
• Deviation from understanding on management, operating and financial linkages with JPFL Films, which may warrant reviewing analytical approach
• Lower-than-expected cash accrual on account of inability to significantly improve the operating profitability and lower than expected demand
• Gross debt to EBITDA ratio remaining over 3 times on a sustained basis

About the Company

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.

Any other information: Not applicable