Detailed Rationale

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

 

The rating continues on ‘Negative’ outlook due to slower-than-expected ramp up of operations at JPFL as against CRISL Ratings’s expectations. JPFL’s revenue has grown by 36% y-o-y in H1 fiscal 2025 against de-growth of 38% during the corresponding period previous fiscal and 14% de-growth for the full fiscal 2024.The revenue recovery was driven by volume growth in both domestic and export market supported by improvement in the prices of biaxially-oriented polypropylene (BOPP) and biaxially oriented polyethylene terephthalate (BOPET), however sustenance of improvement in operating performance over the medium term remains a key monitorable. Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) Margins also showed a substantial sequential improvement in the current year to 8.0% in Q2 fiscal 2025 from 5.0% in Q1 fiscal 2025 against 2.8% in fiscal 2024; though it remains below the normalized margin of 12.0-13.0% during the pre-pandemic period.

 

The industry had witnessed excess supply as new capacities came on stream in both the BOPP and BOPET segments over fiscals 2021-2023, leading to sharp correction in prices from the second quarter of fiscal 2023. Steady domestic demand (accounting for ~75% of sectoral volumes) and negligible capacity additions over fiscals 2024 and year to date 2025 has partially offset the demand-supply imbalance driving improvement in operating performance. With negligible capacity additions being expected in the BOPET segment and gradual additions in the BOPP segment, this improvement is expected to continue over the medium term, though the extent and sustenance of this improvement remains a key monitorable.  

 

The financial risk profile is supported by a strong liquidity profile, with cash and equivalent of over Rs 4,100 crore as on September 30, 2024. The capital structure also remains strong, with gearing below 0.5 times as on September 30, 2024. Although, interest coverage ratio had moderated significantly to 1.3 times in fiscal 2024 (against 3.0 times in fiscal 2023) owing to muted operating performance, same is expected to improve in fiscal 2025 to ~3-4 times. The company is in the process of adding capacities in BOPP and capacitator segment in the coming 1 year, which will lead to healthy addition to sales volume upon commissioning. Additionally, JPFL has installed capacities in Biaxially oriented polyamide nylon films (BOPA) in September 2024, which being a value-added product, is also expected to improve EBITDA margins going forward.

 

The ratings continue to reflect market leadership of the company in the domestic flexible packaging and non-wovens fabric business and healthy financial risk profile. These strengths are partially offset by vulnerability to volatility in raw material prices and demand-supply dynamics, and weaking of operating efficiency.

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 the majority shareholding in JPFL Films Private Limited (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, , Capacitor Films Line with capacity of 5,000 TPA , BOPA films with Capacity of 5,000 TPA and in coated products, with capacity of 11,000 TPA. The company has non-woven business where the capacity is 58,000 TPA. JPFL undertakes regular capital expenditure (capex) to expand capacities and will likely maintain its leadership position over the medium term. The company is in the process of adding capacity in BOPP segment by 50,000 TPA by March 2025.

 

In the past few fiscals, JPFL has improved it product profile by adding value added products such as capacitor films, BOPA films, nylon films and self-adhesive labels, these products are expected to be less susceptible to price fluctuations as against other commodity-based products in the group’s product portfolio (like base films of BOPP and BOPET).

 

Strong financial risk profile

The financial risk profile is currently supported by cash and equivalents of Rs 4,100 crores, majorly deployed over mutual funds, debt and equity investments. The financial profile also draws strength from a strong networth which led to a low gearing of 0.36 times as of September 30, 2024, and expected to remain less than 1 in the medium term as well. Interest coverage was moderate in H1 FY25, impacted by one-time impact of revaluation of Compulsory Convertible Preference Shares (CCPS), at 3.5 times expected to remain at 3-4 times for full year fiscal 2025 as well.

 

Weakness:

Vulnerability to volatile raw material costs and demand-supply dynamics

The BOPP and BOPET business are cyclical in nature. Product realizations 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 realization. The last 5 fiscals saw a huge fluctuation in margins due to a surge in demand and supply. The operating margins, which remained around 12-13% historically, rose to 19.2% in fiscal 2020, 27.6% in fiscal 2021 and to 25.2 % in fiscal 2022 backed by healthy demand and hence realizations across product segments. Due to capacity addition in the industry between fiscal 2022 and fiscal 2023 leading to oversupply and correction in product prices, the margins declined to 9.5% in fiscal 2023 and further to 2.8% in fiscal 2024. Half year fiscal 2025 has shown a stabilization in demand and supply scenario which led to a sequential improvement in margins to 5% in Q1 FY25 and 8% in Q2 FY25, the full year margins are expected at 9%-10% in fiscal 2025. 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.

 

Weaking of operating efficiencies due to demand and supply imbalance

The imbalance in demand and supply scenario had impacted all packaging players across industry in the last few fiscals. Despite JPFL having the single largest facility in Nashik, operating margins have been impacted more as compared to few of the peers due to large share of commoditized products in the product offerings.

 

However, the company has been adding value added products to the product portfolio in the last 2 years. JPFL added capacitor films, self-adhesive labels in 2022, nylon films in 2023 and BOPA September 2024. Value added products help shield operating profitability during commodity price fluctuations. With addition of above products, the share of value added is expected to improve going forward.

Liquidity: Strong

Liquidity remains robust with cash and liquid investments of around Rs 4,100 crore as on September 30, 2024, on consolidated basis. The working capital limit of over Rs 1,600 crore was utilized ~35% on average over the 6 months through August 2024. Unutilized bank lines, adequate cash accrual of Rs 650-700 crores going forward and cash and equivalent should be sufficient to meet debt obligation as well as incremental working capital requirement in the near term.

Outlook: Negative

There has been a sequential improvement in performance of JPFL; however CRISIL Ratings believes, going forward, slower than expected recovery as compared to industry standards might impact the company’s overall business risk profile. The outlook may be revised to 'Stable' in case of sequential improvement and sustenance in profitability along with healthy revenue growth.

 

The ESG profile of JPFL supports its strong credit risk profile

 Flexible packaging manufacturers have a high impact on the 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 the 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.
• Company has taken various steps that maximized the conservation of energy like Installation of energy efficient fans, increased usages of solar panels, 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 remained at has improved with the percentage of women improving from 13.9% in fiscal 2023 to 16% in fiscal 2024
• 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

• Healthy increase in scale of operations with sequential improvement and sustenance of EBITDA margins at over 10%
• Maintenance of strong financial risk profile and a healthy liquidity profile

 

Downward Factors

• Slower than expected recovery in revenue with EBITDA margins falling below 7-8% impacting cash accruals.
• Weakening of business and/or financial risk profile (including liquidity) due to sizeable investments in new businesses
• Material deviation from understanding of management, operating and financial linkages with JPFL Films, which may warrant reviewing analytical approach.

About the Company

JPFL, a part of the BC Jindal group, was incorporated in 1974 to manufacture polyster 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 , 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 58,000 TPA of nonwoven products for hygiene and medical applications and has a reputed customer base.

 

During August 2022, the company de-merged 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