Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Jindal Poly Films Limited (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 outlook revision factors in the weak operating performance of the company due to adverse demand-supply scenario in the flexible packaging industry which forms a significant share of consolidated performance of JPFL. 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 declined by over 20% during fiscal 2023 to Rs 4,687 crores from Rs 5,878 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 9.7% in fiscal 2023 from 25.7% 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. The capital structure of JPFL remains comfortable with gearing less than 0.5 time as of March 31, 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 company is expected to report a revenue growth of 3-5% in fiscal 2024, albeit on a weakened base of fiscal 2023. 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 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 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.

 

Weakness:

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% 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%. While the industry scenario is expected to remain muted in the current fiscal, the operating margins are expected to improve to 12 – 14% in fiscal 2024. 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. 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 new non-woven line in fiscal 2023. The group is planning to further invest 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 3,600 crore as on March 31, 2023, on consolidated basis, this includes funds received from Brookfield SPV for successful completion of business transfer. 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 19.02% in fiscal 2022
• 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
• Weak cash accrual on account of supressed operating margin or weaker 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 58,000 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

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Term Loan	NA	NA	Nov-2024	9.36	NA	CRISIL AA-/Negative
NA	Term Loan	NA	NA	Jun-2028	150	NA	CRISIL AA-/Negative
NA	Term Loan	NA	NA	Jun-2032	300	NA	CRISIL AA-/Negative
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	163.64	NA	CRISIL AA-/Negative
NA	Working Capital Facility	NA	NA	NA	50	NA	CRISIL AA-/Negative
NA	Working Capital Facility	NA	NA	NA	80	NA	CRISIL A1+
NA	Working Capital Facility	NA	NA	NA	5	NA	CRISIL AA-/Negative
NA	Working Capital Facility	NA	NA	NA	50	NA	CRISIL AA-/Negative
NA	Working Capital Facility	NA	NA	NA	40	NA	CRISIL AA-/Negative