Detailed Rationale

CRISIL Ratings has placed its ‘CRISIL AA-/CRISIL A1+’ ratings on the bank facilities of Jindal Poly Films Limited (JPFL) on ‘Rating Watch with Developing Implications’.

 

The rating action follows an announcement by the company that its board of director has approved transfer of it’s packaging film business. As per this, the packaging film business will be hived off to its wholly owned subsidiary (JPFL Films Private Limited or JPFL Films, formerly known as J. and D. Speciality Films Pvt Ltd). Simultaneously, JPFL has entered into agreement with Project Holdings Fourteen (DIFC) Limited, a special purpose vehicle of Special Investment Fund of Brookfield ("Brookfield SPV") wherein Brookfield SPV will invest Rs 2000 crore for 25% minority stake (on fully diluted basis and subject to adjustment linked to financial performance of JPFL, in any case Brookfield SPV would remain a minority investor) in JPFL Films. Post culmination of this entire transaction, JPFL Films will act as a operating company (packaging business contribute around 85% of existing revenue), while JPFL will act as a holding (75% stake in JPFL Films) cum operating company (non-woven fabric contribute around 15% of existing revenue) apart from having additional liquidity of Rs 2000 crore as consideration received for dilution of stake in JPFL Films. CRISIL Ratings is in discussion with the management to seek further details of the transaction, including division of assets and liabilities, financial and managerial linkages between the holding and the subsidiary company and timelines for completion of the transaction. CRISIL Ratings will remove the ratings from watch and take a final rating action once clarity is received on these aspects and there is adequate progress on receipt of requisite approvals.

 

The ratings continue to reflect the market leadership of the company in the domestic flexible packaging and nonwovens fabric business and its 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

CRISIL Ratings had considered the standalone business and financial risk profiles of JPFL. From December 2017, JPF Netherlands BV, Netherlands, ceased to be a subsidiary of JPFL as issuance of new shares to a third-party investor led to dilution in the shareholding of JPFL to 49.5% from 51% and the entire investment of JPFL was demerged and transferred to Universus Photo Imaging Ltd (formerly Jindal Photo Imaging Ltd). The management had indicated that overseas operations are self-sustainable and there are limited business linkages between domestic and overseas operations and cash flows are not fungible. The debt in overseas operations is ring-fenced from JPFL. The business and financial risk profiles of Jindal Photo Films Division have not been combined as it was demerged into Universus Photo Imaging Ltd in fiscal 2020.

 

With the proposed business realignment, CRISIL Ratings will reassess its analytical approach to take the final rating action.

Key Rating Drivers & Detailed Description

Strengths:

Leadership position in the domestic market

JPFL is the largest player in India’s bi-axially-oriented polyethylene terephthalate (BOPET) and BOPP markets, with capacities of 177,500 tonne per annum (TPA) and 302,000 TPA, respectively. It also has a strong position in the high-value-added metallised films market with consolidated capacity of 71,640 TPA and in coated products with capacity of 19,678 TPA. The capacity under subsidiary Global Non-Woven Limited (GNL) was doubled to 36,000 TPA in March 2021 along with commissioning of a non-woven line. JPFL undertakes regular capex to expand capacities and will likely maintain its leadership position over the medium term.

 

Healthy operating efficiency

Operating efficiency in the domestic 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 company 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 business segment under GNL remains profitable amid growing demand for hygiene products.

 

JPFL maintained steady operating performance in the current fiscal despite second wave during the first quarter. Its operating performance remains strong with revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) increasing to Rs 4,145 crore and Rs 960 crore, respectively, for the first nine month of fiscal 2022 from Rs 2,926 crore and Rs 856 crore, respectively, a year earlier during the same period, driven by strong demand for packaging and hygiene products and subdued raw material prices. While the margin is expected to moderate due to cyclicality in demand along with fluctuating raw material prices, it should remain healthy.

 

Weakness:

Vulnerability to volatile raw material costs and demand-supply dynamics

The BOPP and BOPET business is cyclical. Product realisations have fluctuated in the past depending on the demand-supply gap. Also, the industry is highly fragmented and players tend to add large capacities when prices improve, leading to a fall in product realisations. For instance, the operating margin of JPFL increased to 34.9% in fiscal 2011 from 21.4% in fiscal 2010 before correcting to 15.3% in fiscal 2012 and 7.3% in fiscal 2013 as new capacities were added. The margin gradually improved to 14.9% in fiscal 2016 before moderating again to 12.3% in fiscal 2019. It rose to 18.3% in fiscal 2020 and 28.2% in fiscal 2021 with healthy realizations across product segments. Profitability is also vulnerable to volatility in raw material prices as raw material cost accounts for 55-60% of sales. The operating margin is expected to moderate over the medium term to 16-18%, though cash accrual should be healthy.

 

Continued debt-funded capacity expansion

The company regularly undertakes capacity expansion which is largely debt funded. In fiscal 2019, the company increased its domestic BOPET and CPP capacities with an investment of Rs 380 crore and added spun-melt fabric capacity in March 2020 at a cost of Rs 335 crore. A new BOPP capacity of 52,500 TPA and another CPP line were set up at a cost of Rs 350 crore. While the former was commissioned in third quarter of fiscal 2021, the latter became operational in March 2020. The company plans investment of around Rs 550 crore to set up a new Capacitor Films Line and an additional BOPP line. The Capacitor line is expected to start by March 2022 while BOPP line is expected to start by March 2023. JPFL reduced debt to around Rs 850 crore as on September 30, 2021, on account of continued healthy operating performance. Any delay in ramp-up of new capacities, or any new, large, debt-funded capex or acquisition could adversely impact the financial risk profile and hence will remain a key monitorable.

 

While investments in Jindal India Thermal Power Ltd (JITPL) in the past have precluded debt reduction, this entire exposure was written off in fiscal 2019. However, JPFL has infused Rs 150 crore in JITPL in FY21 as loans and advances to support the implementation of the latter’s resolution plan. Any significant investment in JITPL leading to deterioration of the financial risk profile of JPFL will be a key rating sensitivity factor.

Liquidity: Strong

Liquidity remains robust with cash and liquid investments of around Rs 700 crore as on September 30, 2021. The company has maintained over Rs 200 crore cash and liquid investments since March 2017. Liquidity is aided by moderate fund-based working capital lines utilization Internal cash accrual, cash and equivalent, and unutilised bank lines should be sufficient to meet debt obligation as well as incremental working capital requirement in the near term.

Rating Sensitivity Factors

Upward factors:

• Significant and sustained improvement in operating performance, leading to higher cash accrual
• Sustenance of healthy liquidity of over Rs 600 Crs and a better-than-expected capital structure

 

Downward factors:

• Significant additional investment in power project or any other unrelated business leading to weakening of financial risk profile
• Lower-than-expected cash accrual on account of reduction in the operating margin or weaker demand
• Gross debt to EBITDA ratio of over 3 times on a sustained basis

About the Company

JPFL, 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. It has capacities of 1,77,500 TPA and 302,000 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 36,000 TPA of non-woven products for hygiene and medical applications and has a reputed customer base. In fiscal 2019, the manufacturing division of JPL, which is primarily engaged in the photo-print paper, X-ray films, and thermal printing machines business, was demerged from JPFL. JPL has two manufacturing units, one in Daman and Diu and the other in Samba, Jammu & Kashmir.

 

Further on March 17, 2022; JPFL announced hiving off its packaging films division to JPFL Films.

 

For the nine months ended December 31, 2021, operating income was Rs 4,145 crore and profit after tax (PAT) Rs 705 crore, against Rs 2,926 crore and Rs 558 crore, respectively, in the corresponding period of the previous year.

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	Long-term loan	NA	NA	Jan-22	26	NA	CRISIL AA-/Watch Developing
NA	Rupee term loan*	NA	NA	Nov-24	16	NA	CRISIL AA-/Watch Developing
NA	Rupee term loan*	NA	NA	Dec-22	37	NA	CRISIL AA-/Watch Developing
NA	Rupee term loan*	NA	NA	Dec-22	13	NA	CRISIL AA-/Watch Developing
NA	Rupee term loan*	NA	NA	Dec-22	16	NA	CRISIL AA-/Watch Developing
NA	Proposed fund-based bank limits	NA	NA	NA	250	NA	CRISIL AA-/Watch Developing
NA	Proposed working capital facility*	NA	NA	NA	140	NA	CRISIL AA-/Watch Developing
NA	Proposed non-fund-based limits	NA	NA	NA	350	NA	CRISIL A1+/Watch Developing

*These facilities corresponds to Global Non-Woven Division