Detailed Rationale

CRISIL Ratings on the bank facilities of Jindal Poly Films Limited (JPFL) continues on 'Rating Watch with Developing Implications’.

 

CRISIL Ratings had placed its ‘CRISIL AA-/CRISIL A1+’ ratings on the bank facilities of JPFL on watch, following the announcement by the company that its board of directors have approved transfer of its packaging film business, which constituted 85% of the overall revenue, to its wholly owned subsidiary -- JPFL Films Pvt Ltd (JPFL Films, rated CRISIL AA-/Watch developing/ CRISIL A1+/ Watch developing). Simultaneously, JPFL had entered into agreement with Project Holdings Fourteen (DIFC) Ltd, a special purpose vehicle of Special Investment Fund of Brookfield (Brookfield SPV) wherein Brookfield SPV will invest Rs 2,000 crore for a 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.

 

The transfer of packaging division business has been completed in August 2022, with JPFL completing all necessary terms and conditions. A consideration of Rs 2000 crore was paid by Brookfield SPV in exchange for 19,990 compulsory convertible preference shares and 20 equity shares in JPFL Films. Going forward, JPFL Films will act as an operating company for the packaging division while JPFL will act as a holding (75% stake in JPFL Films) cum operating company (with residual business of nonwoven fabric contributing around 15% of existing revenue).

 

However, the ratings continue to remain on watch as CRISIL Ratings is in discussions with JPFL’s management seeking clarity on financial and managerial linkages between holding and subsidiary company. CRISIL Ratings will remove the ratings from watch and take a final action once clarity on above aspects is received.

 

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

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 flow is not fungible. 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 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 biaxially-oriented polyethylene terephthalate (BOPET) and biaxially oriented polypropylene (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 Global Nonwovens Ltd (GNL) division is under process to increase up to  60,000 TPA along with commissioning of a nonwoven line. JPFL undertakes regular capital expenditure (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 fiscal 2022 despite the second wave of the Covid-19 pandemic during the first quarter. Its operating performance remains strong, with revenue and earnings before interest, tax, depreciation, and amortisation (EBITDA) increasing to Rs 5,869 crore and Rs 1,429 crore, respectively, in fiscal 2022 from Rs 4,047 crore and Rs 1,160 crore, in fiscal 2021, 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.

 

Weaknesses:

• Vulnerability to volatile raw material costs and demand-supply dynamics: The BOPP and BOPET business are 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, 28.2% in fiscal 2021 and to 24.4 % in fiscal 2022 with healthy realisations 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 to 20-21% over the medium term, 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 cast polypropylene (CPP) capacities with an investment of Rs 380 crore and added spun-melt fabric capacity in March 2020 at cost of Rs 335 crore. A new CPP line and new BOPP capacity of 52,500 TPA were set up at a cost of Rs 350 crore. While the former became operational in March 2020, the latter was commissioned in the third quarter of fiscal 2021. The company started a new capacitor and a new BOPP line in fiscal 2022 at capex of Rs 550 crore. The company is further planning to invest Rs 500 crore and Rs 400 crore in fiscals 2023 and 2024, respectively, to add BOPP line of 42,000 TPA and BOPET line of 43,200 TPA, which the company is planning to fund 75% via debt and rest via cash accrual. 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 infused Rs 150 crore in JITPL in fiscal 2021 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 1,000 crore as on March 31, 2022. The company maintained over Rs 200 crore cash and liquid investments since March 2017. 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.

Rating Sensitivity factors

Upward factors

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

 

Downward factors

• Significant additional investment in power project or any other unrelated business
• 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, 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. 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 nonwoven products for hygiene and medical applications and has a reputed customer base. In fiscal 2019, the manufacturing division of JPFL, which is primarily engaged in the photo-print paper, X-ray films, and thermal printing machines business, was demerged from JPFL.

 

Further on March 17, 2022; JPFL announced hiving off its packaging films division to JPFL Films and on August 2, 2022, the business transfer has successfully been executed.

 

For the three months ended June 30, 2022, net profit was Rs 319 crore on income of Rs 1510 crore, compared with Rs 233 crore and Rs 1,335 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable