Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on the bank facilities of Manjushree Technopack Ltd (MTL).

The ratings continue to reflect the established market position of the company, healthy operating efficiency, and strong and improving financial risk profile. These strengths are partially offset by large working capital requirement and exposure to intense competition in the plastic packaging industry.

 

On April 10, 2024, there was an announcement by MTL of a business transfer agreement with Oricon Enterprises Ltd (Oricon) to acquire its plastic packaging business. The proposed acquisition will help MTL consolidate its position as a leader in the rigid packaging segment. The company will have access to all production units of Oricon in Goa and Odisha.

 

CRISIL Ratings understands the acquisition is expected to be funded through infusion via compulsorily convertible debentures (CCDs) from the parent of MTL, Advent International (Advent; global private equity investor). Hence, the acquisition is not expected to significantly impact the credit profile of MTL. This will be monitorable as the transaction is expected to be closed in the next 2-3 months.

 

The large capital expenditure (capex) programme undertaken over the past four fiscals towards organic and inorganic expansion will help bolster production capacities and register strong revenue growth over the medium term. Operating profitability is expected to be strong at 15-17%, supported by superior operating capabilities, thereby increasing annual cash flow to about ~Rs 240 crore over the medium term from ~Rs 176 crore in fiscal 2023.

 

Financial risk profile is comfortable and continues to improve on the back of steady cash accrual and equity infusion by the parent. Debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio improved to 1.8 times in fiscal 2023 from 2.3 times in fiscal 2021; while total outside liabilities to tangible networth ratio improved to 1.02 times as on March 31, 2023, from 1.58 times as on March 31, 2021. While these metrics moderated on-year in fiscal 2023, they are expected to improve gradually over the medium term, supported by healthy business performance, progressive debt repayment and moderate capital spending.

 

In the recent past, MTL has made acquisitions to ramp up operations, add new products to portfolio and improve geographical presence. The company has also undertaken organic growth in Visakhapatnam, Andhra Pradesh; and Mysuru, Karnataka. It may continue pursuing small to mid-sized acquisitions to enhance revenue growth but is expected to maintain financial prudence.

Analytical Approach

CRISIL Ratings has combined MTL and its wholly owned subsidiary, MTL New Initiatives Pvt Ltd, as the two companies have common management and financial and operational linkages.

 

CRISIL Ratings has also amortised intangibles and goodwill of ~Rs 336 crore over a period of seven years following the acquisition of Classy Kontainers and Hitesh Plastics.

 

The CCDs of ~Rs 587 crore (as per fiscal 2023 audited financials and issued by MTL) have been treated as part of equity as they will compulsorily get converted into equity after eight years.

 

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:

• Established market position, as indicated by strong customer base and increasing revenue diversity: The company is one of the largest players in the rigid plastics packaging business in India with installed capacity of over 1,90,000 tonne per annum. Strong market share is supported by established relationships with customers such as Reckitt Benckiser (India) Ltd, Dabur India Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Hindustan Coca Cola Beverages Private Ltd, PepsiCo India Private Ltd, and Mondelez India Foods Private Ltd. Over the past few years, MTL has diversified its customer base and increased presence in various categories of the fast-moving consumer goods packaging industry, such as food and beverages, personal care, home care, liquor and pharmaceuticals. Manufacturing base is in Bengaluru. With the acquisition of Varahi Ltd (Varahi) in fiscal 2017 and facilities of National Plastics Industries Ltd (NAPLA) in fiscal 2020 in North India, overall market reach and ability to service diverse clients improved substantially. In April 2021, MTL completed the acquisition of the business-to-business services of Pearl Polymers Ltd (PPL), which helped to increase market share. The acquisitions have also helped to improve product diversity (NAPLA acquisition has added dispensers and sprays to the portfolio), add new clients, and supply new products to existing clients, thereby improving wallet share. MTL also expanded into East India markets by setting up a plant in Guwahati, Assam, in 2017. In fiscal 2021, it commissioned a greenfield capacity in Silvassa, Dadra and Nagar Haveli, that will help enhance geographical diversification in the western market. The company also commissioned a rigid plastic recycling plant in Bengaluru in fiscal 2021. Furthermore, in January 2022, MTL completed acquisition of Classy Kontainers and in July 2022, it announced the acquisition of Hitesh Plastics. These helped to expand into new client and product (such as caps and closures) segments. Addition of new plants in Vizag and Mysore will further support client additions, apart from enhancing product profile. Furthermore, acquisition of the plastic packaging business of Oricon is expected to strengthen business risk profile.

 

• Strong operating efficiency: Freight costs are an important element in the overall cost structure of the packaging industry. Geographical proximity also plays an important role in the acquisition of clients. Presence in North India has improved after acquisition of Varahi, NAPLA and PPL and should continue to help MTL in integrating manufacturing units with the supply chain systems of customers. Additionally, the newly commissioned Vizag plant, upcoming Mysore plant and recent acquisitions will bring the company’s facilities closer to the customers. Furthermore, well-developed, in-house design facilities, and capabilities of diverse manufacturing processes allow the company to maximise potential revenue from a particular geographical region.

 

Despite volatile raw material prices, operating margin is likely to be healthy at 15-17% over the medium term as MTL can pass on raw material price variations to clients.

 

• Healthy and improving financial risk profile: Higher annual cash accrual of Rs 180-240 crore over the medium term (Rs 176 crore in fiscal 2023) and progressive debt repayment should help fund capex or acquisition plans. Owing to CCDs with coupon of 9%, interest coverage ratio may moderate, but remain comfortable, at 3.5-4 times in fiscal 2024. The debt to Ebitda and net cash accrual to total debt ratios are expected to remain similar to fiscal 2023 levels.

 

Weaknesses:

• Large working capital requirement: Operations are moderately working capital intensive due to seasonality in most end-user segments. As the company primarily caters to beverage manufacturers, sales peak during summer, leading to a sizeable inventory (60-80 days during March-May). The company also extends credit of 60-90 days to customers. Working capital cycle may remain moderately stretched, with gross current assets of 130-140 days over the medium term.

 

• Exposure to intense competition: The packaging industry is highly fragmented, leading to intense competition that may continue to constrain scalability, pricing power and profitability. However, established presence and strong customer relationships help mitigate this. The company’s research and development capabilities are also expected to help maintain a better margin than peers.

Liquidity: Strong

Cash accrual is projected at Rs 180-240 crore per annum, against debt repayment of ~Rs 55 crore per annum over the medium term and annual capex needs of Rs 80-100 crore (excluding acquisitions). Bank limit of ~Rs 390 crore was utilised at 84% on average for the 12 months through August 2023, and headway exists for meeting incremental working capital needs.

Outlook: Stable

MTL will continue to benefit from higher contribution of newly commissioned capacities and recent acquisitions, leading to ramp up in operations and geographical diversity, as well as steady increase in offtake by existing customers. Healthy financial risk profile should sustain over the medium term, with improving cash accrual and prudent capex spend.

Rating Sensitivity Factors

Upward factors

• Sustained annual revenue growth of ~15% and operating profitability of 16-17% leading to healthy cash generation.
• Improvement in debt protection metrics, with debt to Ebitda ratio of 1.5-1.6 times on a sustained basis.

 

Downward factors

• Sharp decline in business performance impacting operating profitability (below 12-13%) and cash accrual on sustained basis.
• Large, debt-funded capex or acquisition weakening debt protection metrics; for instance, debt to Ebitda ratio of over 3 times.

About the Company

MTL was established in 1987 as a private limited company and reconstituted as a public limited company in 1994. It manufactures polyethylene terephthalate (PET) jars and bottles, multilayer containers, PET hot-fillable bottles, and pre-forms for use in the food, beverage, pharmaceuticals, cosmetics, agricultural chemicals, and allied sectors. In February 2013, it started operations at its state-of-the-art PET preform manufacturing facility at Bidadi, Karnataka, which has a ‘platinum green’ certification under the Leadership in Energy & Environmental Design programme and is the largest of its kind in South Asia.

 

As of March 2023, Advent is a majority stakeholder with ~97% shareholding, while ~3% is held by other public shareholders.

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 levels	Rating assigned with outlook
NA	Cash credit	NA	NA	NA	225	NA	CRISIL AA-/Stable
NA	Cash credit	NA	NA	NA	105	NA	CRISIL AA-/Stable
NA	Cash credit	NA	NA	NA	60	NA	CRISIL AA-/Stable
NA	Proposed cash credit limit	NA	NA	NA	10	NA	CRISIL AA-/Stable
NA	Long-term loan	NA	NA	Aug-2026	15.47	NA	CRISIL AA-/Stable
NA	Long-term loan	NA	NA	Oct-2027	62.05	NA	CRISIL AA-/Stable
NA	Long-term loan	NA	NA	Sep-2027	150	NA	CRISIL AA-/Stable
NA	Long-term loan	NA	NA	Nov-2029	92	NA	CRISIL AA-/Stable
NA	Proposed term loan	NA	NA	NA	382.18	NA	CRISIL AA-/Stable
NA	Bank guarantee	NA	NA	NA	3	NA	CRISIL A1+
NA	Letter of credit	NA	NA	NA	20	NA	CRISIL A1+
NA	Letter of credit*	NA	NA	NA	40	NA	CRISIL A1+
NA	Foreign exchange forward	NA	NA	NA	1.3	NA	CRISIL A1+

*BG sub limit Rs.10 cr