Detailed rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Uflex Ltd (Uflex; part of the Uflex group) to ‘CRISIL AA-/Stable/CRISIL A1+’ from 'CRISIL A+/Stable/CRISIL A1'.

 

The upgrade is on account of higher-than-anticipated improvement in the business risk profile and the financial risk profiles of Uflex. The improvement in the business risk profile is reflected in increase in revenue to Rs 9,247 crore as on December 31, 2021, and likely to exceed Rs 12,000 crore for the full fiscal, reflecting year-on-year growth of more than 35%. Operating margin has remained stable at 17-18% over the nine months through fiscal 2022 despite substantial increase in raw material prices. In the last nine months, increase in raw material prices and the lag effect in passing on the prices have led to profitability margin of 17-18% compared with ~20 % in the corresponding period of the previous fiscal.  Uflex restricted its customer order bookings to 7-10 days from normal levels of 30-60 days, which helped with better control over pricing of orders. This led to the operating margin stabilising at 18% in the third quarter of fiscal 2022, up from 14% in the preceding quarter. Operating profitability is expected at 18% in fiscal 2022.

 

The increase in revenue was on account of higher volume and price rise. Volume increased because the group added capacities across five different geographies, namely Russia, Hungary, Poland, Egypt and Nigeria, out of which the first four commenced operations in fiscal 2021, while Nigeria commenced operations in the second quarter of fiscal 2022. All overseas as well as Indian packaging films capacities are operating at utilisation levels of above 95%, including the enhanced capacities, except for Nigeria (utilisation levels of about 60%). Expansion of the Aseptic Packaging plant will get commissioned in the first quarter of fiscal 2023; the Dubai cast polypropylene (CPP) plant is expected to be operational by the second quarter. Additionally, the company’s greenfield expansion at the Dharwad plant in Karnataka is expected to become operational by the fourth quarter of fiscal 2023; ramp-up of the capacities in Nigeria and timely commissioning of new capital expenditure (capex) shall ensure strong volume growth and healthy operating performance over the medium term.

 

The financial risk profile of the Uflex group is strong, as reflected in total outside liabilities to tangible networth (TOLTNW) ratio of 1.13 times as on March 31, 2021, compared with 1.14 times as on March 31, 2020.

 

The financial risk profile remained comfortable despite significant increase in debt availed for funding the capex undertaken by the group in fiscals 2020 and 2021.  Debt protection metrics were comfortable. The financial risk profile is expected to remain stable over the medium term.

 

The Russia-Ukraine conflict is not expected to impact operations at the Uflex group’s Russian subsidiary [Flex Films RUS LLC, Russia], as the entity contributes 3% to the consolidated revenue of the group, and all raw material purchases and sales are from and in Russia only. Hence, no impact is expected because of deprecation of the ruble over other currencies.

 

The ratings continue to reflect the company’s established presence in the flexible packaging industry, diversified customer and product profiles and a comfortable financial risk profile. These strengths are partially offset by large working capital requirement and susceptibility to cyclicality in the commoditised packaging films industry.

Analytical approach

CRISIL Ratings has combined the business and financial risk profiles of Uflex and all its Indian and foreign subsidiaries and step-down subsidiaries and joint ventures, together referred to as the Uflex group, on account of operational, management and financial linkages among the entities.

 

Please refer to Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation

Key rating drivers and detailed description

Strengths

Established market position in the global flexible packaging industry: The Uflex group is one of the largest players in the flexible packaging industry, with a strong market presence in the domestic and overseas markets through subsidiaries in Egypt, Dubai, Mexico, USA, Russia, Poland, Hungary and Nigeria. Revenue of the group was Rs 8,849 crore in fiscal 2021 against Rs 7,393 crore in fiscal 2020. The group has achieved sales of Rs 9,247 crore as on December 31, 2021, and will likely exceed Rs 12,000 crore of sales for the full fiscal.

 

The company operates a cumulative capacity of 510,000 tonne per annum (tpa), including biaxially oriented polypropylene (149,000 tpa), BOPET (350,000 tpa) and CPP films (11,000 tpa). The company has strengthened its market position by setting up facilities at five different geographies, namely Russia, Hungary, Poland, Egypt and Nigeria, out of which the first four commenced operations in fiscal 2021, while Nigeria commenced operations in the second quarter of fiscal 2022. All overseas as well as Indian packaging film capacities, except Nigeria (which was at about 60%), are operating at above 95% utilisation levels, including the enhanced capacities. Ramp-up of the capacities in Nigeria shall ensure strong volume growth and healthy operating performance over the medium term.

 

Diversified product and customer profiles: The group has presence throughout the value chain in flexible packaging. It provides complete end-to-end packaging solutions, ranging from flexible packaging intermediate products (packaging machines, holograms, inks and adhesives, cylinders)  to end or final products (packaging films, multilayer laminates and liquid packs). Over the years, it has developed a reputed and diversified clientele, catering to leading players in the packaging films, flexible packaging and fast-moving consumer goods (FMCG) industries. Also, risk of customer concentration is low.

 

In India, Uflex has a manufacturing capacity of 92,000 tpa of packaging films and 135,000 tpa of flexible packaging products, including laminates and liquid packaging. The company’s packaging films are used across a range of industries and applications, leading to a diversified clientele. Furthermore, it benefits from established relationships with several leading players from the consumer goods and packaging industries.

 

Comfortable financial risk profile: The capital structure is comfortable, supported by gearing of 0.73 time and 0.78 time as on March 31, 2021, and March 31, 2020, respectively. The increase in gearing was on account of debt availed to fund the large capex of around Rs 3,000 crore undertaken for expanding capacities in Russia, Nigeria, Poland and Hungary in fiscals 2019 and 2020. Debt protection metrics were strong, indicated by interest coverage ratio and net cash accrual to adjusted debt ratios of at 7.9 times and 0.38 time, respectively, in fiscal 2021. The net debt position of the group as on December 31, 2021, was ~Rs 3,700, with healthy cash and equivalents of ~Rs 700 crore. In the absence of any large, debt-funded capex expected in the near term, the financial risk profile of the company is expected to remain healthy over the medium term .

 

Weaknesses

Large working capital requirement: Gross current assets were 192 days as on March 31, 2021, driven by receivables of 101 days and inventory of 60 days. The working capital is partially supported by credit of 70-100 days from suppliers.

 

Cyclical and commoditised packaging films industry: The biaxially-oriented polypropylene (BOPP) and BOPET industry is cyclical. Product realisations have fluctuated in the past depending on the demand-supply gap. Moreover, the industry tends to add large capacities when prices improve, resulting in overcapacity and, hence, pressure on realisations. Also, because of the commoditised nature of the packaging business, players have little scope for passing on increase in raw material costs (accounting for 65-75% of net sales), making them highly susceptible to volatility in raw material prices. Thus, the operating margin is susceptible to fluctuations in product realisations and input costs.

Liquidity: Strong

Net cash accrual, expected at over Rs 1,400 crore per annum, will sufficiently cover yearly debt obligation of Rs 400-500 crore over the next two fiscals. In fiscal 2021, the group generated cash accrual of Rs 1,285 crore against repayment of Rs 219 crore. With increase in the scale of operations and stable margins, cash accrual is expected at 1,500-1,700 crore over the medium term, providing additional cushion to the liquidity.

 

The group also had healthy unencumbered cash balance of ~Rs 700 crore as on December 31, 2021, which increased from Rs 576 crore as on March 31, 2021. Bank limit utilisation averaged 67% over the nine months through December 2021. Current ratio was moderate at 1.56 times as on March 31, 2021.

Outlook Stable

The Uflex group will continue to benefit from its strong market position in the packaging industry and comfortable financial risk profile over the medium term.

Rating sensitivity factors

Upward factors

• Net debt levels of the Uflex group at Rs 3,700 crore over next the 18 months, with the TOLTNW remaining below 1 time
• Continuous improvement in business performance and no time or cost overruns on the new project

 

Downward factors

• Lower-than-expected cash accrual on account of reduction in the operating margin or weaker demand
• Net debt levels of the Uflex group increasing to over Rs 4,000 crore and sustaining at those levels over the next 18 months

About the company

Promoted and founded in 1985 by Mr Ashok Chaturvedi, the Uflex group offers end-to-end flexible packaging solutions, including films (BOPET, BOPP, CPP [cast polypropylene]  and metallised), flexible laminates, holographic films, aseptic liquid packaging, packaging and printing machines and inks and adhesives, catering mainly to the FMCG industry. The company is headquartered at Noida, Uttar Pradesh, and has manufacturing facilities in India, Dubai, Mexico, Russia, Egypt, Poland, Hungary, Nigeria and the US.

Any other information: Not applicable