Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank loan facilities of Uflex Limited (Uflex; part of the Uflex group)

 

The ratings continue to reflect the strong market position of Uflex in both the domestic and overseas markets. The sustainability in the business risk profile is reflected in the growth of revenue to Rs.14,663 crores in FY23 from Rs. 13,127 crores in fiscal 2022 despite softness in overseas market and lower realization. The growth in revenue of FY23 was driven by healthy demand from the domestic market whereas the exports volumes has remained subdued in comparison with previous fiscals due to various macro-economic factors. The operating performance of the Uflex group for fiscal 2023 was weaker than expectations as the margins have declined to ~12% in FY23 from 16.89% in FY22, the decline in the margins was for all the packaging industry which has been adversely impacted since Q2 FY23, due to sharp decline in prices because of oversupply in the industry and rise in the raw material prices. The group has reported revenue of Rs.6,668 cr. in H1 fiscal 2024 against Rs.7,895 crores in H1FY23; decline in revenue is due to the subdued demand in the exports market particularly in Europe and USA due to various macroeconomic factors. Also, the group has reported EBITDA margins of 10.11% in H1FY24. 

 

In Q4FY23 Uflex has commercialized its Biaxially-Oriented Polyethylene Terephthalate (BOPET) plant in Dharwad and Cast Polypropylene (CPP) plant in Dubai which are expected to generate additional revenue of Rs. 700-800 crores from FY24 onwards. Aseptic packaging business which has current capacity of 7 billion packs operated at 120% in FY23. Uflex is planning to debottleneck the existing capacity of Aseptic by enhancing the same to 11-12 billion packs per year. Group is expected to report healthy revenue growth of over the medium term benefitting from the enhanced capacity and healthy demand in the aseptic packaging along with the demand expected to improve from exports market.

 

Uflex. is setting up PET chips unit in Panipat expected cost of which is Rs. 550-600 cr. and is expected to get commercialized by Q4FY24. This plant will have the capacity of producing 14,400 Ton/month which is expected to remain sufficient for the consumption for the Domestic Units.  Group in Q1FY24 has announced that they are setting up a new plant in Egypt, the expected cost of the same would be around Rs. 570-580 cr. This plant will have the capacity of producing 20,000 Ton/month which is expected to remain sufficient for the consumption for Middle East, Nigeria, Egypt and Poland.

 

The margins of FY24 are expected to remain in the range of 12-15%, however the margins are expected to be improved from FY25 onwards as the PET chips plant of Panipat is expected to commercialize from Q4FY24 onwards which will start contributing to the margins.

 

The financial risk profile of the Uflex group is strong, as reflected in total outside liabilities to tangible networth (TOLTNW) ratio of 1.18 times as on March 31, 2023, compared with 1.16 times as on March 31, 2022. The financial risk profile remained comfortable despite significant increase in debt availed for funding the capex undertaken by the group.  The financial risk profile is expected to remain stable over the medium term.

  

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 susceptibility to cyclicality in the commoditized packaging films industry along with forex loss and large working capital requirement.

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 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 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. The operating income of the group has improved from Rs. 13,127 crores in fiscal 2022 to Rs. 14,663 crores in FY23.

 

The company operates at a cumulative capacity of 5,28,000tpa, including biaxially-oriented polypropylene (1,49,000tpa), biaxially-oriented polyethylene terephthalate (3,50,000tpa) and cast polypropylene (CPP) films (29,000tpa). Additionally BOPET plant in Dharwad and CPP plant in Dubai has commercialised in Q4FY23 which would add additional capacity of 63,000 MT (45,000 BOPET & 18,000 CPP. On commissioning of both these facilities, its total cumulative capacities is now at 5,91,000tpa. In addition to packaging films, the company manufactures various value-added films, including coated films, metallised films, inks and adhesives, and it is also one of the largest flexible packaging companies in India.

 

In India, Uflex has a manufacturing capacity of 1,70,000tpa of the flexible packaging products, including laminates and aseptic packaging. During FY23, the company increased its capacity of aseptic packaging and is planning to increase it further by debottlenecking the manufacturing process. 

 

• 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.

 

The company’s packaging films are used across a range of industries and applications, leading to a diversified customer base. Furthermore, it benefits from established relationships with several leading players from consumer goods as well as packaging industries.

 

• Comfortable financial risk profile: The capital structure is comfortable, supported by gearing of 0.77 time as on March 31, 2023. Debt protection metrics were strong, indicated by interest coverage ratio and net cash accrual to adjusted debt ratios of at 4.16 times and 0.19 time, respectively, in fiscal 2023. The net debt position of the group as on March 31, 2023, was ~Rs.4613 crores with healthy cash and equivalents of ~Rs 1091 crore. Management has philosophy of doing the regular capex and currently with the ongoing capex of PET chips plant and other regular capex the net debt levels are expected to be in the range of 4500-5000 cr. over the medium term. Continuous debt funded capex is leading to increasing Net Debt to

 

EBIDTA levels. However due to the group's strong networth of over Rs.7400 crore as on March 31, 2023, and prudent funding of the company's aggressive capital expenditure with relatively moderate debt supports the financial risk profile of the company. A higher-than-expected debt for funding the capex or a moderation in the profitability, thereby resulting in a deterioration in the credit metrics, will remain key rating sensitivities.

 

Weaknesses:

• Cyclical and commoditised packaging films industry and foreign exchange risk: The biaxiallyoriented 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. Adverse movements in forex rates can negatively impact the group’s profitability, given Uflex’s foreign currency-denominated loans and its exposure to multiple currencies. However, it has a natural hedge in the form of export revenue, thereby offsetting the forex risk to some extent.

 

• Large working capital requirement: Gross current assets were 200 days as on March 31, 2023, driven by receivables of 85-90 days and inventory of 75-80 days. The working capital is partially supported by credit of 70-100 days from suppliers.

Liquidity: Strong

Net cash accrual, expected at over Rs.1200-1,400 crore per annum, will sufficiently cover yearly debt obligation of Rs.500-600 crore over the next two fiscals. The group also had healthy unencumbered cash balance of ~Rs 1091 crore as on March31, 2023, which increased from Rs 588 crore as on March 31, 2022. Bank limit utilisation averaged 60-65% over the 12 months through Mar-23.  Current ratio was moderate at 1.5 times as on March 31, 2023. However the losses reported by Uflex in Q1FY24 may impact the cash accruals for the full fiscal which can put some pressure on the liquidty of the group.

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/EBITDA levels of the Uflex group remained below 1.5 times on sustained basis, 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/EBITDA levels of the Uflex group increasing to over 3.25 times on sustained basis.
• Continued foreign exchange losses impacting the overall margins and cash accruals of the group.

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