Increased debt ranges to stay credit score profiles of versatile packaging gamers subdued this fiscal, says CRISIL – Business Information

With elevated debt levels which had burgeoned over the past three fiscals due to sizeable capacity, credit profiles of flexible packaging players will continue to remain subdued this fiscal, stated a report by CRISIL Ratings. 

However, it added, steady demand which accounts for around 75 per cent of sectoral volumes, and negligible capacity additions will partially offset the demand-supply imbalance this fiscal year. Consequently, capacity utilization levels shall improve by 400-450 basis points (bps) and realizations will stabilize driving a modest 7-8 per cent revenue recovery. This comes on the back of a decline of 10-11 per cent during the last fiscal as excess supply resulted in sharp drop in realisations.

In the milieu, CRISIL said, the operating margin will recover by 150-200 bps from the decadal low of approximately 6 per cent last fiscal, backed by stable raw material prices and improving capacity utilisation. Operating margins had dropped by around 430 bps last fiscal owing to lower operating leverage and sharp fall in realisations due to oversupply.

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CRISIL Ratings analysed seven large flexible packaging players, which account for over 60 per cent of the domestic capacity to reach the findings. 

The industry primarily comprises bi-axially oriented polypropylene (BOPP) and bi-axially oriented polyethylene (BOPET) films. BOPET films have diverse end-use applications due to their higher oxygen-retention power, high tensile strength, longer shelf life and better print quality. BOPP films, with better moisture resistance properties and lower cost, are ideal for packaging food products.

Shounak Chakravarty, Director, CRISIL Ratings, said, “Leverage for flexible packaging players will continue to remain high this fiscal owing to elevated debt levels which had nearly doubled over fiscals 2021-2024, as BOPP and BOPET players expanded their capacities by a staggering ~20% and ~45 per cent respectively. However, negligible capacity addition, along with healthy domestic volume growth of 7-9% this fiscal, will bridge the demand-supply mismatch to some extent. Capacity utilisation, too, will improve to ~60 per cent this fiscal from ~56 per cent last fiscal, supporting realisations and revenue recovery.”

Per the CRISIL report, domestic demand, comprising nearly three-fourths of the sectoral volume, will mirror the fast moving consumer goods (FMCG) segment, which accounts for more than 80 per cent of flexible packaging demand. Growth in the FMCG sector will be driven by improving rural demand, supported by expectation of a good monsoon and higher MSPs, and stable urban demand. On the other hand, persistent weakness in the European Union and currency-related challenges in African markets will restrict export growth to 2-4 per cent despite demand from the US picking up.

Rucha Narkar, Associate Director, CRISIL Ratings, said, “Reducing demand-supply imbalance, stable realizations and benign raw material prices (forming 65-70 per cent of the overall cost structure) will improve operating margins to 7.5-8.0 per cent this fiscal. That said, it will still remain below the historical average of 12-13 per cent. Further, debt protection metrices like Debt to Ebitda (earnings before interest, taxes, depreciation and amortisation) and interest coverage will show only a marginal improvement to ~7.5 times and ~3.2 times, respectively, this fiscal from ~12.2 times and ~1.9 times in the previous fiscal.”

However, CRISIL said that net cash accruals shall be sufficient to meet debt obligations this fiscal, with the coverage ratio (net cash accrual to repayment obligation) expected at ~1.45 times (up from ~1.40 times last fiscal). Going forward, per the report, volatility in prices of crude-linked raw materials owing to ongoing geopolitical situation and any slowdown in domestic demand will bear watching.