Robust demand, supported by heightened hygiene consciousness, growing in-home consumption, and benign input costs will improve the operating profitability of packaging film companies to a decadal high of 19% this fiscal.

An analysis of CRISIL-rated flexible packaging film companies, which account for over 60% of the industry’s revenue and debt, indicates brightening of their credit outlook over the near to medium term amid stable debt levels.

Says Manish Gupta, Senior Director, CRISIL Ratings Ltd, “With demand estimated to have been growing at ~12% this fiscal, and prices of inputs – mainly crude derivatives¹ – down ~20%, prospects of packaging film makers have started to improve. We expect Ebitda margin to expand 400 basis points (bps) on-year to 19% this fiscal. Larger companies that are also into speciality and value-added products will benefit the most.”

Since prices of crude derivatives are inherently volatile, the demand-supply balance plays an important role in profitability of packaging players.

In periods when demand-supply is well-balanced, firms are able to pass on input price variations to end-consumers. However, in phases of supply glut – largely on account of chunky capacity additions, a phenomenon common in this sector - it becomes difficult for players to fully pass on the input cost increases. This was visible in fiscals 2013 and 2017 when margins shrunk due to excess supply (see chart 1 in annexure).

This time, however, the situation looks very different. Industry capex has been slow in the past few years and operating rates are high at 80-90% – showing well-balanced demand-supply. Consequently, despite rising crude prices, operating margins are expected to remain range-bound at 15-17% for the next few quarters.

Says Nitesh Jain, Director, CRISIL Ratings Ltd, “Profitability of the flexible packaging film companies is expected to remain healthy in the current demand-supply environment. As a result, debt/Ebitda for the industry is expected to improve to 2.2 times this fiscal from 2.8 times in the last (see chart 2 in annexure). Firms have used the upcycle to improve their debt metrics and liquidity cushion, auguring well for credit profiles.”

Broadly, flexible packaging companies manufacture bi-axially oriented polypropylene (BOPP) and bi-axially oriented polyethylene (BOPET) films. BOPET films have more oxygen retention power, high tensile strength, longer shelf life, and better print quality than BOPP films, resulting in diverse end-use applications. BOPP films have higher moisture retention properties and are cheaper than BOPET films. As a result, they are used extensively to pack food products. Pandemic-induced behaviours of enhanced hygiene consciousness and in-home consumption are likely to keep demand buoyant in the coming months.

While demand is expected to continue growing at 10-12% annually, the industry is prone to chunky capacity additions, disrupting the demand-supply equation. Any significant capacity addition announcements by the industry, therefore, will continue to be a key monitorable for profitability as well as sustenance of improved debt metrics.

¹ Polypropylene granules for BOPP and PET resin/chips, pure terephthalic acid, and mono ethylene glycol for BOPET are key inputs to packaging films.