Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Chiripal Poly Films Limited (CPFL) to ‘Stable’ from ‘Negative’, while reaffirming the rating at ‘CRISIL A-’. The rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A2+’.

 

The revision in outlook reflects improvement in operating performance of the company with successful completion and ramp up of the large capital expenditure (capex) undertaken over the past 15 months. Revenue grew by over 60% year-on-year to Rs 3,317 crore in fiscal 2022, mainly driven by sharp rise in realisations of key products and sales volume of biaxially-oriented polypropylene (BOPP) films, after the third manufacturing line was commissioned in August 2021. Given the drop in realisations of BOPP as well as biaxially-oriented polyethylene terephthalate (BOPET) films during fiscal 2023, revenue may grow only by around 5% for the full fiscal. Growth will however be aided by successful commissioning of the second BOPET manufacturing line in September 2022. With improved spreads and volume, operating margin rose to 15.1% in fiscal 2022, from 10.4% in fiscal 2020. The margin is expected to come down to 11-12% going forward as spreads for key products could drop back to steady-state levels. 

 

The financial risk profile, though improved, remains average, largely on account of continued debt-funded capex, with debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio of 1.86 times in fiscal 2022 and gearing of 0.8 time as on March 31, 2022. With ongoing debt-funded capex of the cast polypropylene (CPP) line, gross debt is expected to peak at about Rs 1,000 crore as on March 31, 2023. The company has a sizeable proportion of low-cost foreign currency debt as it enjoys a natural hedge against exports (forming nearly 22% of sales in fiscal 2022), reducing foreign exchange risk. With likely moderation in operating margin and cash accrual, the debt/Ebitda and gearing ratios could weaken marginally in fiscal 2023. Operations continue to be working capital intensive as customers are offered extended credit terms.

 

CRISIL Ratings also notes that the Income Tax (IT) department conducted raids at multiple locations of the Chiripal group and at residences of the promoters and key personnel between July 19 and July 27, 2022. This raid also covered certain locations of CPFL. CPFL is cooperating with the IT department and the matter is under investigation. CRISIL Ratings will remain in touch with the management and continue to monitor the developments. Any material penalties levied, and funding for the same will be a monitorable.

 

The ratings continue to reflect the established market position of CFPL as one of India’s leading poly film manufacturers, its experienced management, moderate operating efficiency supported by strong capacity utilisation and benefits of backward integration into polyethylene terephthalate (PET) chips. These strengths are partially offset by exposure to volatility in raw material prices and realisations driven by demand-supply dynamics and average financial risk profile resulting from modest leverage and debt protection metrics. The ratings are also constrained by susceptibility to project risk and any delay in the ongoing capex.

Analytical Approach

• CRISIL Ratings has taken a standalone approach as business transactions with the Chiripal group are at an arm’s length and there is no financial fungibility between the group companies.
• The 0.01% non-cumulative optionally convertible redeemable preference shares (NCOCRPS) issued by the company have been treated as equity.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position as one of the leading poly film manufacturers in India: CFPL manufactures BOPP, BOPET and metallised films, which are extensively used in the flexible packaging industry. The clientele is well-diversified, comprising players from the fast-moving consumer goods (FMCG), pharmaceuticals, electricals and textiles segments. The company is one of India’s leading packaging film manufacturers, backed by its combined capacity of 207,950 tonne per annum (TPA) (as on November 15, 2022) to manufacture 128,150 TPA of BOPP and 79,800 TPA of BOPET. In fiscal 2017, the company also started manufacturing PET chips with capacity of 220,000 TPA.

 

• Moderate operating efficiency supported by healthy capacity utilisation and benefits of backward integration: Operating profitability for the company is susceptible to raw material price volatility. Diversified product mix, healthy demand dynamics, high capacity utilisation, strong customer relationships and backward integration into PET chips have helped the company maintain healthy operating profitability of 10-15% over past three years. Manufacturing lines near Ahmedabad are located in close proximity to major suppliers such as Reliance Industries Ltd (CRISIL AAA/Stable/CRISIL A1+) and Indian Oil Corporation Ltd (CRISIL AAA/Stable/CRISIL A1+), and other customers. Setting up of manufacturing lines in Telangana recently will provide the company access to the south Indian market.

 

• Experienced management team: CPFL’s management has strong industry experience of over 15 years. Furthermore, CPFL is part of the diversified Chiripal group, which has extensive experience in the textile value chain with presence in textile fabrics and petrochemicals, among others. The management has demonstrated its ability to leverage this experience and make CPFL among the leading domestic manufacturer in terms of combined capacity. Furthermore, the group’s presence in the textile value chain mitigates the offtake risk in PET chips as around 60% of the capacity is consumed by the group (either in-house or by group companies). The promoters have infused funds into the company in the past, to support the rapid expansion. However, one of the promoters had a legal case filed against him, following a fire incident at one of the group companies and was granted an anticipatory bail. Any adverse development with respect to this investigation as well any material liability arising from outcome of the recent IT raid, and its subsequent impact on the financial risk profile of CFPL would be a key monitorable.

 

Weaknesses:

• Susceptibility to volatility in raw material cost and realisations, driven by demand-supply dynamics: Amidst cyclicality in the BOPP and BOPET business, product realisations have fluctuated in the past, depending on the demand-supply gap. Furthermore, the industry is highly competitive with few large players aggressively expanding capacities over the past few years, resulting in realisation pressures. Players tend to add large capacities whenever prices pick up and this leads to a fall in product realisations. Furthermore, the key raw materials, poly propylene granules, pure terephthalic acid (PTA), and mono ethylene glycol (MEG) are all derivatives of crude and hence, operating margin remains susceptible to volatility in crude prices. Players have the flexibility to pass on any hike in raw material prices to an extent.

 

• Average financial risk profile: With continued debt-funded capex over the past few years, the financial risk profile remains average with debt/Ebitda ratio of 1.86 times in fiscal 2022. Gearing was comfortable below 0.8 time as on March 31, 2022, while the interest coverage and net cash accrual to total debt ratios were healthy around 10 times and 0.3 time, respectively, in fiscal 2022.

 

The company is currently setting up a CPP line at a total cost of around Rs 150 crore, funded with a debt: equity mix of 3:1. Gross debt is expected to peak around Rs 1,000 crore as on March 31, 2023. With lower operating margin and higher debt levels in fiscal 2023, debt protection metrics, which had recovered due to strong profitability in fiscal 2022, are likely to moderate going forward; debt to EBITDA levels are expected to rise to nearly 2.5 times and then correct to 2-2.25 times. CPFL is not expected to undertake any further capacity expansion in the packaging films business in the near-term. Any large debt-funded capex will remain a key monitorable.

Liquidity: Adequate

Cash accruals, expected at over Rs 250 crore annually, will be sufficient to cover the annual debt obligations of ~Rs 95-125 crore over the next 3 years. Cash and equivalents were low around Rs 4 crore as on March 31, 2022. Combined bank limit utilisation averaged 83% (with permitted interchangeability between fund-based and non-fund-based facilities) during the 12 months through September 2022. Any material liability arising from the outcome of the recent IT raid may exert pressure on liquidity, and thus, remains a monitorable.

Outlook: Stable 

CPFL should sustain its business risk profile over the medium term, supported by steady demand for its products, healthy capacity utilisation and benefits of new BOPET line, likely to accrue from fiscal 2023. The financial risk profile is expected to remain adequate, despite ongoing debt-funded capex, supported by steady cash accrual.

Rating Sensitivity factors

Upward factors

• Better than expected revenue growth, and sustenance of healthy operating margin, leading to higher annual cash generation
• Improvement in financial metrics with Debt/Ebitda remaining below 2-2.25 time on sustained basis
• Significant improvement in liquidity position, in form of higher unutilised bank lines and cash surpluses

 

Downward factors

• Material deterioration in business performance, including sharp decline operating profitability impacting cash generation
• Deterioration in financial metrics with Debt/Ebitda increasing above 2.75-3 times, including due to additional debt funded capex, project cost overruns or support offered to weak group companies, or to fund possible penalties relating to recent IT raids.
• Significant weakening of liquidity position due to elongation of working capital cycle, leading to higher bank limit utilisation on sustained basis

About the Company

CPFL, incorporated in 2009, manufactures BOPP, BOPET, and metallised films, which are widely used in the packaging industry. The company is part of the Ahmedabad-based Chiripal group, which is present across various industries, including textiles, education, real estate, packaging and chemicals. The company has manufacturing facilities at Vraj Integrated Textile Park near Ahmedabad and at Hyderabad. It has plant capacities of 128,150 tpa (3 lines) and 79,800 tpa (2 lines), for BOPP and BOPET, respectively. It has also set up a polyester chips manufacturing facility with capacity of 220,000 tpa, and a coating film line with capacity of 4,500 tpa.

Key Financial Indicators (Standalone)

As on / for the period ended March 31		2022	2021
Operating income	Rs crore	3,317	2,042
Profit after tax (PAT)	Rs crore	219	87
PAT margin	%	6.6	4.3
Adjusted debt/adjusted networth	Times	0.79	0.88
Adjusted interest coverage	Times	10.07	5.34

 

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 level	Rating assigned with outlook
NA	Term Loan 1	NA	NA	Sep-24	18.00	NA	CRISIL A-/Stable
NA	Term Loan 2	NA	NA	Sep-24	18.00	NA	CRISIL A-/Stable
NA	Term Loan 3	NA	NA	Mar-27	25.00	NA	CRISIL A-/Stable
NA	Term Loan 4	NA	NA	Mar-27	25.00	NA	CRISIL A-/Stable
NA	Term Loan 5	NA	NA	Nov-29	35.00	NA	CRISIL A-/Stable
NA	Term Loan 6	NA	NA	Sep-29	9.00	NA	CRISIL A-/Stable
NA	Term Loan 7	NA	NA	Dec-31	78.00	NA	CRISIL A-/Stable
NA	Term Loan 8	NA	NA	Dec-31	59.00	NA	CRISIL A-/Stable
NA	Term Loan 9	NA	NA	Dec-31	26.00	NA	CRISIL A-/Stable
NA	Term Loan 10	NA	NA	Mar-33	50.00	NA	CRISIL A-/Stable
NA	Term Loan 11	NA	NA	Mar-32	40.00	NA	CRISIL A-/Stable
NA	Proposed Term Loan	NA	NA	NA	91.26	NA	CRISIL A-/Stable
NA	Fund-Based Facilities	NA	NA	NA	275.00	NA	CRISIL A-/Stable
NA	Non-Fund Based Limit	NA	NA	NA	390.00	NA	CRISIL A2+