Rating Rationale
March 24, 2022 | Mumbai
Huhtamaki India Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.175 Crore
Long Term RatingCRISIL AA-/Stable (Reaffirmed)
 
Rs.150 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on the bank facilities and commercial paper programme of Huhtamaki India Limited (HIL).

 

In 2022, HIL is expected to report revenue growth of 8-9%, driven by higher realisations and sustained orders from existing customers. Operating margin is expected to improve to around 8% against over 4% in 2021, but still lower than historical levels of 9-12%. This is driven by the company’s efforts to transfer its customers to shorter price reset contracts, in light of increasing raw material prices; but offset by sustained high crude prices due to current geo-political tensions.

 

In 2021, HIL reported revenue growth of 7% despite the Covid-19 pandemic, but operating margin dipped to over 4%, because of continued increase in the prices of raw materials caused by high crude oil prices and lag in fully passing on these to customers.

 

The ratings continue to reflect HIL's established position in the flexible packaging industry, healthy financial risk profile and operational and financial support from the parent, Huhtamaki Oyj (Huhtamaki), Finland. These strengths are partially offset by exposure to intense competition in the fragmented flexible packaging industry, regulatory risks related to environment, and susceptibility of profitability to volatility in raw material prices.

Analytical Approach

CRISIL Ratings has amortised the goodwill on acquisition of Ajanta Packaging (Ajanta) of around Rs. 47 crore over a period of five years commencing June 2018.

 

CRISIL Ratings has also applied the parent notch-up criteria to factor in the operational and financial support from the parent Huhtamaki, which owns near 67.73% stake in HIL.

Key Rating Drivers & Detailed Description

Strengths:

  • Established market position in the premium flexible packaging market

HIL is a leading converter in the domestic flexible packaging industry. Its established market position is supported by diversified product range, which comprises flexibles, labels, and metallised and polythene films. CRISIL Ratings believes HIL’s strong and diverse customer profile will continue to support its strong business risk profile over the medium term. HIL’s innovation and product development capabilities are further enhanced by its parent, Huhtamaki providing support in product development.

 

  • Healthy financial risk profile

The financial risk profile is supported by healthy networth of Rs 644 crore and debt of Rs 349 crore as on December 31, 2021, resulting in gearing below 0.54 time. However, the debt protection metrics moderated in 2021 with interest coverage ratio of 4.4 times and net cash accrual to total debt ratio of 0.20 time from 8.9 times and 0.70 time respectively, in 2020, on account of moderation in operating margin and one-time expenses pertaining to relocation of Thane plant, Management Consulting and voluntary retirement expenses together amounting to around Rs 70 crore. Nevertheless, both operating margin and cash accrual are expected to improve over the medium term supported by transfer of customers to shorter price reset contracts. As a result, healthy cash accrual of Rs 190-260 crore over the medium term will be sufficient to meet capital expenditure (capex) of Rs 100 crore per annum and incremental working capital requirements, resulting in gearing improving to below 0.4 time and interest coverage ratio to over 11 times over the medium term.

 

  • Operational and financial support from the parent

HIL receives support from its parent, Huhtamaki, on product development along with operational and financial support. The parent has provided financial support to the company in the form of external commercial borrowings amounting to Rs 200 crore at competitive rates and has also provided corporate guarantees to the bankers of HIL.

 

Weaknesses:

  • Exposure to intense competition in the fragmented flexible packaging industry and regulatory risks related to environment

The fragmented nature of the flexible packaging industry puts pressure on profitability of the converters. Though the industry is highly consolidated in terms of catering to the fast moving consumer goods (FMCG) and pharmaceutical customers, there is intense competition among the players, which restricts pricing flexibility. Also, these companies have limited bargaining power against large FMCG and pharmaceutical players. The company is also exposed to regulatory risks due to increasing focus on environmental issues. Any adverse regulatory changes, impacting the credit profile of HIL, is a monitorable.

 

  • Susceptibility of profitability to volatility in raw material prices

Raw material cost accounts for 65-70% of the company’s operating income. The prices of key raw materials, such as films, polyethylene granules, and biaxially-oriented polyethylene, are linked to crude oil prices, which are volatile and are factored into pricing under terms with customers. CRISIL Ratings believes the company’s operating margin will remain susceptible to volatility in input cost

Liquidity: Strong

HIL enjoys strong liquidity with cash and cash equivalents of over Rs. 30 crore and unutilised fund based bank lines of Rs 220 crore as on December 31, 2021. Net cash accrual of Rs 190-270 crore over 2022 to 2024 will be sufficient to meet annual capex of Rs 100 crore and incremental working capital requirements.

Outlook: Stable

CRISIL Ratings believes HIL will maintain a healthy business risk profile over the medium term and will continue to benefit from the operational and financial support from its parent, Huhtamaki.

Rating Sensitivity factors

Upward factors

  • Substantial improvement in business performance, leading to improvement in operating profitability to above 12% on sustainable basis
  • Significant improvement in capital structure and debt protection metrics

 

Downward factors

  • Deterioration in the credit profile of the parent or change in stance of support by the parent
  • Sustained weakening of the operating performance, for instance operating margin moderating to below 5% on sustained basis.
  • Large debt funded capex or acquisition, or any adverse regulatory changes in future, impacting the credit profile of the company

About the Company

Founded in 1935, HIL is an established player in India’s flexible packaging industry. The company manufactures printed laminates of plastic, aluminum foil, and paper-based films. Its parent, Huhtamaki holds 67.73% equity stake in HIL as on December 31, 2021.

 

HIL has 14 manufacturing facilities in Maharashtra, Dadra & Nagar Haveli, Telangana, Uttarakhand, Sikkim, Assam, Karnataka, Daman, Andhra Pradesh and Himachal Pradesh

Key Financial Indicators

As on / for the period ended December 31

Units

2021*

2020

Revenue

Rs Crore

2625

2463

Profit after tax

Rs Crore

-23

96

PAT margin

%

-0.9

3.9

Adjusted Debt/Adjusted Networth

Times

0.54

0.34

Interest coverage

Times

4.41

8.88

   *Provisional

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of Instrument

Date of Allotment

Coupon Rate (%)

Maturity

Date

Issue Size

(Rs. Cr)

Complexity

Level

Rating Assigned

with Outlook

NA

Proposed Term Loan

NA

NA

NA

87.0

NA

CRISIL AA-/Stable

NA

Working Capital Facility

NA

NA

NA

88.0

NA

CRISIL AA-/Stable

NA

Commercial Paper

NA

NA

7-365 days

150.0

Simple

CRISIL A1+

 

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 175.0 CRISIL AA-/Stable   -- 29-04-21 CRISIL AA-/Stable 30-04-20 CRISIL AA-/Stable 10-10-19 CRISIL AA-/Stable CRISIL AA-/Stable
      --   --   -- 16-04-20 CRISIL AA-/Stable 26-06-19 CRISIL AA-/Stable --
      --   --   --   -- 27-03-19 CRISIL AA-/Stable --
Non-Fund Based Facilities ST   --   --   -- 16-04-20 CRISIL A1+ 10-10-19 CRISIL A1+ CRISIL A1+
      --   --   --   -- 26-06-19 CRISIL A1+ --
      --   --   --   -- 27-03-19 CRISIL A1+ --
Commercial Paper ST 150.0 CRISIL A1+   -- 29-04-21 CRISIL A1+ 30-04-20 CRISIL A1+ 10-10-19 CRISIL A1+ CRISIL A1+
      --   --   -- 16-04-20 CRISIL A1+ 26-06-19 CRISIL A1+ --
      --   --   --   -- 27-03-19 CRISIL A1+ --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Rating
Proposed Term Loan 87 CRISIL AA-/Stable
Working Capital Facility 88 CRISIL AA-/Stable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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