Rating Rationale
April 30, 2020 | Mumbai
Huhtamaki PPL Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.175 Crore
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
 
Rs.150 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on bank facilities and commercial paper programme of Huhtamaki PPL Limited (HPPL).
 
The rating action takes cognisance of measures taken by Government of India along with various state governments towards containment of COVID-19 which includes temporary closure of non-critical establishments, inter-state transportation etc. along-with advisory against travel and visiting areas of mass gatherings.
 
HPPL manufactures primary consumer packaging for essential commodities like food products, personal care, home care, hygiene and pharmaceuticals among others. Being part of supply chain of essential commodities, HPPL is allowed to operate the manufacturing units to ensure supply of primary packaging for the essential products. However, the manufacturing activities are scaled down and the units are operating at part capacity.
 
While, most of the governments' measures are applicable till May 03, 2020, revocation of the measures will be contingent upon directive from the Central government and extent of spread of COVID-19. A sustained long period of closure can result in deterioration in credit profile of HPPL. On the other hand, a faster reversal to normalcy may contain the extent of deterioration likely in credit quality. That said, the ability of the business to revert back to operational stability and any relief measures given by the government will be a key monitorable, and CRISIL will continue monitoring these events.
 
The NCDs of Rs 385.0 crore raised to fund the acquisition of Positive Packaging India Limited (PPIL) have been prepaid on December 20, 2019.
 
The ratings continue to reflect HPPL's established position in the flexible packaging industry and comfortable financial risk profile. These strengths are partially offset by exposure to intense competition in the fragmented flexible packaging industry and regulatory risks due to environmental issues, and susceptibility of profitability to volatility in raw material prices.

Analytical Approach

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

Key Rating Drivers & Detailed Description
Strengths
* Established market position in the premium flexible packaging market
HPPL is a leading converter in the domestic flexible packaging industry. Its established market position is supported by its diversified product range, which comprises flexibles, labels, and metallised and polythene films. CRISIL believes HPPL's strong and diverse customer profile will continue to support its strong business risk profile over the medium term. HPPL's innovation and product development capabilities are enhanced by parent, Huhtamaki Oyj (Huhtamaki), Finland
 
* Comfortable financial risk profile
The financial risk profile is marked by sufficient internal accruals and stable operating performance. The net debt is expected to remain at comfortable levels of around Rs 300 crore. Debt protection metrics are also expected to remain comfortable due to stable debt profile. The gearing is also expected to remain around 0.6 to 0.7 time over medium term against 0.43 time as on December 31, 2019.
 
Weaknesses
* Exposure to intense competition in the fragmented flexible packaging industry and regulatory risks due to environmental issues
The fragmented nature of flexible packaging industry puts pressure on profitability of the converters. Though the industry is highly consolidated in terms of catering to the 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/pharmaceutical players.
 
The company is exposed to regulatory risks due to increasing focus on environmental issues. Any adverse regulatory changes impacting the credit profile of HPPL is a monitorable.
 
* Susceptibility of profitability to volatility in raw material prices
Raw material cost accounts for around 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. HPPL is able to pass on the raw material price variations to customers with a lag of 3 to 6 months. CRISIL believes the company's operating margin will remain susceptible to volatility in input cost.
Liquidity Strong

HPPL enjoys strong liquidity with cash and cash equivalents of Rs. 115 crore as on April 02, 2020. Bank lines of around Rs 248 Cr were moderately utilized with average utilization of 33% for six months ended March 2020 (utilisation of over 60% in March 2020). The limits were utilised majorly for non-fund based purposes. The capital expenditure of Rs 80-100 crore will be funded through internal accruals.

Outlook: Stable

CRISIL believes HPPL will maintain a healthy business risk profile over the medium term, and will continue to benefit from business and financial support from Huhtamaki.
 
Rating Sensitivity factors
Upward factors

* Substantial improvement in business performance leading to improvement in operating profitability to above 12% on a sustainable basis
* Significant improvement in capital structure and debt protection metrics
 
Downward factors
* Considerable decline in business performance, profitability and cash accruals
* Weakening of financial profile with increase in TOL/TNW to over 2 times
* Any adverse regulatory changes in future impacting the credit profile

About the Company

HPPL, founded in 1935, is an established player in India's flexible packaging industry. The company manufactures printed laminates of plastic, aluminum foil, and paper-based films. Parent, Huhtamaki holds 66.94% equity stake in HPPL as on March 31, 2020.

HPPL has 18 manufacturing facilities in the states of Maharashtra, Dadra & Nagar Haveli, Telangana, Uttarakhand, Sikkim, Assam, Karnataka, Daman and Himachal Pradesh.
 
HPPL has completed acquisition of Ajanta in May 2018 and Ajanta's results are included in financial results of HPPL from June 2018.
 
HPPL has completed the acquisition of flexible packaging business of Mohan Mutha Polytex Pvt Ltd. in January 2020.

Key Financial Indicators
As on / for the period ended December 31 Units 2019 2018
Revenue Rs Crore 2599 2369
Profit after tax Rs Crore 161 29
PAT margin % 6.2% 1.2%
Adjusted Debt/Adjusted Networth Times 0.43 0.76
Interest coverage Times 9.95 7.62

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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 crore) Rating assigned with outlook
NA Term Loan NA NA 22-Feb-2021 100.0 CRISIL AA-/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 75.0 CRISIL AA-/Stable
NA Commercial Paper NA NA 7-365 days 150.0 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  150.00  CRISIL A1+  16-04-20  CRISIL A1+  10-10-19  CRISIL A1+  29-03-18  CRISIL A1+    --  -- 
            26-06-19  CRISIL A1+           
            27-03-19  CRISIL A1+           
Short Term Debt (Including Commercial Paper)  ST                  21-09-17  CRISIL A1+  CRISIL A1+ 
                    12-07-17  CRISIL A1+   
Fund-based Bank Facilities  LT/ST  175.00  CRISIL AA-/Stable  16-04-20  CRISIL AA-/Stable  10-10-19  CRISIL AA-/Stable  29-03-18  CRISIL AA-/Stable  21-09-17  CRISIL AA-/Stable  CRISIL AA-/Stable 
            26-06-19  CRISIL AA-/Stable      12-07-17  CRISIL AA-/Stable   
            27-03-19  CRISIL AA-/Stable           
Non Fund-based Bank Facilities  LT/ST      16-04-20  CRISIL A1+  10-10-19  CRISIL A1+  29-03-18  CRISIL A1+  21-09-17  CRISIL A1+  CRISIL A1+ 
            26-06-19  CRISIL A1+      12-07-17  CRISIL A1+   
            27-03-19  CRISIL A1+           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Long Term Bank Loan Facility 75 CRISIL AA-/Stable Cash Credit & Working Capital demand loan* 128.15 CRISIL AA-/Stable
Term Loan 100 CRISIL AA-/Stable Letter of credit & Bank Guarantee 46.5 CRISIL A1+
-- 0 -- Proposed Long Term Bank Loan Facility .35 CRISIL AA-/Stable
Total 175 -- Total 175 --
*Fully interchangeable with non-fund based limits
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for rating short term debt

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