Detailed Rationale

CRISIL ratings has removed its ratings, on the bank facilities of Jindal Poly Films Limited (JPFL), from ‘Rating Watch with Developing Implications’ and has reaffirmed its ratings at ‘CRISIL AA-/CRISIL A1+’, while assigning a ‘Stable’ outlook to its long-term rating.

 

The ratings had earlier been placed on watch following the announcement by the company regarding transfer of its packaging film business, which constituted 85% of the overall revenue, to its subsidiary -- JPFL Films Pvt Ltd (JPFL Films, rated CRISIL AA-/Stable/CRISIL A1+). Simultaneously, JPFL had entered into agreement with Project Holdings Fourteen (DIFC) Ltd, a special purpose vehicle of Special Investment Fund of Brookfield (Brookfield SPV) wherein Brookfield SPV was to invest Rs 2,000 crore for a 25% minority stake (on fully diluted basis and subject to adjustment linked to financial performance of JPFL, in any case Brookfield SPV would remain a minority investor) in JPFL Films.

 

CRISIL Ratings has resolved the watch consequent to the successful transfer of packaging division business in August 2022, with JPFL completing all necessary terms and conditions. A consideration of Rs 2000 crore was paid by Brookfield SPV in exchange for 19,990 compulsory convertible preference shares and 20 equity shares in JPFL Films.

 

Furthermore, clarity regarding the managerial, operational, and financial linkages has been received between JPFL and JPFL Films. Going forward, JPFL will act as a holding (75% stake in JPFL Films) cum operating company (with residual business of nonwoven fabric contributing around 15% of existing revenue). The management has articulated fungibility of funds, if required, between the two entities and strong management linkages as well as shared name will ensure the same.

 

During first half of fiscal 2023, the consolidated revenue of the company has increased by 7% on-year due to higher realisation from packaging films business during first quarter of fiscal 2023. However, operating margins declined to 13.8% in first half of fiscal 2023 from 23.1% during first half of fiscal 2022, due to steep decline of prices of commodity packaging films during second quarter of fiscal 2023. The packaging industry at present is facing a supply glut due to bunching up of capacities during the last one year, which lead to pressure on the realisations and margins. Going forward, the realisations are expected to remain impacted. However, the profitability is expected to remain better than historical levels (prior to fiscal 2021) going forward.

 

The revenue from non-woven division saw a decline during fiscal 2022 on-year to Rs 598 crores from Rs 610 crores in fiscal 2021 and decline was also seen during first half of fiscal 2023 on-year to Rs 257 crores from Rs 307 crores during first half of last year due to decline in export volumes. The EBIT margins were at 22.7% for fiscal 2022 against 42.1% in previous year and 16.3% during first half of fiscal 2023 against 29.6% during first half of fiscal 2022. The margins of non-woven fabric division were expected to decline from the highs of fiscal 2022 and fiscal 2021, however are expected to remain healthy too going forward.

 

The ratings continue to reflect market leadership of the company in the domestic flexible packaging and nonwovens fabric business and healthy operating efficiency. These strengths are partially offset by vulnerability to volatility in raw material prices and demand-supply dynamics, and continued debt-funded capacity expansion.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of JPFL and its wholly owned subsidiaries on account of managerial, operational, and financial linkages among the entities. The company will continue to hold majority shareholding in JPFL Films and strong management linkages as well as shared name will ensure fungibility of funds between JPFL and JPFL Films. CRISIL Ratings has changed its analytical approach for JPFL from standalone to consolidated approach to get a holistic view on the business of JPFL as a group.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Leadership position in the domestic market

JPFL Group is the largest flexible packaging player in India – the business which has been placed under JPFL Films. JPFL Films has biaxially-oriented polyethylene terephthalate (BOPET) and biaxially oriented polypropylene (BOPP) capacities of 177,500 tonne per annum (TPA) and 302,000 TPA, respectively. It also has a strong position in the high-value-added metallised films market, with consolidated capacity of 71,640 TPA, and in coated products, with capacity of 19,678 TPA. The company has non-woven business where the capacity expansion up to 60,000 TPA (from existing 36,000 TPA) is in progress, with commissioning of a nonwoven line by February 2023. JPFL undertakes regular capital expenditure (capex) to expand capacities and will likely maintain its leadership position over the medium term.

 

• Healthy operating efficiency

Operating efficiency in the domestic flexible packaging business is driven by a single-location manufacturing capacity in Nashik, Maharashtra, which results in economies of scale and low per-unit cost of production. Moreover, as the market leader, the group enjoys flexibility in raw material procurement because of its ability to choose between foreign and local suppliers, depending on the price quoted. The BOPET operations are backward integrated into polymer chips, which mitigates inherent volatility in raw material cost. Also, the non-woven business remains profitable amid healthy demand for medical and hygiene products.

 

The operating performance of JPFL remains strong, with revenue and earnings before interest, tax, depreciation, and amortisation (EBITDA) increasing to Rs 5,878 crore and Rs 1,480 crore, respectively, in fiscal 2022 from Rs 4,082 crore and Rs 1,129 crore, in fiscal 2021, driven by strong demand for packaging and hygiene products and subdued raw material prices. During first half of fiscal 2023, the revenue grew to Rs 3006 crores from Rs 2797 crores in first half of fiscal 2022. However, the EBITDA declined to Rs 416 crores in first half fiscal 2023 from Rs 646 crores during same period from last year. The margins are expected to remain subdued in the medium term, due to temporary oversupply in flexible packaging business in India.

 

Weaknesses: 

• Vulnerability to volatile raw material costs and demand-supply dynamics

The BOPP and BOPET business are cyclical. Product realisations have fluctuated in the past depending on the demand-supply gap. Also, the players tend to add large capacities when prices improve, leading to a fall in product realisations. The margins, which remained around 12% historically, rose to 19.2% in fiscal 2020, 27.6% in fiscal 2021 and to 25.2 % in fiscal 2022 backed by healthy realisations across product segments. Due to chunky capacity addition in the industry in the current fiscal, the margins are declining again as witnessed during Q2 fiscal 2023 wherein the margins stood at 3.1%.

 

Profitability is also vulnerable to volatility in raw material prices as raw material cost accounts for 55-60% of sales. The operating margin is expected to moderate to 14-16% over the medium term, though cash accrual should be healthy.

 

• Continued debt-funded capacity expansion

The group regularly undertakes capacity expansion, which is largely debt funded. The company has incurred capex of over Rs. 1,400 crores over the last four fiscals, primarily for capacity addition. The group started a new capacitor and a new BOPP line in fiscal 2022 at capex of Rs 550 crore. Furthermore, the group has added new non-woven line in current fiscal which is expected to commission by February 2023. The group is further planning to further invest Rs 250 crore and Rs 400 crore in fiscals 2023 (remaining) and 2024, respectively, to add BOPP line of 42,000 TPA and BOPET line of 43,200 TPA, which the company is planning to fund 75% via debt and rest via cash accrual. Any delay in ramp-up of new capacities, or any new, large, debt-funded capex or acquisition could adversely impact the financial risk profile and hence will remain a key monitorable.

Liquidity: Strong

Liquidity remains robust with cash and liquid investments of around Rs 3,900 crore as on September 30, 2022, on consolidated basis, this includes funds received from Brookfield SPV for successful completion of business transfer. Unutilised bank lines and adequate cash accrual and cash and equivalent should be sufficient to meet debt obligation as well as incremental working capital requirement in the near term.

Outlook: Stable

CRISIL Ratings believes JPFL will sustain its financial risk profile and established market position, while sound operating efficiency should help maintain healthy cash accrual, over the medium term.

Rating Sensitivity factors

Upward factors

• Significant and sustained improvement in operating performance, leading to higher-than-expected cash accrual which maintaining a healthy product diversity
• Maintaining a healthy Gross debt to EBITDA ratio of below 1.5 times on a sustained level

 

Downward factors

• Weakening of business and/or financial risk profile (including liquidity) due to investments in new businesses
• Deviation from understanding on management, operating and financial linkages with JPFL Films, which may warrant reviewing analytical approach
• Lower-than-expected cash accrual on account of reduction in the operating margin or weaker demand
• Gross debt to EBITDA ratio of over 3 times on a sustained basis

About the Company

JPFL, a part of the BC Jindal group, was incorporated in 1974 to manufacture partially oriented yarn (POY). In 1996, the company diversified into packaging films by manufacturing BOPET. It stopped manufacturing POY in fiscal 2006 to focus on the packaging films division. It now manufactures polyester chips and the complete range of packaging films comprising BOPET and BOPP and non-Woven fabrics. It has capacities of 177,500 TPA and 302,000 TPA for BOPET and BOPP, respectively. In February 2014, it acquired 60.45% stake in GNL and increased the stake to 100% in fiscal 2017. GNL has a unit at Nashik with capacity of 36,000 TPA of nonwoven products for hygiene and medical applications and has a reputed customer base.

 

During August 2022, the company demerged its packaging division to its subsidiary JPFL Films. This subsidiary is to be jointly held by JPFL and Brookfield SPV

Key Financial Indicators- (consolidated – company reported)

As on/for the period ended March 31		2022	2021
Revenue	Rs crore	5,878	4,082
Profit after tax (PAT)	Rs crore	1,150	749
PAT margin	%	19.56	18.34
Adjusted debt/adjusted net worth	Times	0.31	0.35
Interest coverage	Times	63.31	20.80

 

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	NA	NA	Nov-24	9.36	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Jun-28	150	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Jun-32	300	NA	CRISIL AA-/Stable
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	203.64	NA	CRISIL AA-/Stable
NA	Working Capital Facility	NA	NA	NA	50	NA	CRISIL AA-/Stable
NA	Working Capital Facility	NA	NA	NA	80	NA	CRISIL A1+
NA	Working Capital Facility	NA	NA	NA	5	NA	CRISIL AA-/Stable
NA	Working Capital Facility	NA	NA	NA	50	NA	CRISIL AA-/Stable

 

Annexure - List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Jindal Films India Limited	Full	Common management, financial linkages, and common promoters
Jindal Packaging Trading DMCC	Full
Jindal Imaging Limited	Full
JPFL Films Private Limited	Full
Jindal Polypack Limited	Full
Universus Poly & Steel Limited	Full
Jindal Specialty Films Limited	Full