Rating Rationale
July 22, 2020 | Mumbai
Jindal Poly Films Limited
Ratings upgraded to 'CRISIL AA-/Stable/CRISIL A1+'; CP withdrawn
 
Rating Action
Total Bank Loan Facilities Rated Rs.848 Crore
Long Term Rating CRISIL AA-/Stable (Upgraded from 'CRISIL A+/Positive')
Short Term Rating CRISIL A1+ (Upgraded from 'CRISIL A1')
 
Rs.60 Crore Commercial Paper CRISIL A1+ (Upgraded from 'CRISIL A1'; Rating Withdrawn)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its rating on the bank loan facilities of Jindal Poly Films Limited (JPFL; part of the BC Jindal group) to 'CRISIL AA-/Stable/CRISIL A1+' from 'CRISIL A+/Positive/CRISIL A1'. The rating on the commercial paper has also been upgraded to 'CRISIL A1+' from 'CRISIL A1' and subsequently withdrawn as per the company's request and independent confirmation of no outstanding. This is in compliance with CRISIL's withdrawal policy.
 
The upgrade reflects CRISIL's expectation of an improvement in the credit risk profile over the medium term, driven by healthy cash accrual and better credit metrics, and a healthy market position. The earnings before interest, tax, depreciation and amortisation (EBITDA) has increased by over 40% to Rs 648 crore, with the margin at 18.3%, in fiscal 2020 as compared with the previous fiscal. This has led to further improvement in liquidity to Rs 650 crore as on March 31, 2020. The margin is expected to moderate because of inherent cyclicality in demand and newer capacities being added in the industry.
 
Furthermore, the company had, in March 2020, implemented spun-melt fabric line under the Global Non-Wovens Division (GNL) with a capacity of 18,000 tonne per annum (tpa). The new bi-axially oriented polypropylene (BOPP) capacity of 52,500 tpa is expected to be commissioned by September 2020. With healthy cash flows from these expansions, the financial risk profile is expected to improve. Any new capital expenditure (capex) will be largely funded through the healthy existing cash balance.
 
The company has been able to maintain steady operating performance during the Covid-19 driven national lockdown as well because of healthy demand for packaging and hygiene products. Hence, while overall revenue may be marginally lower in fiscal 2021, the operating margin should remain healthy. Furthermore, no support to the group's power asset is expected over the medium term. With no major debt funded capital expansion, JPFL's net debt to EBITDA ratio should remain under 2 times over the medium term. Any large debt funded capex leading to deterioration in debt protection metrics or significant reduction in liquidity will be a key monitorable.
 
The ratings continue to reflect market leadership in the domestic flexible packaging business and healthy operating efficiency. These strengths are partially offset by vulnerability to volatility in raw material prices and demand-supply dynamics of the business, and increase in debt following ongoing capacity expansion in domestic operations.

Analytical Approach

CRISIL continues with a standalone approach for arriving at the ratings. From December 2017, JPF Netherlands BV, Netherlands, ceased to be a subsidiary of JPFL as due to issuance of new shares to a third-party investor, the shareholding of JPFL in the former had been diluted to 49.5% from 51%. Further, the entire investment of JPFL in JPF Netherlands BV has been demerged and transferred into Universus Photo Imaging Limited (Earlier known as Jindal Photo Imaging Limited). Further, as per the management, overseas operations are self-sustainable and cash flows from domestic and overseas entities are not fungible. The debt in overseas operations is ring-fenced from JPFL and there are limited business linkages between domestic and overseas operations.
 
CRISIL, in the past, had reduced the networth by the outstanding investments in the power entity, Jindal India Thermal Power Ltd (JITPL), through Jindal India Powertech Ltd. However, in fiscal 2019, the entire exposure of JPFL to JITPL has been written off. With no new investments expected in JITPL, this analytical adjustment is no longer required. Further, Jindal Photo Films Division is now not consolidated since its demerger into Universus Photo Imaging Limited (Earlier known as Jindal Photo Imaging Limited) in fiscal 2020.

Key Rating Drivers & Detailed Description
Strengths:
* Leadership position in the domestic market
The company is the largest player in India's bi-axially-oriented polyethylene terephthalate (BOPET) and BOPP markets, with capacities of 177,500 tpa and 251,000 tpa, respectively. It also has a strong position in the high-value-added metallised films market, with consolidated capacity of 71,000 tpa, and in coated products with capacity of 19,678 tpa. The capacity under GNL has also been doubled to 36,000 tpa in March 2020 along with commissioning of a nonwoven line. The domestic BOPP capacity will also expand to 3,03,500 tpa by September 2020. The company has regular capex to expand capacities and therefore is expected to maintain its leadership position over the medium term.
 
* Healthy operating efficiency
Operating efficiency in the domestic business is driven by a single-location manufacturing capacity in Nashik, Maharashtra, which results in economies of scale and hence low per-unit cost of production. Moreover, as the market leader, the company enjoys flexibility in procurement of raw material 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 business segment under GNL remains profitable amid growing demand for hygiene products. The operating margin had improved to 18.4% in fiscal 2020 from 12.3% in the previous fiscal amid healthy demand for packaging products. While the margin is expected to moderate due to cyclicality in demand along with fluctuating raw material prices, healthy operating efficiency is likely to be maintained.
 
Weaknesses:
* Vulnerability to volatile raw material costs and demand-supply dynamics
The BOPP and BOPET business is cyclical; product realisations have fluctuated in the past depending on the demand-supply gap. Also, the industry is highly fragmented and players tend to add large capacities whenever there is improvement in prices, leading to a fall in product realisations. For instance, the operating margin of the company increased to 34.9% in fiscal 2011 from 21.4% in fiscal 2010 before correcting to 15.3% in fiscal 2012 and 7.3% in fiscal 2013 as new capacities were added. Similarly, while the margin gradually improved to 14.9% in fiscal 2016, it again moderated to 12.3% in fiscal 2019. It has again increased to 18.3% in fiscal 2020 with healthy realisations across product segments. Profitability is also vulnerable to volatility in raw material prices as cost of raw material accounts for 55-60% of sales. The operating margin is expected to moderate over the medium term to around 12%, though cash accrual should be healthy.
 
* Increased debt due to ongoing capacity expansion
Debt has remained high due to regular capacity additions. Debt as on March 31, 2020, was Rs 1,402 crore against Rs 1,066 crore a year earlier. The company has further made a prepayment of its term loan of Rs 37 crore in first quarter of fiscal 2021. The company regularly undertakes capacity expansions which in the past has been largely debt funded. In fiscal 2019, the company increased its domestic BOPET and CPP capacities with an investment of Rs 380 crore while a spun-melt fabric capacity was added in March 2020 at a cost of Rs 335 crore. A new BOPP capacity of 52,500 tpa along with another CPP line is being implemented at a cost of Rs 350 crore. While the former is expected to be commissioned by September 2020, the latter has become operational in March 2020. The company is planning a further investment of around Rs 700 crore to set up an additional BOPP and BOPET line, the plans for which are in nascent stage. Lower reliance on debt is expected for funding capex plans due to strong liquidity. Nevertheless, debt is expected to remain at Rs 1,400-1,500 crore over the next two fiscals. While investments in JITPL in the past have precluded debt reduction, this entire exposure has been written off in fiscal 2019. No further support to this entity is expected. 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 continues to remain robust with cash and liquid investments was about Rs 650 crore as on March 31, 2020 (Rs 458 crore a year earlier). The company has maintained over Rs 200 crore cash and liquid investments since March 2017. Liquidity is further aided by fund-based working capital lines of Rs 275 crore, which were utilised at an average of 20% during the 12 months ended April 30, 2020. In fiscal 2021, net cash accrual is expected to be healthy at over Rs 450 crore against repayment obligation of around Rs 243 crore. Internal cash accrual, cash and cash equivalents, and unutilised bank lines should be sufficient to meet repayment obligation as well as incremental working capital requirement in the near term.

Outlook: Stable

CRISIL 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 cash accrual
* Sustenance of healthy liquidity at over Rs 600 crore along with a better-than-expected capital structure
 
Downward factors
* Further investment in the power project or any other unrelated businesses
* Lower-than-expected cash accrual on account of reduction in the operating margin or weaker demand
* Gross debt to EBITDA of over 3 times on a sustained basis
About the Company

JPFL, 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 currently manufactures polyester chips and the complete range of packaging films comprising BOPET and BOPP. It has capacities of 1,77,500 tpa and 2,51,000 tpa for BOPET and BOPP, respectively. In February 2014, it acquired 60.45% stake in GNL; the stake increased to 100% in fiscal 2017. GNL's unit at Nashik, having a capacity of 36,000 tpa, manufactures non-woven products for hygiene and medical applications and has a reputed customer base. In fiscal 2019, the manufacturing division of JPL, which is primarily engaged in the photo-print paper, X-ray films, and thermal printing machines business, was demerged from JPFL. JPL has two manufacturing units, one each in Daman and Diu; and Samba, Jammu & Kashmir.

Key Financial Indicators (Standalone - Company reported)
As on/for the period ended March 31   2020 2019
Revenue Rs crore 3517 3694
Profit after tax (PAT) Rs crore 479 -372
PAT margin % 13.6 -10.1
Adjusted debt/adjusted networth Times 0.78 0.73
Interest coverage Times 12.05 8.97

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 Commercial Paper NA NA 7-365 days 60 Simple Withdrawn
NA Rupee Term Loan NA NA Sep-25 95 NA CRISIL AA-/Stable
NA Rupee Term Loan NA NA Jun-21 19 NA CRISIL AA-/Stable
NA Long Term loan NA NA Jan-22 40 NA CRISIL AA-/Stable
NA Rupee Term loan NA NA May-24 85 NA CRISIL AA-/Stable
NA Rupee Term loan NA NA Jun-21 9 NA CRISIL AA-/Stable
NA Proposed Working Capital Facility^ NA NA NA 250 NA CRISIL AA-/Stable
NA Proposed Non-fund based limits NA NA NA 350 NA CRISIL A1+
^Fully interchangeability with Non Fund based limits
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  60.00  Withdrawn      09-08-19  CRISIL A1  03-12-18  CRISIL A1  10-08-17  CRISIL A1  CRISIL A1 
                23-08-18  CRISIL A1  18-07-17  CRISIL A1   
                20-04-18  CRISIL A1  28-02-17  CRISIL A1   
                03-04-18  CRISIL A1       
Non Convertible Debentures  LT    --    --    --  03-04-18  Withdrawal  10-08-17  CRISIL A+/Stable  CRISIL A+/Negative 
                    18-07-17  CRISIL A+/Stable   
                    28-02-17  CRISIL A+/Negative   
Fund-based Bank Facilities  LT/ST  498.00  CRISIL AA-/Stable      09-08-19  CRISIL A+/Positive  03-12-18  CRISIL A+/Stable  10-08-17  CRISIL A+/Stable  CRISIL A+/Negative 
                23-08-18  CRISIL A+/Stable  18-07-17  CRISIL A+/Stable   
                20-04-18  CRISIL A+/Stable  28-02-17  CRISIL A+/Negative   
                03-04-18  CRISIL A+/Stable       
Non Fund-based Bank Facilities  LT/ST  350.00  CRISIL A1+      09-08-19  CRISIL A1  03-12-18  CRISIL A1  10-08-17  CRISIL A1  CRISIL A1 
                    18-07-17  CRISIL A1   
                    28-02-17  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
Long Term Loan 40 CRISIL AA-/Stable Long Term Loan 115 CRISIL A+/Positive
Proposed Non Fund based limits 350 CRISIL A1+ Proposed Fund-Based Bank Limits^ 250 CRISIL A+/Positive
Proposed Working Capital Facility^ 250 CRISIL AA-/Stable Proposed Non Fund based limits^^ 315 CRISIL A1
Rupee Term Loan 208 CRISIL AA-/Stable Rupee Term Loan 133 CRISIL A+/Positive
-- 0 -- Working Capital Facility** 35 CRISIL A+/Positive
Total 848 -- Total 848 --
**This facility is for Jindal Photo Division of Jindal Poly Films Limited
^Fully interchangeability with Non Fund based limits
^^Fully interchangeability with 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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