CRISIL Ratings’ packaging industry outlook

Ramu Ramanathan (RR): An analysis of CRISIL-rated flexible packaging film companies, which account for over 60% of the industry’s revenue and debt, indicates brightening of their credit outlook over the near to medium term amid stable debt levels. Which companies are part of the CRISIL rating? And what is the scope of the study?
Nitesh Jain (NJ): CRISIL Ratings has looked at flexible packaging companies that account for over 60% of the industry’s revenue and debt. These include Jindal Poly Films, Cosmo Films, Uflex Ltd, Max Speciality Films, Ester Industries, Chiripal Polyfilms.

RR: In periods when demand-supply is well-balanced, firms are able to pass on input price variations to end-consumers. However, in phases of supply glut – largely on account of chunky capacity additions, a phenomenon common in this sector - it becomes difficult for players to fully pass on the input cost increases. Why so?
NJ: The bi-axially oriented polypropylene (BOPP) and bi-axially oriented polyethylene (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 when prices improve, leading to a fall in product realisations in subsequent periods. 

RR: Since prices of crude derivatives are inherently volatile, the demand-supply balance plays an important role in profitability of packaging players. What is your view? 
NJ: Raw material cost accounts for 55-60% of sales in this industry. Thus, profitability is vulnerable to volatility in raw material prices. The major input cost for flexible packaging film are crude derivatives, which have been inherently volatile. 

RR: And yet, there is a solid operating profitability of packaging film companies in India. You have said, a decadal high of 19% this fiscal; please elucidate.
NJ: As demand for packaging products outpaces supplies, the players are able to pass on the higher input costs and also improve their realisations. In periods of higher supplies, players are forced to reduce prices, irrespective of movement in input costs, leading to lower margins. 

For instance, as the above chart shows, growth in the operating margin of entities analysed by CRISIL Ratings fell from 13.8% in fiscal 2012 to ~10.4% in the next three years due to new capacities vitiating the demand-supply position. A similar cycle followed over fiscals 2016-2019. Growth has looked up again since fiscal 2020, with healthy realisations across product segments. The spurt in demand brought on by the pandemic pushed margin up to 21.1% last fiscal compared with previous estimates of ~19%.

RR: Industry capex has been slow in the past few years and operating rates are high at 80-90% – showing well-balanced demand-supply. Going forward will be see any investments to boost capacity or factory. 
NJ: This fiscal, players are again looking to add new capacities over the next 2-3 years as capacity addition in the past two fiscals was slower than growth in demand. Thus, operating margin is expected to moderate over the medium term to 15-17%, though it would still be healthy compared with earlier years.

RR: Other than adding capacities, any other strategy by the Indian films players?
NJ: Commodity flexible packaging products of BOPP and BOPET continues to dominate the overall product portfolio of the companies and players will continue to add these. However, the focus has also moved to speciality products which have specific applications in-line with the consumer requirements. Therefore, new coating, thermal, metalliser lines etc are being explored by majority of the players. Thus, in the post-pandemic world, volumes of speciality, sustainable/recyclable and customised products are expected to grow with increasing consumer awareness. Few domestic packaging films players have also entered into exclusive contracts with some of the FMCG firms. 

RR: What is the demand for BOPET and BOPP?
NJ: Demand for flexible packaging films remains healthy. However, in the recent past demand for BOPET has seen some decline, it remains robust for BOPP. The speciality products in the BOPP portfolio are witnessing faster growth for reasons discussed earlier. Export market has also improved, given growing demand from Europe across product segments, including sustainable plastics.

RR: According to you, how have the past 18 months panned out for the Indian packaging industry?
NJ: The flexible packaging films industry saw realisations improve in fiscals 2020 and 2021, riding on strong demand in domestic and international markets alike. Added to this, the players moved towards innovative new products such as sustainable/ recyclable plastics, metallised and -thermal coated products. 

RR: Why, according to you did BOPP and BOPET films perform well?
NJ: Both BOPP and BOPET films did well. Indeed, given the changing consumer preference, BOPP replaced a part of the traditional packaging methods such as aluminium foil.

RR: So, there has been a robust demand for BOPP films, supported by heightened hygiene consciousness plus growing in-home consumption? Right?
NJ: Yes. BOPP and BOPET films have diverse end-use applications. BOPP films have higher moisture retention properties and are used extensively to pack food products, mainly snacks, biscuits, pasta, dried foods, meat etc.

RR: What about BOPET films?
NJ: BOPET films, on their part, have more oxygen retention power, high tensile strength, longer shelf life, and better print quality. These films are used in photographic/X-ray, labels, metallic yarn in textile flexible packaging, cables, capacitors, hot stamping foils, release films, electronics, printing, pre-press and office supplies, sequins in textiles, motor insulations, and document lamination etc. 

RR: You speak of the impact caused by the pandemic, but what was transpiring prior to it?
NJ: In earlier years, growth in demand for flexible packaging in the country was driven by strong economic activity, along with rapid urbanisation and higher penetration of FMCG products. Export demand, especially from Europe, was tepid because of lower economic activity there.

RR: And since the onslaught of the pandemic in 2020 …
NJ: Since the onslaught of the pandemic early last year, however, consumers have adopted to using more of packaging products to mitigate the threat of infection from a communicable disease such as Covid-19. With people preferring to remain indoors, home delivery of foods, medicines, groceries, etc, has supported the growth in demand. Growing e-commerce purchases, too, have pushed up packaging requirements. 

RR: Are these lifestyle habit modifications here to stay?
NJ: While some of these consumption requirements were accelerated by the pandemic, the lifestyle behaviours are expected to continue. The products are expected to evolve continuously, though, in line with the growing recyclability/ sustainable plastic requirements. 

RR: Traditionally what was happening?
NJ: Traditionally, commodity packaging films products are used in combination (layers of BOPP and BOPET) to suit properties of moisture retention, tensile strength, etc, which hinders their recyclability as these are from different polymers. 

RR: Do the top brands echo these sentiments?
NJ: Yes. Large global FMCG players (HUL, Nestle, PepsiCo, Cadbury, etc) have in recent past committed to 100% recyclability of their product range in a phased manner. As a result, speciality packaging film products have shown increased traction. For example, a BOPP + BOPP lining (metallised, thermal or plain BOPP) makes these packaging films recyclable as these are from the same polymer family. 

RR: In this day and age, what are the FMCG companies looking at? Any buzz you picked up?
NJ: FMCG companies will look to tie up with reputed companies that are agile and have a track record of delivering consistent quality. Given this context, the larger packaging film firms would have an advantage over the smaller or unorganised players in being able to support the research and development for customisation, along with scaling up of production for the speciality product portfolio.

Nitesh Jain is the director – corporate and infrastructure sector at CRISIL Ratings. Jain joined CRISIL in 2006, and has about 15 years of experience in credit ratings. In his current role, he oversees credit rating assignments for over 250 large corporates across a wide range of sectors. These include cement, capital goods, power, fertilizer, logistics, oil and gas, consumer durables, telecom, media and entertainment. 

He is a Chartered Accountant (CA) from the Institute of Chartered Accountants of India. He is also responsible for recovery ratings for distressed assets acquired by Asset Reconstruction Companies (ARCs).