Nitesh Jain, Director of CRISIL Ratings, believes that robust demand, supported by increased hygiene awareness, growing home consumption and moderate input costs, will improve the operating profitability of packaging film companies. to a 10-year high of 19% this fiscal year. In an exclusive interview with WhatPackaging? magazine, Nitesh Jain examines the role of the pandemic in boosting the industry.
Ramu Ramanathan (RR): An analysis of CRISIL-rated flexible packaging film companies, which account for over 60% of industry revenue and debt, indicates an improvement in their short- and medium-term credit outlook in a context of stable debt levels. Which companies are included in the CRISIL rating? And what is the scope of the study?
Nitesh Jain (NJ): CRISIL Ratings reviewed flexible packaging companies that account for over 60% of industry revenue and debt. These include Jindal Poly Films, Cosmo Films, Uflex Ltd, Max Specialty Films, Ester Industries, Chiripal Polyfilms.
RR: In times when supply and demand are well balanced, companies are able to pass on changes in input prices to end consumers. However, in phases of supply glut – largely due to bulky capacity additions, a common occurrence in this sector – it becomes difficult for players to fully pass on increases in input costs. Why is that ?
NEW JERSEY: The activity of biaxially oriented polypropylene (BOPP) and biaxially oriented polyethylene (BOPET) is cyclical. Product achievements have fluctuated in the past depending on the gap between supply and demand. In addition, the industry is highly fragmented and players tend to add large capacities when prices improve, resulting in lower product achievements in later periods.
RR: As the prices of crude oil derivatives are by nature volatile, the supply-demand balance plays an important role in the profitability of packaging players. What is your point of view ?
NJ: RThe cost of raw materials represents 55 to 60% of sales in this industry. Thus, profitability is vulnerable to the volatility of commodity prices. The main entry costs for flexible packaging films are crude derivatives, which have been inherently volatile.
RR: And yet there is a solid operational profitability of the packaging film companies in India. You said, a 10-year high of 19% for this fiscal year; thank you for clarifying.
NEW JERSEY: As the demand for packaging products exceeds the supply, the actors are able to pass on the higher input costs and also improve their outputs. In times of higher offers, players are forced to reduce prices, regardless of changes in input costs, which leads to lower margins.
For example, as shown in the graph above, the operating margin growth of the entities analyzed by CRISIL Ratings has gone from 13.8% in fiscal year 2012 to ~ 10.4% over the next three years. due to new capacities marring the supply-demand position. A similar cycle followed during the 2016-2019 fiscal years. Growth has resumed since fiscal 2020, with healthy achievements in all product segments. The surge in demand triggered by the pandemic pushed the margin up to 21.1% last year from previous estimates of around 19%.
RR: Industry investment spending has been slow in recent years and exploitation rates are high, at 80-90%, showing a balance between supply and demand. In the future, we will see all investments aimed at increasing the capacity or the plant.
NEW JERSEY: In this fiscal year, players are looking again to add new capacity over the next 2-3 years, as the addition of capacity over the past two years has been slower than demand growth. Thus, the operating margin should moderate in the medium term to 15-17%, but would remain healthy compared to previous years.
RR: Apart from adding capacity, another strategy for actors in Indian cinema?
NEW JERSEY: BOPP and BOPET’s flexible raw material packaging products continue to dominate the companies’ overall product portfolio and players will continue to add more. However, the focus has also shifted to specialty products which have specific applications in line with consumer demands. Therefore, new lines of coating, thermal, metallization, etc. are explored by the majority of actors. Thus, in the post-pandemic world, volumes of specialized, sustainable / recyclable and personalized products are expected to increase with increasing consumer awareness. Few of the national packaging film players have also concluded exclusive contracts with some of the FMCG companies.
RR: What is the demand for BOPET and BOPP?
NEW JERSEY: Demand for flexible packaging films remains strong. However, in the recent past the demand for BOPET has seen some decline, it remains robust for BOPP. The specialized products in the BOPP portfolio are growing faster for the reasons mentioned above. The export market has also improved, given growing demand from Europe in all product segments, including sustainable plastics.
RR: How do you think the last 18 months have been for the Indian packaging industry?
NEW JERSEY: The flexible packaging films industry saw its achievements improve during fiscal years 2020 and 2021, thanks to strong demand in the national and international markets. In addition, the players have turned to new innovative products such as sustainable / recyclable plastics, metallized and powder coated products.
RR: Why do you think BOPP and BOPET films work well?
NEW JERSEY: BOPP and BOPET films performed well. Indeed, in view of changing consumer preferences, BOPP has replaced some of the traditional packaging methods such as aluminum foil.
RR: So there has been a strong demand for BOPP films, supported by increased hygiene awareness and growing home consumption? Law?
NEW JERSEY: Yes. BOPP and BOPET films have various end applications. BOPP films have higher moisture retention properties and are widely used for packaging food products, mainly snacks, cookies, pasta, dried food, meat, etc.
RR: What about the BOPET films?
NEW JERSEY: BOPET films, on the other hand, have more oxygen holding power, high tensile strength, longer shelf life and better print quality. These films are used in photography / x-ray, labels, metallic threads in flexible textile packaging, cables, capacitors, hot stamping sheets, release films, electronics, printing, supplies prepress and office, glitter in textiles, engine insulation and document laminating, etc.
RR: You talk about the impact caused by the pandemic, but what happened before that?
NEW JERSEY: In previous years, the growth in demand for flexible packaging in the country was due to strong economic activity, as well as rapid urbanization and higher penetration of FMCG products. Export demand, especially from Europe, was lukewarm due to lower economic activity there.
RR: And since the onslaught of the pandemic in 2020 …
NEW JERSEY: Since the onslaught of the pandemic early last year, however, consumers have embraced greater use of packaging products to lessen the threat of infection with a communicable disease such as Covid-19. With people preferring to stay indoors, home delivery of food, medicine, groceries, etc., has supported the growth in demand. Growing e-commerce purchases have also increased packaging requirements.
RR: Are these lifestyle changes here to stay?
NEW JERSEY: While some of these consumer demands have been accelerated by the pandemic, lifestyle behaviors are expected to continue. However, products are expected to constantly evolve, in line with increasing demands for recyclability / sustainable plastic.
RR: Traditionally, what happened?
NEW JERSEY: Traditionally, basic packaging film products are used in combination (layers of BOPP and BOPET) to accommodate the properties of moisture retention, tensile strength, etc., which hampers their recyclability because they come from different polymers.
RR: Do the big brands echo these sentiments?
NEW JERSEY: Yes. The major global players in consumer products (HUL, NestlÃ©, PepsiCo, Cadbury, etc.) have recently committed to 100% recyclability of their product range gradually. As a result, specialty packaging film products have shown increased traction. For example, a BOPP + BOPP (metallized, thermal or plain BOPP) coating makes these packaging films recyclable because they are from the same family of polymers.
RR: What are FMCG companies looking at these days? A buzz that you picked up?
NEW JERSEY: FMCG companies will seek to partner with reputable companies that are agile and have a proven track record of consistent quality. In this context, large packaging film companies would have an advantage over smaller or unorganized players to be able to support research and development for customization, as well as increased production for the specialty product portfolio. .
Nitesh Jain is the Director of Enterprise and Infrastructure Sector at CRISIL Ratings. Jain joined CRISIL in 2006, and has approximately 15 years of experience in credit ratings. In his current role, he oversees credit rating assignments for over 250 large companies across a wide range of industries. These include cement, capital goods, energy, fertilizers, logistics, oil and gas, consumer durables, telecommunications, media and entertainment.
He is a Chartered Accountant (CA) of the Institute of Chartered Accountants of India. He is also responsible for recovery ratings for distressed assets acquired by asset reconstruction companies (ARCs).
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CRISIL Ratings Packaging Industry Outlook