By Tanu Sharma

India Ratings and Research (Ind-Ra) has affirmed Uflex Limited’s (Uflex) Long-Term Issuer Rating at ‘IND A-’. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Capex Execution/Stabilisation: Uflex has a capex programme of around INR5.8bn for its greenfield project, wherein it is setting up a plant for the packaging of aseptic non-carbonised liquids at Sanand, Gujarat. The capex is to be largely incurred in FY16-FY17, and management expects operations to commence in FY18. The agency expects this capex to keep Uflex’s credit metrics at levels comfortable for the rating category. Execution risk is mitigated by the company’s successful track record of timely and within-budget completion of several projects, domestically and overseas. Uflex has a publicly announced large capex programme, which the company plans to undertake in a phased manner. However, if undertaken aggressively in quick succession, the agency believes it could lead to deterioration in the credit profile.

Liquid packaging is a new product for Uflex, and currently, the market is dominated by Tetrapak International S.A. (Tetrapak). However, Uflex has a reasonable track record in the flexible packaging products business and has introduced products such as waterproof cement bags, lamitubes, lasers, holographic and zipper bags in India; hence, product risk is partly mitigated. Its existing strong relationships with large multinationals in the food and beverage industry also give it likely access to the market and to customers who would like to diversify their sourcing, which is currently concentrated with Tetrapak.

Improvement in Contributions
: The affirmation factors in the improvement in Uflex’s EBIDTA margins to 13.5% in FY16 from 12.1% in FY15, driven by increasing gross margin contribution in the flexible packaging business to INR130/kg in FY16 from INR110/kg in FY15. This took place on account of lower raw material costs (the cost of packaging film fell due to a fall in crude prices), an improvement in sales realisations (led by an increase in the mix of value-added products such as lamitubes, cement bags, lasers and holographs) and power cost savings for the company’s packaging films business in India.

Uflex’s EBIDTA margin was more stable than its peers’ over FY13-FY16, led by a favourable product mix as well as operations in the flexible packaging business, which has higher scope for value-added products than the plastic films business. On a sustained basis, Uflex expects inventory gains/losses arising from the time lag in passing on input price changes to customers (typically one month) to nullify in due course due to a short raw material inventory period (FY16: 35 days; FY15: 37 days).

Market Leadership
: Uflex's ratings continue to reflect its well-established position in the global and domestic biaxially-oriented polyethylene terephthalate (BoPET) films industry (third largest globally) as well as the organised flexible packaging industry (largest in India). The integrated nature of its operations, from design to manufacture, along with its presence in the downstream flexible packaging segment, also continues to support the ratings.

Inherent Industry Cyclicality
: The ratings are constrained by the inherent cyclicality and semi-commoditised nature of Uflex's end products. The ratings also factor in the inherent risks in demand-supply disparity due to change in end use applications, coupled with oversupply, leading to frequent fluctuations in pricing in the packaging films business. This is partially owing to overcapacity in the domestic BoPET films market. However, the pressure on profitability is partly mitigated by Uflex’s presence in the high-margin flexible packaging business, which accounted for 45% of consolidated revenue and 51% of consolidated EBITDA in FY16 (FY15: 42%; 44%).

Backward Integration
: Uflex’s profitability and cost structure are strengthened by its backward integration into polyethylene terephthalate chips, inks, adhesives, printing cylinders and holographs as well as metallisation and packaging machines. Uflex’s margins have shown resilience to turmoil in the biaxially-oriented polypropylene (BOPP) and BoPET films market over past quarters due to backward integration into inks, adhesives and high-margin packaging equipment as well as forward integration into the high-margin flexible packaging business.

Improvement in Credit Metrics
: Uflex’s consolidated net leverage (net debt/EBIDTA) improved to 2.3x in FY16 from 2.8x in FY15 on the back of an improved EBIDTA margin in FY16. Its gross interest coverage (EBITDA/finance cost) improved to 4.5x in FY16 from 3.9x in FY15, led by debt reduction to INR21.9bn (FY15: INR22.6bn). The company generated positive free cash flows in FY15-FY16 as against negative free cash flows in FY13-FY14 due to expansion-related capex.

Sound Liquidity
: Uflex’s liquidity position is robust, with 57% average peak use of its fund-based limits during the 12 months ended June 2016 (FY15: 66%). The company also had unrestricted cash of INR3.6bn on 31 March 2016, which covers 93% of scheduled repayments for FY17.


RATING SENSITIVITIES

Positive: A significant improvement in the operating EBITDA margin, successful execution of capex and an improvement in credit metrics would lead to a positive rating action.

Negative:
Any sustained margin deterioration and large debt for capex, leading to sustained deterioration in the consolidated net leverage to above 3x, could lead to a rating downgrade. 


COMPANY PROFILE

Uflex is a vertically integrated manufacturer of packaging films (capacity 337,000tpa) and flexible packaging solutions (laminates capacity 100,000tpa) as well as equipment at multiple locations in India, the US, the UAE, Egypt, Mexico and Poland. Uflex reported consolidated revenue of INR59.6bn (FY15: INR60.3bn), EBIDTA of INR8bn (INR7.3bn) and net income of INR3.1bn in FY16 (INR2.5bn). The company had standalone (Indian operations) revenues of INR34.8bn (FY15: INR33.3bn), EBIDTA of INR4.7bn (INR3.7bn) and net income of INR2bn in FY16 (INR1.4bn).

Uflex’s ratings:
- Long-Term Issuer Rating: affirmed at ‘IND A-’; Outlook Stable
- INR2,900m fund-based working capital limits: affirmed at ‘IND A-’/Stable/‘IND A2+’
- INR3,100m non-fund-based working capital limits: affirmed at ‘IND A2+’
- INR600m letter of credit limits for capital goods: affirmed at ‘IND A2+’
- INR9,535m long-term bank loans (increased from INR4,576m): affirmed at ‘IND A-’; Outlook Stable
 



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.
 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Tanu Sharma

    Associate Director
    India Ratings and Research Pvt Ltd 601-9 Prakashdeep Building 7 Tolstoy Marg New Delhi 110001
    +91 11 43567243

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121