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.
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.
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