By Abhishek Nigam

India Ratings and Research (Ind-Ra) has upgraded Polyplex Corporation Limited’s (Polyplex) Long-Term Issuer Rating to ‘IND AA-’ from ‘IND A+’. The Outlook is Stable. The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Long-term loans

-

-

FY24

INR1.50

IND AA-/Stable

Upgraded

Fund-based working capital limits

-

-

-

INR2.02 (reduced from INR2.07)

IND AA-/Stable/IND A1+

Long-term rating upgraded; short-term rating affirmed

Non-fund-based working capital limits

-

-

-

INR0.30 (reduced from INR0.48)

IND AA-/Stable/IND A1+

Long-term rating upgraded; short-term rating affirmed

ANALYTICAL APPROACH

Ind-Ra has continued to take a consolidated view of Polyplex and its subsidiaries Polyplex (Asia) Pte Limited and Polyplex (Thailand) Public Co. Limited, due to the strong operational and strategic linkages among them. The financials of Polyplex’s other large subsidiaries, such as Polyplex America Holdings Inc., Polyplex (Singapore) Pte. Ltd., Polyplex Europe B.V., EcoBlue Limited and PT Polyplex Films Indonesia are consolidated at Polyplex (Thailand) Public Co., together referred to as group, and hence form a part of Ind-Ra’s consolidated approach.

The upgrade reflects 1) Polyplex’s continued strong EBITDA margins in FY19-1HFY21, 2) the strong volume growth outlook for the company over FY21-FY24, 3) the likely improvement in scale as well as diversification over the next few years, 4) the strong liquidity and credit metrics, which are at the higher end of the range for ‘IND AA-’ rated peers. 

KEY RATING DRIVERS

Strong Market Positioning with Healthy Volume Growth Outlook: The group has an operational history of about 25 years, and with its polyethylene terephthalate (PET) film capacity of 2,58,800 metric tonne (MT), it is a leading global PET film manufacturer. The company has a stable market share of about 25% in Thailand and Turkey, and around 10% in India, the US and Indonesia. Ind-Ra expects the group’s sales volumes to grow at 12% CAGR over FY20-FY24 from new facilities. The Indonesia BOPET plant commenced operations in November 2019, the Indonesia BOPP plant is set to commence operations in FY22, and the company recently announced a new brownfield capex in the US. The agency expects the company’s absolute EBITDA to grow at 8% CAGR over FY20-FY24 to INR10.4 billion, mainly on the back of strong volume growth.

 

Diversified Business Profile: The group’s  business is diversified in terms of manufacturing capacities and revenue contribution split across regions and product applications. The company has six manufacturing facilities across India, Thailand, Turkey, the US and Indonesia, with distribution presence and warehouses in key global markets. In terms of product, 61% of the group’s  sales are derived from thin PET films, with BOPP; thick PET; coated and other films contributing the remaining 39%. 

Healthy EBITDA Margin Outlook amid Strong BOPET Cycle:
Ind-Ra believes global BOPET utilisation will remain at a healthy level over the next two years due to strong demand coupled with moderate capacity additions. The COVID-19 outbreak has boosted the demand for packaging films in FY21, which reported an annual growth rate of 6%-7% globally over the last few years. Besides high global utilisation for BOPET plants, Ind-Ra believes the margin outlook is also supported by the recent weakening of  crude oil prices and weak ethylene price outlook over the next few years. The BOPP market after four years of oversupply has shown signs of normalisation, thereby strengthening product spreads and margins. Therefore, Ind-Ra believes the group’s new Indonesia BOPP capacity is slated to start at a favourable time and will aid the company’s profitability.

 

Strong Credit Metrics: The group's debt declined to INR7.58 billion in FY20 (FY19: INR7.85 billion). Ind-Ra expects the group’s total debt to decline significantly by end-FY23, mainly due to strong free cash flow generation FY23 onwards, resulting from healthy EBITDA margins. The agency believes the group’s capex will remain elevated in FY21-FY22 for the setting up of the Indonesia BOPP plant and the recently-announced USA expansion. Post FY22, the agency expects the capex to decline sharply unless the company announces any new capex. Overall, Polyplex has a comfortable financial profile and capital structure   and the leverage (total debt to EBITDA), which had stood at 0.97x in FY20, is set to improve over FY21-FY23.

 

Liquidity Indicator - Adequate: The group has demonstrated strong operating cash flow generation, given its high capacity utilisation and presence in less volatile BOPET segment. It had high unrestricted cash reserves of INR5.9 billion at end-1HFY21  (FY20: INR4.4 billion)  and limited capex needs beyond FY22 as the agency believes bulk of the new US project capex would have been incurred by then. All these factors are supportive of the company’s strong free cash flow generation trends FY23 onwards. The group also benefits from having strong relationships with multiple banks. Historically, it has managed leverage ratios well, and  the agency believes there is space on the balance sheet to borrow more, if need be. The group’s debt repayments are stretched out with no bulky lumpsum payments scheduled for the next two-to-three years.

 

Newly-announced USA Capex is Credit Neutral: In October 2020, Polyplex announced plans to invest USD103 million in a new brownfield plant in the US. Ind-Ra believes the new capex is credit neutral, given that the company had a strong net cash balance sheet at end-FY20, and the ongoing capex is limited,  with its Indonesia BOPET (biaxially oriented polyethylene terephthalate) plant having already commenced operations in November 2019 and its BOPP (biaxially oriented polypropylene) plant set to begin operations in FY22. The agency believes the company’s core operating profitability outlook is robust, supported by the likelihood of an increase in BOPET margins and volume growth. Ind-Ra takes comfort from the group’s long track record of operating in the US, which is a net importer for BOPET films. Ind-Ra believes the successful completion of the capex, within time and budget, will further diversify the group’s earnings base.

 

Forex and Raw Material Price Risk: Any adverse movements in forex rates can negatively impact the profitability, given the entity’s foreign currency-denominated loans and exposure to multiple currencies. The group derives almost 80% of its revenues from overseas markets. It tries to create a natural hedge by choosing the right currencies for taking loans, i.e. match liability with cash flows. The remaining open exposure is hedged through a three-month rolling forward contract.

 

The key raw materials for the group’s  products include polypropylene, PET and monoethylene glycol. Apart from volatility in crude oil prices, the prices of PET/ monoethylene glycol are also susceptible on their own demand-supply dynamics. Additionally, prices can change sharply, on a quarterly basis, due to inventory stocking, de-stocking trends.

Regulatory Risk:
The plastic packaging industry remains susceptible to adverse government regulations. Also, the group remains exposed to any adverse international trade action, given its large presence in international markets.  


RATING SENSITIVITIES

Positive: Developments that could, individually or collectively, lead to a positive rating action include:

·      - material progress towards product diversification and higher EBITDA contribution from value-added products; and

·       - significant improvements in the scale and operating EBITDA margins, leading to a sustained improvement in the business profile.

 

Negatives: Developments that could, individually or collectively, lead to a negative rating action include:

·      -  delays, cost over-runs or slower than expected ramp-up for new projects;

·      - a decline in the consolidated revenue or sustained deterioration in the operating EBITDA margin below 10%;

·      - large, debt-funded capex or acquisition leading to sustained deterioration in the net leverage exceeding 1.25x;; and

·       - any adverse government regulatory action negatively impacting the sector.


COMPANY PROFILE

Polyplex’s product portfolio includes PET films (thin & thick), BOPP, cast polypropylene and blown polypropylene. These products are used in flexible packaging besides several and diverse industrial applications such as tapes, labels, thermal lamination, imaging and graphics, photo-voltaic and optical applications. With manufacturing facilities spread across India, the US, Thailand, Turkey and Indonesia, the entity has a diversified portfolio of products. Additionally, it also has a sizeable presence in downstream capabilities such as metallising, holography and silicone coating.

CONSOLIDATED FINANCIAL SUMMARY

Particulars

FY20

FY19

Revenue (INR billion)

44.8

45.6

EBITDA (INR billion)

7.8

7.3

EBITDA margins (%)

17.4

16.0

Total debt (INR billion)

7.5

7.8

Gross interest coverage (x)

43.3

25.2

Net leverage (x)

-0.35

0.0

Source: Polyplex, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Size of Issue (billion)

Rating/Outlook

26 December 19

Issuer rating

Long-term

-

IND AA-/Stable

IND A+/Stable

Long-term loans

Long-term

INR1.50

IND AA-/Stable

IND A+/Stable

Fund-based working capital

Long-/short-term

INR2.02

IND AA-/Stable/IND A1+

IND A+/Stable/IND A1+

Non-fund-based working capital

Long-/short-term

INR0.30

IND AA-/Stable/IND A1+

IND A+/Stable/IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.
 

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.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

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For more information, visit www.indiaratings.co.in.

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Analyst Names

  • Primary Analyst

    Abhishek Nigam

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40356194

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121