Robust demand, supported by heightened hygiene consciousness, growing in-home consumption, and benign input costs will improve the operating profitability of packaging film companies to a decadal high of 19 percent this fiscal.
An analysis of Crisil-rated flexible packaging film companies, indicates brightening of their credit outlook over the near to medium term amid stable debt levels.
These companies account for over 60 percent of the industry's revenue and debt
"With demand estimated to have been growing at 12 percent this fiscal, and prices of inputs -- mainly crude derivatives1 -- down 20 percent, prospects of packaging film makers have started to improve," said Manish Gupta, Senior Director, Crisil Ratings.
"We expect Ebitda margin to expand 400 basis points (bps) on-year to 19 percent this fiscal. Larger companies that are also into speciality and value-added products will benefit the most."
According to the analysis report, despite rising crude prices, operating margins are expected to remain range-bound at 15-17 percent for the next few quarters.
"Profitability of the flexible packaging film companies is expected to remain healthy in the current demand-supply environment. As a result, debt or Ebitda for the industry is expected to improve to 2.2 times this fiscal from 2.8 times in the last," said Nitesh Jain, Director, Crisil Ratings.
"Firms have used the upcycle to improve their debt metrics and liquidity cushion, auguring well for credit profiles."
In addition, the report said the pandemic-induced behaviours of enhanced hygiene consciousness and in-home consumption are likely to keep demand buoyant in the coming months.
"While demand is expected to continue growing at 10-12 percent annually, the industry is prone to chunky capacity additions, disrupting the demand-supply equation," the report said.
"Any significant capacity addition announcements by the industry, therefore, will continue to be a key monitorable for profitability as well as sustenance of improved debt metrics."