Latest News | Profitability of Packaging Film Cos to Improve to 19 Pc This Fiscal: Report

Mumbai, Feb 18 (PTI) Packaging film companies are expected to see an improved profitability at a decade high of 19 per cent this fiscal driven by robust demand, growing in-home consumption, and benign input costs, among others, a report said.

An analysis of Crisil-rated flexible packaging film companies, which account for over 60 per cent of the industry's revenue and debt, indicates brightening of their credit outlook over the near-to medium-term amid stable debt levels, ratings agency Crisil said in the report on Thursday.

“With demand estimated to have been growing at around 12 per cent this fiscal, and prices of inputs – mainly crude derivatives1 – down round 20 per cent, prospects of packaging film makers have started to improve.”

"We expect EBITDA (earnings before interest, taxes, depreciation, and amortization) margin to expand 400 basis points (bps) on-year to 19 per cent this fiscal. Larger companies that are also into speciality and value-added products will benefit the most," said Manish Gupta, Senior Director, CRISIL Ratings Ltd.

Broadly, flexible packaging companies manufacture bi-axially oriented polypropylene (BOPP) and bi-axially oriented polyethylene (BOPET) films. BOPET films have more oxygen retention power, high tensile strength, longer shelf life, and better print quality than BOPP films, resulting in diverse end-use applications.

BOPP films have higher moisture retention properties and are cheaper than BOPET films. As a result, they are used extensively to pack food products. Pandemic-induced behaviours of enhanced hygiene consciousness and in-home consumption are likely to keep demand buoyant in the coming months, it said.

Stating that since prices of crude derivatives are inherently volatile, the demand-supply balance plays an important role in profitability of packaging players, the report said in periods when demand-supply is well-balanced, firms are able to pass on input price variations to end-consumers.

However, in phases of supply glut – largely on account of chunky capacity additions, it becomes difficult for players to fully pass on the input cost increases. This was visible in fiscal 2013 and fiscal 2017 when margins shrunk due to excess, according to the report.

This time, however, the situation looks very different. Industry capex has been slow in the past few years and operating rates are high at 80-90 per cent – showing well-balanced demand-supply.

Consequently, despite rising crude prices, operating margins are expected to remain range-bound at 15-17 per cent for the next few quarters, the report added.

(The above story is verified and authored by Press Trust of India (PTI) staff. PTI, India’s premier news agency, employs more than 400 journalists and 500 stringers to cover almost every district and small town in India.. The views appearing in the above post do not reflect the opinions of LatestLY)