A revival in demand, led by increased offtake from e-commerce channels, will support a rebound for paper-packaging entities this fiscal, offsetting the impact of pandemic-induced disruptions in the first quarter, Crisil said on Tuesday.
According to the rating agency, despite a 200 basis points (ps) blow to operating margin, credit profiles will be stable on the back of strong capital structure.
A study of 50 CRISIL-rated companies, which account for 37 per cent of the industry’s revenue, indicates as much.
Sales volume had wilted after the lockdown as demand from key end-user industries such as ready-made garments, industrial components, consumer durables and exports weakened.
However, demand rebounded as heightened safety and hygiene consciousness forced consumers to increase use of e-commerce channel for deliveries.
Therefore, on-year basis, demand for paper packaging is seen unchanged at 9 million metric tonne this fiscal, the agency said in a press statement.
The industry, which logged a steady compound annual growth rate of 5.5-6.5 per cent over the past five fiscals, added about 1.5 million tonne capacity last fiscal. With demand flat-lining, it is set to log its lowest operating rates of less than 70 per cent this fiscal.
Crisil said that low operating rates curb the ability to pass on input price increases to consumers. The pandemic has led to supply disruptions, impacting waste paper supply, a key input for this industry. Consequently, input prices have risen 14 per cent from Rs 10.5 per kg in February this year to Rs 12 per kg in September.
To mitigate high input costs, the industry is trying to push high-value products such as grease-proof paper for food packaging, bleached white paper for e-commerce, and abrasion- and damage-resistant corrugating paper for shipping consumer durables. However, this will only partially mitigate the impact of rise in input prices.
Mohit Makhija, Director, CRISIL Ratings, said :”Given the increase in input costs, average operating margin is expected to shrink 200 bps on-year to 12-12.5 per cent this fiscal. However, it is good to see companies working to raise margins by improving their product mix, especially in categories such as FMCG and e-commerce.”
Manufacturers have also been deleveraging over the years by deploying cash accrual to meet incremental working capital requirement, support capital expenditure (capex) and improve debt servicing ability. Hence, despite muted business performance in this fiscal, total outside liabilities to tangible net worth (TOL/TNW) is expected to improve to 1.2 times this fiscal from 2.3 times in fiscal 2015.
As a result, interest coverage ratio is expected to remain over 3.5 times despite weaker profitability this fiscal.
Krishna Ambadasu, Associate Director, CRISIL Ratings, said : “Notwithstanding a decline in cash accrual by 25 per cent, liquidity of packaging paper makers remains comfortable. Net cash accrual is expected to be over 2 times debt repayments due in fiscal 2021, compared with close to one time in fiscal 2015, indicating improvement in debt-servicing ability.”
Consequently, credit outlooks are expected to remain stable this fiscal, Crisil said.