The profitability of the Indian flexible plastic packaging industry is likely to remain under pressure in the financial year 2023-24, reaching the lowest in the last 10 years due to oversupply in the domestic market and weak demand overseas. A Crisil research report published earlier this week estimates the Indian flexible packaging industry to record decadal low profitability of around 8 percent in the current financial year.
India’s flexible packaging industry has recorded double-digit growth over the last eight years due to increased demand for consumer products in recent years. During the pandemic-induced lockdowns and supply chain disturbances in the financial year 2020-21 and 2021-22 when the entire manufacturing sector struggled for survival, the flexible packaging industry saw a substantial increase of approximately 20 percent in profit margins. With consumers facing lockdowns and employees preferring to work from home (WFH), there was a massive surge in demand for flexible packaging products.
However, capacity expansion work on stalled projects continued. The Crisil report suggests that the industry added a significant capacity over the past few years, despite lower-than-expected demand for consumer products. These substantial capacity additions, coupled with the resulting oversupply, is expected to push the profitability of the Indian flexible packaging industry to a decadal low of around 8 percent this fiscal year.
| Decadal average of operating margin |
| Financial year (April-March) | Revenue (Rs crore) | EBITDA margin (%) |
| 2023-24(P) | 23,500 | 7.8 |
| 2022-23 | 25,000 | 10.5 |
| 2021-22 | 25,000 | 18.3 |
| 2020-21 | 18,500 | 20.6 |
| 2019-20 | 17,500 | 15.1 |
| 2018-19 | 17,900 | 10.5 |
| 2017-18 | 18,000 | 9.8 |
| 2016-17 | 16,850 | 10.7 |
| 2015-16 | 16,900 | 12.9 |
| 2014-15 | 16,900 | 9.4 |
| 2013-14 | 17,000 | 9.7 |
| 2012-13 | 12,000 | 9.0 |
| 2011-12 | 10,000 | 12.0 |
Source: Crisil; Ebitda=Earnings before interest, tax, depreciation, and amortization; P=Projected
Furthermore, the weakness in export demand will contribute to the decline in profitability, with revenues expected to decrease by 3-5 percent as realizations remain subdued due to the supply glut, as mentioned in the report. Crisil’s analysis of eight major flexible packaging players, accounting for over 75 percent of the domestic capacity, supports this assertion.
The industry has historically experienced cycles of substantial capacity additions and oversupply. For instance, during the last fiscal year, capacity expansion led to a drop in the industry’s operating margin, from 18-20 percent during the pandemic, to around 10.5 percent. Meanwhile, the credit risk profiles of manufacturers will remain under pressure until an expected recovery in operating performance takes place toward the end of the fiscal year.
Diverse end-useThe industry comprises biaxially oriented polypropylene (BOPP) and biaxially oriented polyethylene (BOPET) films. BOPET films have diverse end-use applications due to their higher oxygen retention power, high tensile strength, longer shelf life, and better print quality compared with BOPP films. However, BOPP films have higher moisture resistance properties and are cheaper, making them ideal for packaging food products.
Mohit Makhija, Senior Director at Crisil Ratings Ltd, stated, “The industry’s operating margin is expected to shrink by approximately 2.5 percent to around 8 percent this fiscal, following a sharp correction of about 7.5 percent in the previous fiscal. BOPET film manufacturers have added approximately 45 percent capacity, while BOPP film manufacturers have added approximately 20 percent in the last two fiscal years. In comparison, the domestic demand has increased only around 11 percent during this period. This imbalance was further exacerbated by a decline in exports, typically accounting for 25-30 percent of total revenue, due to the slowdown in Europe and the United States, which are key markets.”
While food packaging, pharmaceuticals, and personal care segments are likely to help maintain domestic demand resilience, exports may recover slowly towards the end of this fiscal year. With no major capacity coming online this fiscal year and the next, the demand-supply balance is expected to gradually improve over the next 6-12 months. Given these dynamics, volume growth is expected to be moderate at 5-6 percent this fiscal.
On the supply side, raw material prices typically follow the movement of crude prices. The average raw material prices this fiscal year will be lower year-on-year, which will also impact the realizations. Consequently, the industry’s revenue is expected to decline by 3-5 percent. This comes after stagnant revenue performance in the previous fiscal year. Manufacturers will need to rely on balance sheet liquidity and financial flexibility to navigate through this cyclical downturn, said the report.
Anand Kulkarni, Director at Crisil Ratings Ltd, believes, “The credit profiles of flexible packaging companies are expected to remain under pressure due to weak operating performance in the current fiscal. Additionally, capacity additions in the recent past have increased debt levels. Hence, the debt metrics of these companies have weakened considerably. Debt to Ebitda (earnings before interest, taxes, depreciation, and amortization) and interest coverage ratios are estimated at approximately 3.9 times and approximately 2.8 times, respectively, this fiscal against a 10-year average of approximately 2.5 times and approximately 5 times.”
DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com
