The ratings are underpinned by CFL's comfortable liquidity position, with strong interest coverage, even debt maturities and low-cost external commercial borrowing (ECB; 47% of total debt in FY11).
The ratings are constrained by continued pressure on CFL's consolidated operating EBITDA margins caused by volatile raw material prices (derivatives of crude oil) and lower selling prices of BOPP film, and by underperformance of GBC's business. EBITDA margins for the nine months to December 2011 (9MFY12) were 8.8%, down from 10.4% in FY10. CFL's thermal lamination film capacity in South Korea and The Netherlands remained under-utilised in FY11 and 9MFY12 due to suppressed demand in Japan post tsunami and in Europe. As a result, GBC incurred an EBITDA loss in H1FY12. CFL plans to cease production in The Netherlands and relocate production to India by Q3FY13.
CFL is undertaking capex to build a 40,000 tons per year BOPP line at Aurangabad SEZ with operations expected to begin in April 2013. CFL also has capex plans for overseas in FY14. Total capex over FY13-FY14 is estimated at INR2bn, which will be funded by debt and internal accruals. This, together with moderate margins, should increase leverage in FY13 although interest coverage is expected to remain strong with cheap ECB loans.
Business risks include product concentration on BOPP films and the supply-led cyclicality that the domestic and overseas BOPP market is subject to. The company is also exposed to foreign exchange movements, although this is partially offset by natural hedge provided by 40% of its debt and 60% of its revenue being denominated in foreign currencies in FY11. Other risks include regulatory changes in importing countries, such as imposition of import duties.
Improvement in consolidated profitability along with sustained reduction in consolidated net debt/ EBITDA below 3x (FY11: 3.38x) would be viewed positively by Fitch. Sustained reduction in consolidated operating profitability or further capex that leads to consolidated net debt/ EBITDA above 4.5x would be negative for the ratings.
Fitch has also affirmed CFL's debt instruments as follows:
INR2,450m (reduced from INR2,500m) fund-based working capital limits: affirmed at 'Fitch A-(ind)'/'Fitch A1(ind)'
INR1,440m (reduced from INR1,590m) non-fund-based working capital limits: affirmed at 'Fitch A1(ind)'
INR3,149.8m (increased from INR3,022.7m) long-term bank loans: affirmed at 'Fitch A-(ind)'
INR100m commercial paper within fund-based limits: affirmed at 'Fitch A1(ind)'