BOPET and BOPP films are largely commoditised business and has inherent risk associated with it. As in other commodity business, JPFL also remains vulnerable to changes in the demand and supply scenario in the BOPET and BOPP segments.

Over Supply and threat of Chinese products

Owing to availability of low price Chinese products and more capacities coming on stream, JPFL like its peers has little role over controlling its selling price and is purely driven by the market dynamics. While domestic demand remains firm, exports are critical for maintaining the capacity utilisation level and the overall profitability. Given the oversupply scenario any decline in export or any adverse change in the duty structure would impact the performance of JPFL. In addition to existing BOPP producers, most polyester film producers are also setting up BOPP production facilities, which have led to increased capacity in the market. However, though BOPP film is cheaper, not all converters have been able to make the shift since machine specifications could not be changed quickly and there are some applications that BOPP could not substitute for BOPET.

Rising Input Cost

JPFL like its peers is also exposed to the risk of rise in raw material prices. Raw material costs constitute ~65% - 75% of sales. JPFL's BOPP business is vulnerable because its main raw material - polypropylene homo polymer - is derived from petrochemical, and JPFL is not integrated backwards to manufacture it. Given the volatile and erratic trend in crude oil and demand for polymers for competing applications, the pressure on input costs can be expected to fluctuate. So far flexible packaging film makers have been able to pass on these costs to end consumers and are expected to do so in the foreseeable future due to firm demand.

Lower Plant utilisation Rate

In our valuation model we have factored in plant utilisation rate for a) BOPET film at 100%, 85% and 90%, b) BOPP film at 72%, 64%, 61% c) Metallised Film at
80%, 76% and 73% and d) Coated Film at 30%, 28% and 27% respectively over FY11-13e. Lower plant utilisation to our above assumption would affect its earning.

Another major threat to our view would be delay in new capacity coming on stream, which is unlikely as per the current development and rising competition from Chinese players.