Rating agency, Crisil Ratings in its latest report has said that flexible packaging manufacturers are set for a strong 14-16% rebound in sales this fiscal, with supply disruptions driving a sharp uptick in realisations amid stable volume growth. It noted that the industry saw muted compounded annual growth rate of 1- 2% over the past three years due to oversupply situation with supply estimated at nearly 1.4x times demand as at end of fiscal 2025. This is likely to change this fiscal as a fire-led disruption at the plant of a major manufacturer, impacted nearly around 18% of the installed capacities, restoration of which will be gradual.

The rating agency further said that the fire related capacity reduction is expected to prune the oversupply to around 1.2x times demand this fiscal despite addition of new capacities and a relatively muted export demand due to US tariffs. This, coupled with rising consumption led domestic demand (around 78% of overall sales), will drive up capacity utilizations from around 72% last fiscal to around 85% this fiscal. Besides, operating leverage benefits stemming from better capacity utilization and improving realisations, will enhance operating profitability by 300-500 bps. Also, higher cash accrual emanating from revenue growth and margin improvement will help deleverage balance sheets, keeping credit profiles stable.

As per the report, high domestic demand will more than offset impact of muted exports of which US forms nearly 25-30% and will be affected by the recent US tariff hikes. However, stable consumption in other export destinations - Europe, Africa and Middle East -will support demand. Even if it assumes a slight moderation in export demand, overall volumes are still expected to grow at a reasonable 3-5% this fiscal. It also said that growth in volumes, higher realisations, stable raw material prices (of polypropylene and polyethylene terephthalate, which are primarily linked to crude oil prices), and operating leverage benefits due to better absorption of fixed costs from increased capacity utilisation, will drive up operating profitability by 300-500 bps to upto 15% this fiscal.

Crisil Ratings also noted that however sustainability of the same remains to be seen as historically, the industry has seen cycles of strong performance with high profitability, followed by chunky capacity additions and oversupply, leading to an industry downturn. Going ahead, restoration of the impacted facility, extent of impact of US tariffs on exports and new capacity additions coming onstream will bear watching.