The Future of Packaging: Potential Multibagger Stocks in a Recovering Industry

The Pre-COVID Packaging Industry Landscape

Before 2020, the packaging industry enjoyed a stable demand-supply scenario, resulting in steady pricing. The equilibrium in the market meant that there were no significant mismatches, which allowed for predictable growth and stable profitability across the sector.

The Impact of COVID-19 on the Packaging Industry

The onset of COVID-19 dramatically altered the dynamics of the packaging industry. The demand for Fast-Moving Consumer Goods (FMCG) and pharmaceutical products surged as the pandemic unfolded. This sudden spike led to a substantial increase in BOPP (Biaxially Oriented Polypropylene) and BOPET (Biaxially Oriented Polyethylene Terephthalate) prices, which more than doubled and even tripled in certain instances.

During this period, the entire packaging industry experienced a boom. Quarterly profits for some companies equaled their annual profits, leading to a sharp rise in their stock prices. This prosperity prompted many industry players to embark on massive capacity expansions in 2021, with new capacities coming online by the end of FY22 and FY23.

The Post-COVID Market Correction

However, as the surge in demand moderated post-COVID, packaging companies found themselves with massive overcapacities. This oversupply led to a sharp decline in BOPET and BOPP prices, which fell to their lowest levels in a decade, causing distress across the industry.

Currently, most players are operating their plants at 80-90% capacity utilization. Despite high utilization rates, pricing has crashed due to overproduction. For example, the gross margin for BOPP, which peaked at Rs 40 per kg during COVID, averaged around Rs 25 per kg in normal times, and has now plummeted to Rs 10-12 per kg—a decadal low. The situation for BOPET is even worse, with gross margins at Rs 7-8 per kg, compared to peak prices of Rs 40-45 per kg during COVID.

The Road Ahead for the Packaging Industry

Given the current scenario of operating losses, no major capacity additions are expected in FY25. In FY26, only about 10% of incremental industry capacity will be commissioned. At present, the demand-supply gap in the BOPET industry stands at 15%, while for BOPP, it is less than 15%. This suggests that prices are likely to increase as demand remains steady and grows gradually, with no major capacity expansions anticipated over the next year.

Key Players in the Packaging Industry

Ester Industries:

Ester Industries is well-positioned to benefit from new regulations requiring 10% recycled content in packaging materials.

Cosmo First:

Cosmo First focuses on specialty films, with a target to sell 80% BOPP-based volume of specialty films by FY25. The company continues to innovate and plans to launch high value-added sun control films in FY25. By FY26, specialty BOPET films, sun control films, rigid packaging, and specialty chemicals will start contributing to the company’s profitability.

Major Capex Projects:

1. BOPP Line (World’s Largest Line): This project will increase capacity by 67,000 MTPA for a capex of Rs 3.5 billion, with commercial production expected to start by H1FY26.

2. CPP Films Line (World’s Largest Line): This project will increase capacity by 25,000 MTPA for a capex of Rs 1.4 billion, with commercial production expected to start by H1FY25.

Cosmo First also operates a pet-care vertical, Zigly, which is expanding rapidly. In September 2023, Zigly recorded a monthly GMV (gross merchandise value) of Rs 40 million, driven by expanding retail footprints with 19 stores and an increasing online presence. The company is now looking to consolidate Zigly, which is set to make a significant impact on India’s pet care industry.

Jindal Polyfilms

Jindal Polyfilms is another key player expecting margin improvements. The company has consistently invested in capex expansions to stay ahead of the competition and enjoys flexibility in raw material procurement, allowing it to choose between foreign and local suppliers.

Conclusion

The demand for plastic packaging in India is increasing significantly. However, the market is fragmented, with large, dominant players such as Aptar Group Inc., Uflex Limited, Berry Global, Sealed Air Corporation, and Constantia Flexibles, which continue to innovate and enter into strategic partnerships to retain their market share.

The packaging industry is highly cyclical and currently faces a significant demand-supply imbalance, leading to price fluctuations. Despite these challenges, the industry is poised for recovery as demand continues to grow and capacity expansions remain limited. Investors should keep an eye on key players like Ester Industries, Cosmo First, and Jindal Polyfilms, which are well-positioned to capitalize on the industry’s recovery and growth potential.

While the packaging industry has faced significant challenges, the current landscape presents opportunities for growth and investment. With strategic planning and sustained research, the packaging sector could produce the next set of multibagger stocks. Stay tuned for more insights and updates on the packaging industry.