Plastene India IPO: Give It A ‘Miss’

Plastene India (PIL) has decided to go public on May 9, 2012 with its initial offer of 92.55 lakh shares, wherein 55,290 shares would be reserved for employees and the remaining would be for retail and institutional investors on a proportionate basis. At a price band of between Rs 81-84 per share, the company plans to garner a total of Rs 77.74 crore at the upper price band.

The net proceeds of the IPO would be mainly utilised towards funding the expansion activities at its two manufacturing facilities and further add new capacities for a new product – block bottom valve bags.

In the aftermath of the SMFL IPO failure and uncertainties in the secondary equity markets, investors on the streets would be wondering if PIL with its Rs 77.74 crore IPO could spice up the primary markets and create some opportunity for wealth creation. However, before we get to answering that, let’s just look at the company’s business and gauge whether it’s worth investing in.

PIL, much like its exchange-listed peer, Flexituff International (FIL), is engaged in the business of manufacturing of flexible intermediate bulk containers (FIBCs), conventional poly-woven sacks (PWS), flexible packaging products, woven fabric, tarpaulin, multi-filament yarn (MFY) and webbings. The company also sells granules imported from countries like Saudi Arabia, Thailand, UAE, etc and occasionally trades in goods manufactured by them.

PIL, unlike FIL, has its product portfolio well distributed among PWS and FIBC, which totally contribute around 60 per cent of the company’s consolidated revenues. The remaining portion is filled in by its polymer trading business besides the sale of intermediate products like master batch, fillers and MFY, etc.

Some of the key positives about PIL’s business include the fact that it is known to be a leading industry player in PWS with nearly 50 per cent of the total consolidated revenues coming from export sales as on January 31, 2012. Its manufacturing facilities in Nani Chirai, in the Kutch district of Gujarat, are located at close proximity to the ports, which provides it with efficient logistics for both exports as well as import of raw materials. The company also does distribution activities for Indian Oil Corporation (IOCL) in Kutch and Saurashtra region of Gujarat for supply of PP/HDPE/LLDPE granules wherein it’s entitled to Rs 0.35 per kg commission on sale of these IOCL products. However, the benefits of this are very negligible as this exercise helps reduce PIL’s raw material cost by merely 0.50 per cent.

Despite the company’s favourable market position in the packaging industry, higher degree of diversification across various product portfolios, strong location advantage and steady demand outlook from user industries like fertilisers and cement manufacturers, we at DSIJ have reasons to believe that this offer of PIL is not worth investing in and would like to advise our readers to skip it altogether.

Our bearish attitude on the counter mainly stems from the highly competitive and fragmented nature of the packaging industry, especially for PWS. Due to the low entry barriers and limited product differentiation, there is intense competition which exerts pressure on the margins and results into low capacity utilisation rates. Over the past three years, despite the capacity expansions, PIL has seen low utilisation levels of 41-46 per cent at its PWS plants, which forced the company to shift towards the manufacturing of FIBCs.

However, despite being operative in the FIBC segment, PIL, when compared to its larger peer FIL, is a relatively small player, with the latter commanding a resounding market share of 33 per cent of the Indian FIBC industry in terms of volumes.

Another area of concern is its high debt to equity ratio which stood at 1.64x its pre-issue equity capital as on January 31, 2012. Some word of caution can also be put in about the company’s contingent liability position, which stood at a whopping 565 per cent of its ten-month consolidated net profit of Rs 10.95 crore. If any of these liabilities materialise, it could have a crippling effect on the company’s business profitability.

On the financial front, despite having posted a good historical performance wherein both topline and bottomline have registered a healthy CAGR of 40 per cent and 24 per cent respectively between FY07-FY11, the increasing contribution from sale of traded goods has impacted the margins. In the period ended January 31, 2012, the company has reported net sales of Rs 382.5 crore and net profit of Rs 10.95 crore. Although the margins at the operating level remained stable, the PAT margins were impacted due to significant MTM losses on forex.

Going forward, for the full year ended March 2012 we expect the company to report a post-issue EPS of Rs 3.4, which is 43 per cent lower than its earnings reported for the financial year ended 2011. Based on our earnings’ estimate, the shares of PIL seem to be commanding a PE between 23.84-24.72x. This, when compared to FIL which is trading at 18x its annualized EPS of Rs 16.49, seems expensive.

In conclusion, due to the highly fragmented nature of the industry PIL operates in, the vulnerability of its profitability to fluctuations in crude prices and lack of any competitive advantage useful to create alpha for the shareholders, we recommend our readers and the investor community at large to give this IPO a complete miss.