Poly-sack industry’s poor discounting weighs heavily against Plastene’s hefty offer.
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OFFER AT A GLANCE |
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Name |
Plastene India Ltd |
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Offer Quantity |
92.55 lakh shares of Rs 10 each |
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% on Total Equity |
25.9% |
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Offer Price |
Rs 81 to Rs 84 |
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Offer Amount |
Rs 75 cr to Rs 78 cr |
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Application Quantity |
75 & Multiples of 75 |
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Offer Opens |
May 9, 2012 |
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Bid/Offer Closes |
May 15, 2012 |
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Rated By |
ICRA |
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Rating |
3 out of 5 |
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Lead Managers |
Motilal Oswal Investment |
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Registrars |
Karvy Computershare |
Issue Details
The Ahmedabad-registered Plastene India Limited (PIL) is making an Initial Public Offer (IPO) of 92,55,290 shares, equivalent to 25.89 % of the post issue paid capital of the company. Of the total issue, 5% is reserved for the company’s employees, up to 50% of the issue is reserved for Qualified Institutional Buyers (QIBs), not less than 15% of the issue size is for non-institutional investors and the remaining (30%) is for retail investors. The shares are proposed to be listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Issue Object
The company plans to utilize the issue proceeds for expansion of its existing manufacturing facilities for FIBC and flexible packaging at Gandhidham, purchase of plant and machinery for new product – block bottom valve bag at Gandhidham and expansion of manufacturing facilities at Rajpur besides meeting the general corporate expenses.
Issue Grade
ICRA has assigned a grade of 3 out of 5 to the IPO, indicating average fundamentals. According to the rating report, the grade was largely influenced by a favourable market position of the company in the poly woven sacks (PWS) and flexible intermediate bulk containers (FIBC) industry, higher product diversification as compared to peers, steady demand outlook for the domestic PWS industry and export potential for FIBCs. The grade has also factored in the cost advantage available to PIL due to the proximity of its manufacturing facilities to ports, raw material source and customer base, leading to lower inward and outward freight as compared to peers and captive production of inputs such as master batches (MB), fillers and multi filament yarn (MFY).
Profile
The Champalal Group promoted by Champalal Parekh and his grandson, Prakash Parekh, has a history dating back over four decades. The Group has evolved from commodity trading (viz. import and export of castor, sesame seeds and polymers) to manufacture of plastic and packaging products over a period of time.
Presented as the flagship of the group, Plastene India Limited (PIL), formerly known as Oswal Agloimpex Limited, was incorporated in the year 2004 with a capacity of 21,000 tonnes per annum (tpa) of poly woven sacks and flexible packaging products. The company’s production capacity now stands at 55,000 tpa across two locations at Gandhidham and Rajpur in Gujarat.
PIL is engaged in the manufacture of FIBCs commonly known as jumbo bags, conventional poly woven sacks, flexible packaging products comprising printed laminates and pre-formed pouches, woven fabric, tarpaulin, master batches, fillers; multifilament yarn and webbings. PIL’s wholly-owned subsidiary, Oswal Extrusion Limited (OEL), with its plants in Kandla SEZ and Rakanpur, Gujarat, is engaged in the manufacture of FIBC/poly woven sacks and sources a major part of its fabric requirements from PIL. About 20% of the company’s turnover is derived from trading of granules.
Project
PIL has planned to install machinery for manufacturing 5000 tpa block bottom valve bags (BBVB), commonly known to as “AD Star bags” at a project cost of Rs. 25 Crore. These bags are widely accepted worldwide in packing cement and other bulk commodities as they offer higher tear resistance and moisture resistance, thereby increasing the shelf life of the final product, besides providing a superior branding interface. Although BBVB would be priced at a premium of Rs. 3 per bag, PIL claims to have received encouraging response from its cement customers for the product.
The demand growth prospects for the existing product lines too have prompted the management to enhance the capacities of FIBC & flexible packaging products. With the expansion, the company’s overall manufacturing capacity is expected to increase to 69,000 tpa from the current 56,200 tpa.
Financial Track
The top-line of PIL has grown at a commendable CAGR of 40% over 2007-11, driven initially by growth in the FIBC segment and over the last two years by a sharp growth in trading sales. Manufactured goods sales have shown a healthy CAGR of 23%, within which FIBC sales have exhibited a CAGR of 42%. Traded sales contributed to around 35% of the company’s consolidated turnover out of which polymer trading contributed around 25%. The return indicators too looked healthy with RoCE at 19.7% and RoNW at 20.8% in fiscal 2011.
Nevertheless, higher trading sales have reduced the operating margins to 10.3% in fiscal 2011 from 15.1% in 2008. With the expiry of fiscal incentives in Gandhidham in March 2010, the company’s profitability in the domestic PWS segment has been affected since 2011. In fiscal 2012, despite the company’s operating margins remaining steady in first 10 months, its PAT declined due to significant marked to market foreign exchange loss on PCFC (Pre shipment credit in foreign currency).
Prospects
Notwithstanding the reported favourable demand prospects, PIL’s ability to achieve optimal capacity utilisation remains critical, particularly in light of underachievement in the past. Moreover, the company is exposed to project risks as the expansion is in a preliminary stage and its completion is wholly dependant on the success of the IPO. Out of the proposed expansion outlay (77 cr), the company has incurred capital expenditure of less than Rs 7 cr till March 2012.
Valuation
Poly packaging industry is poorly discounted on the bourses. Whereas the overall market P/E (price-earning ratio) is put at above 15 times, poly pack segment is discounted only about 8 times. In terms of Price-Book Value and Price-Revenue too the industry is placed much lower than the market composites. Considering the industry’s pathetic discounting, PIL’s pricing at a P/E of more than 16 times looks very steep. In fact, first 10 months performance of fiscal 2012 pushes the P/E to as high as 30x!
Of the recent poly sacks IPOs, Flexituff, which was offered at Rs 155 last year, is currently ruling over Rs 320 commanding a P/E of more than 20 times. But, another poly bag manufacturer, RDB Rasayans, is currently languishing at a hefty discount. As against the offer price of Rs 79, RDB is quoted at just Rs 16! When dividend paying companies in the industry are available at less than 6 times their earnings, why should one stake in PIL at a P/E of more than 16?
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How Plastene India compares with the peer group |
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POLY-SACK SEGMENT |
M-CAP |
P/E |
P/BV |
P/FV |
P/R |
OPM |
YLD |
PRICE |
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(Rs Cr) |
(X) |
(%) |
(Rs) |
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Flexituff International |
696 |
20.7 |
3.0 |
32.0 |
1.3 |
17.6 |
0.3 |
320.40 |
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RDB Rasayans |
29 |
14.6 |
0.5 |
1.6 |
0.6 |
12.8 |
0.0 |
16.20 |
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Kanpur Plastipack |
22 |
1.8 |
1.1 |
2.7 |
0.1 |
9.8 |
3.7 |
27.10 |
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Emmbi Polyarns |
21 |
5.6 |
0.5 |
1.3 |
0.2 |
9.2 |
1.6 |
12.93 |
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Jumbo Bag |
11 |
15.3 |
0.6 |
1.4 |
0.1 |
8.3 |
0.0 |
13.54 |
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POLY PACK (28 NOS) |
1,990 |
8.3 |
0.8 |
4.6 |
0.4 |
15.7 |
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MKT. COMPO (2906) |
5,970,467 |
15.3 |
2.2 |
28.4 |
1.3 |
22.0 |
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Plastene (Hi-band) |
300 |
16.9 |
2.4 |
8.4 |
0.6 |
9.4 |
0.0 |
84 |
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(Lo-band) |
290 |
16.3 |
2.3 |
8.1 |
0.6 |
9.4 |
0.0 |
81 |
Existing Shareholders’ Cost
PIL’s individual promoters hold about 28.4% (with group companies they control 87.3%) which will be reduced to 21% post-IPO. For the core promoter holding of 75.22 lakh shares, the average cost of acquisition works to less than Rs 20 while the public is asked to shell out more than Rs 80 per share.
Investment Banker Track
PIL’s IPO is managed by the Mumbai-based investment banker, Motilal Oswal Investment Advisors (MOIA), who has had a mixed bag in the past. MOIA was associated with eight IPOs in five years between 2007 and 2011 of which three have fetched decent gains while three others have inflicted heavy (more than 75%) losses.
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MOTILAL OSWAL-ASSOCIATED IPOs (2007-2011) |
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ISSUER |
ISSUE |
LIST-DAY |
CURRENT |
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DATE |
PRICE |
GAIN % |
GAIN% |
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TREE HOUSE |
10-Aug-11 |
135 |
-13.7 |
54.9 |
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ASHOKA BUILDCON |
24-Sep-10 |
324 |
2.9 |
-38.4 |
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MBL INFRA |
27-Nov-09 |
180 |
14.3 |
-1.3 |
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PIPAVAV DEFENCE |
16-Sep-09 |
58 |
-2.1 |
43.7 |
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ARCHIDPLY INDUSTRIES |
11-Jun-08 |
74 |
-31.8 |
-85.8 |
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RESURGERE MINES |
11-Aug-08 |
9 |
94.3 |
-97.8 |
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SHRIRAM EPC |
29-Jan-08 |
330 |
-11.0 |
-78.0 |
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ZYLOG SYSTEMS |
20-Jul-07 |
350 |
23.2 |
83.5 |
Note: Price adjusted to post-IPO split/bonus
Concerns
- Highly competitive and fragmented industry due to low entry barriers.
- Vulnerability of FIBC export demand to global slowdown.
- Weak bargaining power with customers could exert pressure on margins in the domestic poly woven sack business, particularly for fertilizer bags.
- Unpredictable margins due to fluctuations in the prices of polymers.
- Expansion project at a preliminary stage, only 10% of the machinery have been ordered
- Funding requirements and expansion plans have not been appraised by any external agency.
- More than one group companies engaged in similar line of business.
- Conflict of interest in transactions with related parties.