Company produces PET films and Engineering plastic, for which domestic demand is growing at more than 15% p.a. Company’s utilization levels are currently more than 100% for PET film and around 100% for engineering plastic. Thus to meet growing demand, company is planning to expand capacity of PET film from 30,000 Mts to 57,000 Mts by the end of 2010 and also planning to raise Engineering plastic capacity from 3,600Mts to 11,000Mts. Expansion is mostly funded from internal accruals and debt. (No equity dilution is contemplated). Company also has more than matching capacity of PET chips, which is and intermediate product. Last year performance was affected due to volatility and high prices of the raw material like PTA and MEG. But now the raw material prices have stabilized and better realizations are leading to healthy margins for the company. Better performance is expected to continue as the realizations are better and the input costs have come down. Most of the sales are to the domestic markets [75%] catering to FMCG segment where demand is strong at 20-22% [and least affected by any slowdown], rest is exported [25%]. Outlook for the current year and the coming year looks promising with company expected to achieve sales close to 450 crores and profit after tax close to 50 crores for 2010. Current years earnings could be close to Rs 9 and thus discounting present stock price by around 2.4X and offers scope for appreciation looking to growth potential.
Background
The company manufactures and sells PET film [Capacity - 30,000 MTs], its value added variants and Engineering plastics [Cap. 3,600 MTs]. It also manufactures intermediate required for PET films - Polymer chips [Cap. 36,000Mts] which is mostly used for captive consumption and the surplus is sold in market. Utilisation levels for PET films is over 100% thus company is now expanding capacity for PET films from 30,000Mts to 57,000Mts and for Engineering plastic from 3,600Mts to 11,000Mts by the end of 2010. These expansion plans will cost around 200Crores and they would be funded, 50% by internal accruals and the remaining by debt. For ‘09 company has prepaid their term loan significantly leading to lower interest costs. Plus this will enable company to take low cost term loan again for expansion plans. The global demand growth of PET film is growing around 7-8% and in India it has been growing at around 15%p.a.This demand growth in the segment of PET film has been triggered by steep growth in Flexible Packaging of FMCG/Snack food products which continue to shift from loose/ bulk packs to smaller unit packs. A significant shift in use of packaged products and rapidly growing organized retailing, promises a sustained growth in packaging & PET film usage.
The Engineering Plastics compounds and blends business continues to be a high growth segment. The major applications for Engineering Plastics compounds are in the - Electrical, Electronics and Automotive sectors. Of these three sectors, the growth in demand of Engineering Plastics compounds continues to be in excess of 20% per annum in Electrical and Electronics industry. The raw materials for these products are PTA and MEG which ruled quite high in 08-09 with high volatility of the oil prices. But now oil prices have stabilized considerably and settled at lower levels, leading to better margins. Company is the first company to use rice husk for Thermic Fluid Heater which will save emission of 18000Mts of carbon di-oxide and once registered under CDM (Clean development Mechanism), the company will get equivalent CER’s under Kyoto Protocol of United Nations.
Risks and Concerns
The anti-dumping and anti-subsidy duties on Indian PET film manufacturers in US, EU & Brazil continue. Turkey has also imposed an anti-subsidy duty on Indian PET Film producers. Any sharp rise in the oil prices leading to price rise in raw material, PTA and MEG could affect the profit margins of the company.
Peer Valuations
The peer group companies are – Polyplex [with smaller capacity and lower sales], is available at 15X of current earnings; another player Garware polyster [with large capacity and much bigger sales] is available at much higher discounting.
Recommendation
Looking to present fundamentals, expansion plans and very attractive valuations, we expect company to give very good returns in medium to long term. We have price target of Rs 30 in next 3-6 months and over Rs 40 in 12 months.
Source: Internet (By DD SHARMA)
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