CRISIL Research Ier Report Kanpur Plasticpack
CRISIL Research Ier Report Kanpur Plasticpack
CRISIL Research Ier Report Kanpur Plasticpack
Initiating coverage
Assessment
Excellent fundamentals Superior fundamentals Good fundamentals Moderate fundamentals Poor fundamentals
Assessment
Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP)
Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company.
Disclaimer:
This Company-commissioned Report (Report) is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / Report are subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assumes the entire risk of any use made of this data / Report. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person especially outside India or published or copied in whole or in part, for any purpose.
Polaris Software Limited Kanpur Business momentum Plastipack remains intact Limited
Capacity expansion and backward integration to drive growth
Fundamental Grade Valuation Valuation Grade Grade Industry Industry 2/5 (Strong (moderate fundamentals) 4/5 fundamentals) 5/5 (CMP (Strong upside from CMP) 5/5 has strong upside) Bulk packaging Information technology
Fundamental Grade
5 4 3 2 1
Kanpur Plastipack Ltd (KPL) manufactures flexible intermediate bulk containers (FIBCs), which are used in bulk packaging, and PP/HDPE woven sacks. It also earns commissions as a stockist. The company has a manufacturing capacity of 10,000 MT. We assign KPL a fundamental grade of 2/5, indicating that its fundamentals are moderate to other listed securities in India. KPL to benefit from increased global and local acceptance of FIBCs FIBCs are used in bulk packing of chemicals, minerals and other commodities. The US$ 3 bn global FIBC industry is expected to grow at ~7% in volumes per annum over the next two-three years, while the domestic industry is expected to grow at 17% over the same period. Due to reliability and cost effectiveness, FIBCs are increasingly being preferred for packaging. To cater to this potential rise in demand, KPL is in the process of expanding its capacity from 10,000 MT to 13,500 MT in two phases by FY13. KPL is well placed in the international markets Currently, 65% of KPLs revenues are from FIBC exports, which logged a 25% CAGR in value terms during FY06-FY10. KPL caters to the overseas markets through ~20 distributors. Italy, Germany and Spain account for 70-80% of this business. Going forward, KPL plans to focus on North and South America. Key negatives and monitorables 1) No price advantage due to undifferentiated nature of FIBCs. 2) Raw material price volatility and inability to pass on the hike. 3) Freight burden on being land-locked. Project fluctuations Revenues to grow at a two-year CAGR of 24.5% CRISIL Equities expects KPLs revenues to increase at a CAGR of 24.5% to Rs 1,536 mn in FY12 due to capacity expansion and growth in end-user segments. Margins are expected to improve to 9.2% in FY12 from 8.8% in FY10 driven by better demand prospects and KPLs planned backward integration into multifilament yarn (MFY) which is expected to be operational in Q1FY12. EPS is expected to increase from Rs 5 in FY10 to Rs 10 in FY12. Valuation - current market price has strong upside We have valued KPL based on the discounted cash flow method. Based on this, the fair value is Rs 40 per share. We initiate coverage on KPL with a valuation grade of 5/5, indicating that the market price has strong upside to our fair value 4) Inadequate supply of power from the grid impacts cost. 5) delays could affect earnings. 6) Foreign exchange execution
Poor Fundamentals
Valuation Grade
Strong Downside Strong Upside
SHAREHOLDING PATTERN
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Dec-09 Promoter Mar-10 FII Jun-10 DII Sep-10 Others 69.2% 69.2% 69.2% 69.2% 30.8% 0.0% 30.8% 0.0% 30.8% 0.0% 30.8% 0.0%
KEY FORECAST
(Rs mn) Operating income EBITDA Adj Net income EPS-Rs EPS growth (%) PE (x) P/BV (x) RoCE (%) RoE (%) EV/EBITDA (x) FY08 745 64 18 3.5 (15.5) 28.1 3.6 14.4 15.3 12.3 FY09 1,014 113 19 3.6 1.6 9.1 1.1 21.6 12.6 4.2 FY10 991 87 26 4.8 45.6 9.4 1.3 14.3 15.2 6.7 FY11E 1,137 100 33 6.2 21.3 7.3 1.2 14.4 17.2 6.6 FY12E 1,536 142 53 10.0 60.6 4.5 1.0 16.7 23.5 5.4
ANALYTICAL CONTACT
Sudhir Nair (Head, Equities) Arun Vasu Rabindra Basu Client servicing desk +91 22 3342 3561 [email protected] [email protected] [email protected] [email protected]
Source: Co mpan y, CRISIL Equ ities estimate NM: Not meaningful; CMP: Current Market Price
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Peer comparison
Kanpur Plastipack FY08 Capacity Capacity Utilisations Realisations(Rs/Kg) EBIDTA EBIDTA % 10000 72% 110.9 64 9% FY09 10000 87% 118.8 113 11% FY10 10000 95% 113.2 87 9% Jumbo Bags FY08 6070 81% 105.6 60 11% FY09 6070 88% 120 66 9% FY10 6070 67% 123 49 8%
Import
Sou rce: Ind ian Fl ex ib le Bu lk Cont aine r Sou rc e: Indus tr y, C RI SI L Equ it ies Associ at ion ( I FI BCA)
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Italy, Germany and Spain account for 7080% of KPLs export revenues
This is primarily used by export-oriented units. FIBCs are usually used without pallets and are easier to handle and transport compared to other forms of packaging. Hence, they are being increasingly used in industries that require economical and reliable packaging at reduced logistical costs, and are preferred to smaller packages (25 or 50 kg bags) and bulk carriages. Industrial growth and substitution are expected to boost FIBC volume growth by around 6-7% per annum globally over the next two-three years. Demand for packaging products is dependent on industrial growth. The domestic packaging industry is expected to grow by 13% per annum over the next two-three years. Within the packaging industry, polymer-based products like woven sacks, FIBCs, leno bags and wrapping fabric are expected to increase at a CAGR of 17% during the period. Maximum growth in packaging product consumption is expected in the FIBC segment, which is used for bulk packaging.
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FIBCs made from HDPE/PP are much lighter and save almost three to five times of packaging material. The lower material weight saves significant amount of energy during the manufacture of raw materials and conversion into bags. Jute bags require almost 50% more energy and paper bags about 300% more energy compared to synthetic bags.
Use of water and chemicals is comparatively lower. Synthetic bags, being lighter, reduce the use of fuel and energy during transportation.
However, it is likely to remain focussed towards increasing demand from its existing export markets and is also actively pursuing newer avenues in South and North America.
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8%
6%
5%
4%
2%
0%
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3%
Power availability
Uttar Pradesh being a power deficit state, KPL was compelled to install its own generation unit (gensets) whose power cost is higher than that availed from the grid. In FY10, when KPL had to increasingly use its own generation units, power cost (as a percentage of sales) increased 114 bps y-o-y which impacted margins. Power consumption Purchased units Own generation units Rate of purchased Units Rate of own units Power as % to sales FY06 87.0% 13.0% 3.82 7.4 6.2% FY07 88.5% 11.5% 3.80 10.26 5.1% FY08 85.8% 14.2% 3.95 7.19 4.8% FY09 84.8% 15.2% 4.05 5.83 4.8% FY10 73.0% 27.0% 4.13 6.35 5.9%
Source: Co mpan y, CRISIL Equ ities If the power situation in Uttar Pradesh does not improve, the company will be increasingly dependent on its own generation unit, which would put pressure on its margins.
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Forex as a % of PBT
Rs mn PBT Foreign exchange(gain)/loss % to PBT FY07 22.3 -3.1 -13.8 FY08 28.1 -0.5 -1.8 FY09 28.5 39.1 137.1 FY10 39.7 -0.4 -0.9
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(%)
40 35 30 25 15 986 1,008 726 -2 1,133 1,530 20 15 10 5 0 -5 FY08 FY09 Net Sales FY10 FY11E FY12E
57%
(%)
12
9.2
10 8 6
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(%)
4.0
17.2
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(executive director), a textile technologist from IIT, Delhi has been with the company for 30 years and contributed to the growth and success of KPL.
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Board composition
The board consists of eight directors, four of whom are independent, three are family members and one is a whole-time director, which meets the SEBI listing guidelines. Mr Mahesh Swarup Agarwal, 83 years, is the executive chairman of the board. He is the founder of KPL. Given the background of directors, we believe that the board at KPL is fairly diversified.
Board processes
The company has various committees audit, remuneration and investor grievance - in place to support corporate governance practices. CRISIL Equities assesses from its interactions with the companys independent directors that the quality of agenda papers and the level of discussions at the board meetings are good and they meet at timely and regular intervals. The audit committee is chaired by an independent director, Mr S.M. Jain, who was the CMD of Fertilisers and Chemicals Travancore Ltd and Paradeep Phosphates Ltd. The companys quality of disclosure can be considered good, judged by the level of information and details furnished in annual reports and other publicly available data. We feel that the independent directors are well aware of the business of the company and are fairly engaged in all the major decisions, reflecting well on the company's corporate governance practices.
The companys corporate governance practices are adequate and meet the minimum required levels
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We have valued KPL based on the discounted cash flow (DCF) method. Based on this method, we arrived at a fair value of Rs 40 per share. At the current market price of Rs 31 per share (December 29, 2010), the stock trades at P/E multiples of 5.0x and 3.1x its estimated FY11 and FY12 EPS of Rs 6 and Rs 10, respectively. The fair value of Rs 40 gives implied P/E multiples of 6.5x and 4.0x FY11 and FY12 earnings, respectively. We initiate coverage on the company with a valuation grade of 5/5, indicating that the market price has strong upside to our fair value.
We assign a fair value of Rs 40 per share and initiate coverage with a valuation grade of 5/5
Jan-09
Jan-08
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Nov-07
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Sep-09
Kanpur Plastipack
3x
5x
8x
EV
3x
Sep-08
Sep-07
4x
Sep-09
5x
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Nov-10
Mar-09
Mar-08
Mar-10
Mar-08
Mar-07
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Mar-09
Mar-10
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Sep-10
+1 std dev
-1 std dev
Premium/Discount to NIFTY
MEDIAN
MEDIAN PE
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0%
KPL is the stockist for IOCLs polymer products and represents IOCL in Kanpur and western UP. KPL receives a commission ~Rs400/tonne for the products sold. CRISIL EQUITIES | 16
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57%
8.6
0 0 FY08 FY09 EBIDTA % FY10 FY11E PAT % FY12E FY08 FY09 FY10 FY11E FY12E
Shareholding pattern
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Dec-09 Promoter Mar-10 FII Jun-10 DII Sep-10 Others 69.2% 69.2% 69.2% 69.2% 30.8% 0.0% 30.8% 0.0% 30.8% 0.0% 30.8% 0.0%
Jan-06
Jan-07
Jan-09
Jan-05
May-06
Jan-08
May-05
May-08
May-09
May-07
Jan-10
May-10
Sep-06
Sep-07
Sep-09
Sep-05
Traded Quantity
Sep-10
Sep-08
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