While searching for undervalued companies, I came across a company by the name of Polyplex Corporation Ltd. The company is into manufacturing of PET films for the packaging industry. For the year 2019 the company had a revenue of almost ₹4600 cr with a profit after tax of ₹583 cr, free cash flow of ₹470 cr but valued at just ₹1845.5 cr( as on 23rd Jan 2020). I will talk about the company in detail in the blog: ” Polyplex Corporation Ltd- A turnaround story “
Polyplex Corporation Ltd- About
Setup in 1984, Polyplex Corporation Limited(PCL) is now an Indian multi-national with the headquarter being at Noida, India. They are primarily into making PET films that finds its application in packaging industry.
The company has manufacturing plants in 5 countries: India, Thailand, the USA, Turkey, and Indonesia. Distribution units in the Netherlands and China. Warehouses in Poland, Spain, Germany, Italy, and Mexico. Representative office in Malaysia and Korea. Implying they revenues are geographically diversified. Even the revenues are well-diversified with sales of about 20%+ each from the US, Europe, India, and other Asian countries.
In terms of the customer base it is quite spread out with a total of over 1600 customers(mainly through large distributors) and the top 10 not contributing more than 20-25% of total revenue.
The subsidiary in Thailand(Polyplex Thailand Public Co. Ltd(PTL)) is publicly listed with PCL holding a 51% stake in it. As of Jan 22’2019, the market cap of PTL stands around ₹3000 cr.
The company spends about 4-5 cr each year on R&D and has 15 patents in its name.
Links to the patent: Link1 Link2
Polyplex Corporation Ltd- A turnaround story
History
An interesting demand-supply mismatch scenario took place between 2010-12. Post the financial crisis of 2008, the worldwide expansion of PET projects went to a standstill. But when the demand picked up in 2009-10, there were not enough capacity to meet the demand. PET prices more than doubled with subdued raw material cost.
Due to demand-supply mismatch the Gross margin increased from 48% in 2010 to 60% in 2011 & EBITDA margin from 18% in 2010 to 36.5% in 2011. With such massive margin jump, every company in the space jumped to increase their capacity, something similar to the recent Graphite electrode story. Once the capacity expansion by way of debottlenecking(increasing efficiency in the existing plant), brownfield or greenfield started to increase the supply part, the PET prices start cooling. With massive expansion taking place during that time, the capacity utilization of Global Thin PET film dropped from 84% in 2010 to 69% in 2015. Polyplex corporation undertook a CAPEX(Capital Expenditure) of approx ₹1200 crore in 2014. Jindal Poly films, the closest competitor of PCL spent more than 1700 cr on CAPEX in 2014.
You might ask why the CAPEX in 2014 when the peak period was 2010-11? It is because of the planning, possibly land acquisition, getting the equipment, various approvals, fund arrangements that consume a lot of time.
Just to validate the PCL story, I also have taken the numbers of Jindal Poly Films Ltd, the closest competitor I know.
Polyplex Corp. Ltd- Demand-Supply benefit
Jindal Poly Films Ltd- Demand-Supply benefit
Global Thin PET film Capacity utilization since 2009. Source- PCL Annual report 2019
With the supply overrunning demand since 2014, no new capacity came and gradually demand growth has started to consume the earlier supply excesses.
Despite the glut of PET supply, PCL has been able to increase capacity utilization due to its wide range of product portfolio & customer relationships.
Other than that I think the global presence helps to cushion the regional lack of demand and focus of regions of growth. For 2019, the capacity utilization is running at over 100% compared to the industry utilization between 75-80%. Hence the fixed asset turnover has also been increasing over the year.
The next leg of growth is expected to come from increased PET prices as well as a new greenfield plant in Indonesia.
Polyplex Corporation Ltd- Capacity Utilization over the years
Polyplex Corporation Ltd- A turnaround story
Products
Polyplex Corporation Ltd's product applications
Polyplex Corporation Ltd as a whole gets about 72% of revenue from the packaging segment and 28% from industrial applications like tapes, labels, thermal lamination, imaging and graphics, photo-voltaic and optical applications.
From the above image, you can make out that the product manufactured by PCL is basically a very basic commodity product. Although the company has been adding more value-added products, that might help to improve the margins a bit.
The thin PET film market size in India is growing at about 9-10% and is expected to pick up as the standard of living grows and urbanization expands.
Split of Base and Value Added Film sales- Polyplex Corporation Ltd
PET film ( PolyEthylene Terephthalate) is made from PET resin. PET resin is made from PTA(Purified Terephthalic Acid) and MEG(Mono Ethylene Glycol). The group is backward integrated by making its own resin.
The pricing of its product is based on the demand-supply scenario both locally and internationally. The raw material is derived from crude oil and any fluctuation in prices of raw material is passed on the end customer with a lag. The contracts are usually monthly or quarterly in nature.
Growth drivers of flexible packaging:
1. Used in the packaging of FMCG products which are non-discretionary in nature
2. It is replacing rigid packaging(PVC Packaging) owning to it’s being lightweight, occupying less shelf space, generating relatively less waste and is the cost-effective
3. It increases the shelf life of the product as well as the aesthetics
4. Increasing share of organized retail
5. Increasing disposable income in emerging countries and consumerism
Polyplex Corporation Ltd- A turnaround story
Corporate Structure
The company has a lot of subsidiaries and step down subsidiary ( a total of 12). It is quite evident given the size of the company’s operation and global presence.
Polyplex Corporation Ltd- A turnaround story
Financial Analysis
Polyplex Corporation Ltd-Financial Analysis
Given a large number of subsidiaries, it will be more prudent to look at the consolidated number.
With increasing scale and capacity utilization, the cost of production has gone down as economies of scale have come in. Hence, improving margins. The PET prices have been subdued 2015-17 and hence the revenue did not grow despite growth in sales volume.
With the PET prices dropping, the profitability dropped to just 0.5% in 2016 and post that the company through continuous effort turned around the business. And did a lot of stuff to reduce the cyclical impact of the industry.
In terms of borrowing only 4% is from India, 66% from the US, 20% in Thai Baht, 10% in Euro, hence a very low cost of borrowing below 4%. Also, with improving cash flow the company prepaid a lot of its debt.
In terms of operational efficiency achieved by the company, the consistent improvement in return ratios is quite evident.
Mutual Fund holding
Only one mutual fund holds stake in the company but has been increasing their stake.
Polyplex Corporation Ltd- A turnaround story
Key Risks
1. Given that PET films and other products of the company are commodity products, it faces consistent threat from the governments of importing countries Anti-Dumping Duties or Countervailing Duties(CVD)– Though the geographic diversification helps Polyplex corp. to some extent in terms shift the export from one country to another as well as diversified manufacturing base helps them escape from some of these duties being a local manufacturer in those countries.(Mainly US)
2. Threat by politicians to ban single-use plastics– This kind of threat will keep coming every now and then. But there is no substitute available to low-cost plastic films and it is the most recyclable material, it emits a lower amount of greenhouse gas while recycling.
3. The product prices are determined by local as well as international demand-supply dynamics, which is very difficult to track. THIS DETERMINES THE COMPANY’S REVENUE GROWTH AS WELL AS PROFITABILITY.
4. Since the company operates in multiple geographies, it faces FOREX risk. IT IS INTERESTING TO NOTICE THAT THE GAIN AND LOSS ARE IN ALTERNATE YEARS. THIS PATTERN IS SINCE 2014 ONLY.
Polyplex Corporation Ltd- A turnaround story
From the point of information shared, the management looks honest and holds more than 50% stake in the group. There is no pledged shareholding. Salary of the top management is reasonable in comparison to the size of the company with the CEO taking home 3.65 cr, promoter Sanjiv Saraf taking ₹ 2.78cr.
In terms of valuation it looks dirt cheap with the Price to earnings ratio of 2.8 , Market cap to sales ratio of 0.36 and price to book value at just 0.65. Cash and cash equivalents of roughly 800 crores. It is more or less a commodity business but with the scale, diversification and increasing contribution of value added products, I think the company deserves a higher valuation.
The biggest with respect to the business of the company would be the risk of not being able to track the supply side of the PET film industry. In case supply increases, there will be sudden drop in end product prices and hence the drop in revenue and profitability. But that is quite obvious for all commodity businesses.
IT IS ALWAYS ADVISABLE TO FIRST TRACK ANY NEW DISCOVERED COMPANY IN TERMS OF EXECUTION BEFORE TAKING ANY POSITION.
Further reading:
Knowledge bytes: https://myinvestmentdiary.com/category/knowledge-bytes/
Industry Analysis:
https://myinvestmentdiary.com/category/industry/