Summary:  It is difficult to find out which specific company will end up being a great ivestment, but it is possible to find out a group of companies in an industry which are definitely more preferable investments than others. For Plastic industries, these companies are about 10-12 in number and their names are:

 

Company	Main products	Verdict
Nilkamal Ltd.	Plastic injection moulding items	Great Potential Investment
Sintex Industries Ltd.	Builders wares of plastics	Great Potential Investment
Bilcare Ltd.	Other plastic packaging goods	Good Potential Investment
Cosmo Films Ltd.	Biaxially oriented polypropylene (BOPP) film	Good Potential Investment
Jindal Poly Films Ltd.	Biaxially oriented polypropylene (BOPP) film	Good Potential Investment
Paper Products Ltd.	Flexible packaging materials	Good Potential Investment
Uflex Ltd.	Flexible packaging materials	Good Potential Investment
Bajaj Steel Inds. Ltd.	Plastic Products	Can be considered
Caprihans India Ltd.	Sheets, films, etc. of plastic, not reinforced	Can be considered
Essel Propack Ltd.	Plastic packaging goods	Can be considered
Jai Corp Ltd.	Sacks & bags of polyethylene	Can be considered
Xpro India Ltd.	Biaxially oriented polypropylene (BOPP) film	Can be considered

Why Plastic Industry:

Last week, the government of India opened up FDI in retail. No matter how opposed I am to it, it does not make much of a difference in the larger scheme of things. As things stand now, it is a question of when and not if. When organized retailing comes big I this country, two types of entrepreneurs will flourish. One will be organized retailers themselves, and the others will be the producers of those millions of small branded items that supply to that “multi-brand retail” model. Based on my experiences of studying the markets of western world, Plastic companies do have an extremely bright future. Their products will be used in packaging nearly everything. Moreover, plastic products will find innovative and cost effective uses in millions of middle income households in the country. Market for plastic products  WILL grow faster as compared to many other markets in this country.

About Listed Companies in Indian Plastic Industry:

The Indian plastic industry is a highly fragmented one, at least in terms of equity markets. When one looks at the listed companies, there are just under 200 companies listed on the stock exchange. These span across industries like: Builders wares; Carboys, bottles & flasks; Flexible packaging materials; Floor coverings of plastics; Moulded luggage; PVC pipes; Plastic Products; Plastic film; Plastic injection moulding items; Packaging goods; Polyester film; Reservoirs, tanks; Sacks & bags; Tubes, pipes & hoses & fittings and Other articles.

However, if one wants to look at those with significant size, then one sees that there are only 54 companies with annual turnover of over 100 Cr. Rupees in last FY and only 17 of those had a turnover of over 500 Cr.

This tells us that the market is highly competitive with a lot of small players catering the market. The chances of differentiation, as a result, are few and so one has to give premium to good financials. In other words we cannot say that we are ok to give a huge premium on brand name if the financials are not in order.

 

About The Types of Companies Covered Below:

As mentioned above, one can segregate the plastic industry further on the basis of what kind of material is being produced. I believe the economics of the business do not differ a lo depending on what kind of product is being produced, and so I am taking into consideration EACH company that exists in the industry. To group them more logically, I am grouping these companies in the following groups:

• Plastic films & flexible packaging
• Plastic furniture, floorings & misc. items
• Plastic packaging goods
• Plastic tubes, pipes, fittings & sheets

In order to limit the sample size, I am taking into consideration each company that has made over 100Cr. Gross Sales in the latest FY. This gives us about 54 companies that fit the bill.

Point(s) to note

I the report below, the comparison is made across all companies on the basis of same set of parameters and inference is drawn on which of them are better as compared to other. However, I would like to add a disclaimer. Even though I believe branding matters only rarely and in some exceptional cases, it cannot be denied that there are definitely economies of scale in play. This means that the bigger companies tend to keep a check on input costs a better way and so tend to be profitable, and hence resilient.

Indirectly, I am saying that paying a premium on brad may not be justified but paying a premium on prize is justified. Reader should take that into consideration while making investment decision.

What am I looking for

I am planning to compare the companies across plastic industry on the same philosophy I had documented here and here. Basically, I will look for companies that are supplying a lot of free cash flows to equity owners, are profitable and have remained profitable and in the business for a long time.

Key players in the industry

Below is the list of key players in the Indian plastic industry, sorted by the decreasing size of their last 3 years FY gross sales in Rs. Cr. I have selected only those companies that have been I the business for over 10 years.

It can be seen that there are a bit too many companies between 100-500 Cr. turnover range; and so in other words, there are too many small players.

Reported Financial Performance:

Below are the high level reported financials of these companies in their latest financial year. Some companies from the above table are missing below as I was unable to compile data for those in the format below.

All amounts are in Rs. Cr. I have mentioned the revenue the company earned, the profit it made, its total net worth as reported and what are the cash and investment items it had.

Free Cash Flows to Equity Owners:

Along with above numbers, one has to take into account how debt items moved between the last 2 years and how the company invested the fund it got from operating income and debt for its capital expenditures. We cannot assume one year’s investments or one year’s borrowings to be the result of one year’s planning. The effect of these activities has to be normalized over a period of time. To accommodate this, I have normalized the following over the past 6 years:

1)        Debt

2)       Cap Ex

3)       Extra ordinary income and expenses

4)       Change in non-cash Working/Capital

Below are the results after I calculated the free cash flow to equity. I have also mentioned the ownership % and the latest closing price in BSE. Pls note the following abbreviations:

• BSE: Closing price in BSE on 25^th Nov (in Rs.)
• PH: Promoter holding % (In %)
• AS: Avg. Sales for last 3 FY (in Rs. Cr.)
• LFAN: Latest FCFE After Normalization (in Rs. Cr.)
• LFBN: Latest FCFE before Normalization (in Rs. Cr.)
• AFAN: Average FCFE after normalization for the past 3 years (in Rs. Cr.)
• AFBN: Average FCFE before normalization for the past 3 years (in Rs. Cr.)
• ANW: Avg Net Worth (in Rs. Cr.)
• TQP: Trailing 4 Quarter Profit (in Rs. Cr.)

Each company has its own reason when free cash flows don’t follow profits. The point to note is that one should generally avoid companies that have negative cash flows with positive profits, unless one has really studied the balance sheet in detail.It can be seen that the eventual normalized free cash flows are very different for some companies as compared to their profit. For e.g. Bright Brothers Ltd. Showed a small profit this FY but their last 3 FY average free cash fows are over -3000 Cr. For this company, this has basically been due to non-cash working capital which has been complete unpredictable.

Value Judgment

Till now the I have mentioned how the numbers of the companies in plastic industry how up for latest year and how they show up if one considers the statements for a few years. What does that mean?

The idea is to find out the companies that are giving good free cash flows to the equity owners and are still showing up cheap. To find this out, one has to compare the latest price per share of these companies with the cash flows per share.

Before doing so, we need to look at the cases of dilution in number of shares due to issues like conversion, options etc. To do this analysis I have considered number of shares in post-dilution basis, which means that I have taken the total number of shares that will come into picture assuming all conversions due to loans/GDRs etc take place.

This has brought big impact into some companies. For e.g., for Karur KCP Packkagings, the total no. of common shares outstanding = 11250000 but post dilution, this number swells to 17203333. The total no. of shares due to dilution swell by more than 50%!

Anyways…

Below is what we see when we compare the latest price per share (on diluted basis) with the profits and cash flows per share basis. On the basis of the numbers below, I have made some judgments. My judgments are:

• Any company that is selling more than 1.5 times its average net worth for the last FY is on the overvalued side, unless the free cash flows are positive and high in value
• Any company that has negative normalized free cash flows for the last 3 FY is a negative proposition. For such scrips, I prefer to a barge pole and shove them away.
• Any company can be assumed to be highly/lowly/decently priced on the basis of above 2 points and how big it is. The point of being “big” comes from the fact that in this industry the economies of scale matter.
• The precise judgment for each company will be different but I am trying to broadly group them into attractive or not attractive on the basis of above points and on the basis of other variables like interest coverage (indicative of amount of money the company has got with it after it has paid it debts; the higher the better)
• Any company with good positive cash flows, low promoter holding, has Current Assets more than Liabilities and is sufficiently big is a great buy. Anything that is missing from this list makes our company less and less valuable.

Below is what I believe is the value judgment on the above companies. Pls note the following abbreviations:

• BSE: Closing price in BSE on 25^th Nov (in Rs.)
• IC: Interest coverage (In no.)
• PE: P/E Reported
• PLFAN: Price per share by Latest FCFE After Normalization (in Rs. Cr.) per share
• PLFBN: Price per share by Latest FCFE before Normalization (in Rs. Cr.) per share
• PAFAN: Price per share by Average FCFE after normalization for the past 3 years (in Rs. Cr.) per share
• PAFBN: Price per share by Average FCFE before normalization for the past 3 years (in Rs. Cr.) per share
• PBV: Price per share by Avg Net Worth (in Rs. Cr.) per share
• P4Q: Price per share by Trailing 4 Quarter Profit (in Rs. Cr.) per share
• CA/CL: Whether Current assets are more than current liabilities?  – This is indicative of how liquid the company is.
• CA/TL: Whether Current assets are more than total liabilities? – This is an additional indicator of how liquid the company is
• SGT5: Are Average Sales for last 3 FY GT 500 Cr?  – this is an indicator of size
• PH6: Are Promoter Holding Less than 60%?  – How easily it will be for someone to buy out the firm if it is in distress?

Based on my analysis, not more than 12 companies in the industry out of more than 50 under consideration are worth investments. The ones in Red below are, what I believe, best avoided. Rest can be considered.

Based on my analysis, I believe we can zero on about 12 companies that can be considered worth investing. However, there are a few caveats in my analysis. Because of these caveats,  I believe that this set of 12 is a prospective set only and an investment decision should happen only when we look at the balance sheet of these companies in detail.

Caveats in the Analysis:

I will cover specific financials of these companies later in my company scorecard. For now, in can someone is making an investment decision based on my analysis, then I believe below are the caveats that should be kept in mind

• All the analysis is on standalone statements: I have taken only the standalone balance sheets of all organizations and not consolidated ones. This is done to maintain consistency. However, there are organizations which have subsidiaries either fully or partially owned. Any analysis of the stock price cannot happen without considering the contribution of subsidiaries, joint ventures etc.
• All companies battle their own problems: Solution to any problem depends on problem itself. Different companies have taken debt or invested in capital expenditures. These could be both good and bad. It depends on the company in question. In my analysis, I have presented a pretty black and white picture without any scope of any grayness.
• All companies don’t have the same business mix: There are companies which are pure play manufacturers, and there are some that have a mix of business segments. For e.g., Nilkamal is also having a retail segment. To the extent these differences are present, I have just compared apples and oranges above.

Conclusion

It is difficult to find out which specific company will end up being a great ivestment, but it is possible to find out a group of companies in an industry which are definitely more preferable investments than others. For Plastic industries, these companies are about 10-12 in number and their names are: