Long: Polyplex equity listed in NSE (National Stock Exchange of India) (Ticker:POLYPLEX)
Trading at: 160 Rupees (as of 6 Jan 2012)
Upside: Best case: 240% (compounded annual return of 36% to 84%) Base case: 96% (compounded annual return of 18% to 40%) Worst case: 31% (compounded annual return of 7% to 14.5%)
Time period: 2 years to 4 years
Table 1
Investment thesis:
Polyplex is trading at extremely attractive valuations. As of 6 January 2012, the stock was trading close to its 52 week low with valuation ratios of 0.22x its tangible book value, 1.3x its price to ttm EPS (P/E), 0.45x its enterprise value to ttm EBITDA, 0.64x its price to ttm EBITDA and 1.5x its price to ttm free cash flow. All these numbers are adjusted and normalized to exclude any onetime, non cash and/or non operating items. With such low valuations the upside is huge. The industry P/E is 3.68x with Uflex and Jindal Poly films, the main competitors of Polyplex, trading at P/E multiples of 3.2x and 1.7x and P/B multiples of 0.7x and 0.5x, respectively. Though the entire industry is trading at very low multiples, Polyplex looks extremely attractive on the basis of its valuation and growth. A tangible book value of 0.5x or a P/E of 3x can easily double to triple the stock price from here. The return on investment can be anywhere between 50% and 200% in 1 to 4 years, with a yearly dividend yield of approximately 4%-4.5%.
Company description, business and industry overview, future projects and growth, risks, profitability, liquidity and management are discussed below and a detailed valuation model is attached.
VALUATION MODEL (click on the link and then click on download)
Company description:
Listed in NSE (National Stock Exchange of India) (POLYPLEX) Polyplex Corporation Ltd. together with its subsidiaries (Polyplex/company) is a global manufacturer and supplier of high performance plastic films (PET, BOPP & CPP) mainly used in the flexible packaging industry. The company has manufacturing plants in India, Thailand, Turkey and the US, apart from distribution channels in the US and China. It is the fourth largest producer of thin Polyester (PET) films. The company is also backward integrated to produce captive raw material for PET films. Polyplex has been paying dividend every year since 1993.
Source: Polyplex Corporation Ltd.’s 2010-2011 annual report
Business and industry overview:
Polyplex’s business is focused on producing high performance plastic films (plain and metalized…thick and thin), technically known as BOPET (Biaxially-oriented polyethylene terephthalate). BOPET is mainly segmented into Thin & Thick Films:
i) Thin Film: 50 Micron & Under (75% of total BOPET market)
ii) Thick Film: Over 50 Micron (25% of total BOPET market)
Source: June 2011 SET opportunity day presentation by Polyplex (Thailand) Public Limited Company
Source: June 2011 SET opportunity day presentation by Polyplex (Thailand) Public Limited Company
BOPET thin film is mainly used in the flexible packaging industry. Flexible packaging is the main market/segment of Polyplex and comprises of 81% of its total sales as of FY2011 (rest is 18% industrial and 1% electrical, both mainly being thick film applications).
Better packaging not only improves the shelf life of the products but is also essential for improving product appeal in a highly competitive consumer goods industry. Flexible packaging also reduces the cost of packaging as compared to the conventional packaging. This has resulted in shift from rigid forms of packaging to flexible packaging which has ensured higher-than-GDP growth rates in this industry across the globe. World demand for BOPET films (thick and thin) is expected to grow by 8.7% p.a. to 2015 and flexible packaging industry growth is estimated at 9% as per PCI films consulting Ltd and Polyplex estimates. PET film, being a higher-end substrate within packaging, has been among the faster growing substrates. An increase in the purchasing power in the developing countries has brought with it a large rise in the per capita consumption of packaging material. As a result, Asia (excluding Japan & Korea), is the largest market for PET films with 41% of the PET films produced being consumed in this region. However, per capita consumption of packaging material in developing countries is still very low as compared to the mature markets, which should help in sustaining the growth rates. The changing demographics of faster growing younger population and urbanization are also contributing to the growth in developing countries. The other drivers of demand and growth in these regions are the increase in the share of organized sector in consumer products and retailing, small serve packs arising out of need for inclusive and rural marketing, increasing consumerism and the resulting need for better packaging.
81% of the company’s products are used in food and consumer goods markets such as packaged foods. Demand for packaging is quite inelastic when it comes to food products, household goods and personal care products etc., which are to a large extent non-discretionary in nature insulating the industry from the global economic recessionary environment. For example, during recessionary period of 2008-2009 and 2009-2010 the top line growth of the company did not decline, though the margins contracted. This is taking into consideration that the company generates approximately 30% of its revenues in North America and 25% in Europe, where recession was most severe. Below are the numbers (fiscal year ending March).
Table 2
The demand for these products is also expected to grow in the future with better standard of living, increasing population, and increased longevity, especially in the emerging economies.
Products manufactured by the company also have electrical and industrial applications (19% of its total sales as of FY2011) and are used in solar power cells, touch-screen panels of mobile phones and flat screen televisions and some parts used in automobiles. Electrical/ electronic segment has maintained its pace of growth due to the demand from flat panel display screens used in LCDs and electronic displays. Films used for solar applications like photovoltaic (PV) products have also shown buoyancy in demand in the recent past. These products are in growth stage and hence demand would remain consistent with decent growth rates and room for expansion. OLED, which utilizes thin film plastic and is in its R&D phase, is the future for screens http://www.youtube.com/watch?v=NcAm3KihFho .
Similar to the shift in demand, the supply-side dynamics have also changed. Most of the new capacities are being added in low-cost developing countries, primarily in Asia. Most of this new capacity is also focused on the packaging segment, with an emphasis on high productivity and low operating costs. This has adversely impacted traditionally large producers of PET film operating with high cost structures, especially in developed economies. These producers are now emphasizing on developing niche technologies in PET films like films for LCDs, solar panels and specific high-end applications within packaging. While trade defense measures like anti-dumping, import duties and countervailing duties have been in use for the last two decades, they are unable to address the inherent problems of low-productivity assets/machines operating in the developed countries producing films for traditional applications. No new thin film line has been setup in the US or EU since 2003 until 2010 (the company has recently set one up which will begin operations in 2012) increasing the import intensity in these regions. Also, diversion of capacity by several large producers from packaging to industrial segment by conversion of thin film lines into intermediate and thick films along with closure of some old lines have added to the supply problem.
Out of the total new capacity added in the last 5 years, 56% has been added in China itself, which is significantly higher than the accretion in demand there. Since large exports from China are still not visible, it has resulted in below-average operating rates there. Operating rates in developed countries in the western world also tend to be lower than the average due to competitive market position (approximately 75%). On the other hand, most of the new assets in the rest of Asia would be operating at above average operating rates (approximately 90%) because of newer, better and efficient machinery used. Companies with better quality, access to international customers and a better supply chain model stand a better chance of emerging as winners.
India is one of the largest and fastest growing markets in the world for flexible packaging. The drivers for growth in India are similar to those of other developing countries with additional consumption coming from the widespread usage of small-serve packs due to its large lower income population. The thin PET film market in India is estimated about 230,000 tons for 2010-2011. However the ban imposed by Government of India on sales of gutkha (chewing tobacco) in plastic sachets in February 2011 has had a significant impact on demand for thin PET films in India. Estimates range between 25%-30% of the Indian market-size could be affected. Polyplex generates 20% of its revenues from India. A 25% reduction in size of the existing PET film market in India due to ban of gutkha would only impact the company’s revenues by approximately 5%. That said, the growth in the region is still above par. Considering the large market base and the expected annual growth rate of about 12%, the company estimates that 25%-30% of the additional global demand shall originate in India making it an attractive market. The total capacity of the industry in India is about 400,000 tons, with the surplus production generally being exported to other regions.
Source: Polyplex Corporation Ltd.’s 2010-2011 annual report and June 2011 SET opportunity day presentation by Polyplex (Thailand) Public Limited Co.
Strategy:
For years the company has been following the below strategies which has helped it grow significantly.
1) Manufacturing or distribution presence in the key regional markets for an efficient delivery model, backward integration and providing better access to the global markets. The company has a large international presence with active sales in 87 countries across the world. It has plants in key locations such as India (to serve the Indian market), Thailand (to serve the South East Asian market), Turkey (to serve the European market), and the USA (to serve the North American market). It produces its own raw materials in all its plant location resulting in lower cost and better control of quality and availability. It also has strong global delivery capabilities with near-shoring and efficient onward distribution network. Acquisition of a distribution company in the USA in early 2006 has been a strategic move of the company in this direction. Setting up of a trading company in China in FY 2009-10 is another strategic decision to establish the company’s presence in one of the largest and fastest growing markets for its products. The company is also evaluating similar initiatives in other key regional markets like Latin America and Africa where its presence is limited.
2) Operating in tax free zones. Most of the company’s manufacturing units, in all countries in which it operates, are strategically located in tax free zones. Average tax paid by the company in 2010-11, 2009-10 and 2008-09 was 5.6%, 12.2% and 7.1% respectively. Its average tax rate for last 12 quarters is approximately 10%. The low tax rate makes them very competitive in terms of pricing their products and helps them maintain good margins. With the same strategy, the company has set up a new manufacturing facility in Decatur, Alabama, USA in 2011. According to a local news service, state and local government of Alabama have waived more than approximately USD 11m in taxes.
3) State of art manufacturing facilities and machines to lower cost per unit. State of art manufacturing facilities along with high capacity utilization rates of more than 90% has helped the company to price its products at competitive rates and maintain healthy margins. The company has been setting up these manufacturing facilities in its key locations (India in 2009, Thailand in 2010 and 2011, the USA in 2011) to take advantage of the inherent problems of low-productivity assets / machines operating in the developed countries by PET film manufacturers. In continuation with this strategy, Polyplex is currently setting up a plant in the US which would be operational by September 2012 with sophisticated machines and state of the art manufacturing facilities. As per plasticnews.com, established U.S. plants, some of which operate with a 15- to 20-year-old machinery, may face problems to regain manufacturing parity with Polyplex as its entering the US market with latest machines of 30,000-ton, 8-meter-wide [line], running at 400-500 meters a minute. Recently they have also entered a joint venture with a Japanese firm which has better technology to further reduce their costs.
4) Diversification of product offering. In the recent past, the company also has ventured into downstream businesses like silicone coating, extrusion coating and diversification into BOPP and CPP films, enabling it to offer a more complete package to the industry.
Future projects under implementation and capital investments by the company and its subsidiaries:
1) Thin PET film line, PET chips plant & metallizer in Alabama, USA
2) Improvements in manufacturing facilities in India
3) Thick PET film line & PET chips plant in Rayong, Thailand
4) Silicon coating line in Rayong, Thailand
5) Blown PP line in Rayong, Thailand
6) Thermal lamination line in Rayong, Thailand
All the above projects are described below:
1. Setting up of a new manufacturing plant in the US: Polyplex has set up a new manufacturing facility (PET film line, PET chips plant and metallizer) in Decatur, Alabama, USA with an estimated capital investment of USD 185m (Phase 1: USD 110m and Phase 2: USD 75m). The tentative completion is in September 2012. The plant has been set up primarily for two reasons: to overcome the trade defense measures like anti-dumping, import duties and countervailing duties in the US and to take advantage of the inherent problems of low-productivity assets / machines operating in the developed countries by PET film manufacturers. As per plasticnews.com, established U.S. plants, some of which operate with a 15- to 20-year-old machinery, may face problems to regain manufacturing parity with Polyplex as its entering the US market with latest machines of 30,000-ton, 8-meter-wide [line], running at 400-500 meters a minute. Another reason is that the traditional large producers are now emphasizing emerging niche technologies in PET films like films for LCDs, solar panels and specific high-end applications within packaging. Due to this we have seen diversion of capacity by several large producers from packaging to industrial segment by conversion of thin film lines into intermediate and thick films along with closure of some old lines. This has added to the supply problem. In addition, no new thin film line has been setup in the US or EU since 2003 until 2010, increasing the import intensity in these regions.
The facility has been set-up with backward and forward integration to reduce cost. As per plasticnews.com, the plant has been strategically located at Decatur, AL as facilities of BP Chemical and Indorama in and around Decatur would help a stable supply of resin and chemicals such as paraxylene. In addition, as per the news service, Polyplex plans to work with local partners to build on-site feedstock resin plant. Once operational, this plant will ensure faster deliveries and a reliable onshore supply chain solution to the existing and potential customers in Americas, which is approx 29% of the company’s market. According to a local news service, state and local government of Alabama have waived more than USD 11m in taxes for setting up a plant in the region.
2. Converting PET film line into specialty film line in India: The company is converting its first PET film line at Khatima plant in India into specialty film line with a capital investment of around Rupees 6,835 lacs (USD 15.3m). The modification of this line will facilitate the broad basing and diversification of product portfolio in India. The project is expected to start commercial production in December 2011. In addition in July 2011 the company added another metallizer at Bazpur plant in India with a capital investment of around Rupees 1,650 lacs (USD 3.7m). It is also debottlenecking and modernizing all its plants in India.
3. Thick polyester film project in Thailand: The company is in the process of setting up a thick film line and a Batch process chips plant (Polyester Resin Plant) with capacities of 28,800 MT and 23,500 MT, respectively in Thailand with a capital investment of Rupees 33,435 lacs (USD 75m) including working capital. This will enable the company to expand its product range to include thicker, more functional and specialty films strengthening its offering in industrial applications, where products are more differentiated and customized. This would help diversify sales into industrial and optical end use segments including new uses in Photovoltaic (PV) industry. Further thick film also offers a relatively higher margin and more stable business thereby mitigating the risk of volatility in earnings. The plant is expected to start commercial production by end of March 2013.
4. Silicone coating, Blown PP and Thermal lamination line in Thailand: Polyplex is currently implementing a silicone coating line (which will use PET film as an input, i.e. backward integration) in Thailand at an estimated capital expenditure of Rupees 10,274 lacs (USD 23m) as a push for forward integration and specialty and value added products. The work for the line was completed in June 2011 and the commercial start up is anticipated by January 2012. This is a high capacity line with capability of making silicon coated products for the entire spectrum of end-use and will help capture the high growth siliconised film market. The company would also add a Blow PP line in Thailand in 2012 which would enhance usage of this silicone coating line besides adding another end use segment of Peel & Stick liner in the product range.
Along with the above projects the board has approved a thin PET film line, PET chips plant and metallizer in Brazil. The company is undertaking these projects as it sees demand for its products in the future and room for expansion. Once functional, these new plants would not only increase the top-line but also depreciation, resulting in lower tax and increased free cash flow.
On completion of the ongoing / approved projects the total manufacturing capacities will increase by approximately 23%. Below is the table:
Table 3
Total market and market share of Polyplex:
The company is presently serving only 10% of the global flexible packaging industry (estimated to be 1545 KMT as of 2011) and even with all the above expansions, by the end of 2012, it is expected to serve approximately 11% of the industry (expected to be 1698 KMT by 2012). It not only has the potential to grow with the growing industry rate of 9%-10% but also to capture the market share by using the same strategies it has been using before.
Table 4
Profitability:
The company’s latest filing is as of 30 September 2011. The table below gives a glance of the company’s top-line growth and EBITDA margins.
Table 5
The above numbers depict the strong revenue growth, profitability and EBITDA margins. That said, in recent quarters the company has seen very high growth rates due to supply shortages. This might not be the case in the future. On a conservative basis, I have modeled a revenue growth of -5% and 10% for FY 2011-2012 and 2012-2013, respectively. Also, Polyplex may face margin pressures as a lot of companies in this industry have recently invested in adding capacities. This might negatively impact the industry margins and hence the profitability. Again, on a conservative basis, I have modeled high raw material costs and a low EBITDA margin of 18%, as compared to an average EBITDA margin of 29% in FY 2011. With these assumptions Polyplex is trading at a price to future EPS of 1.65x and 1.5x and a price to tangible book value of 0.2x and 0.18x for FY 2011-12 and 2012-13, respectively, making it extremely cheap. As of 30 September 2011 it had more 85% more cash on its balance sheet than its market cap. One has to keep in mind that in a year or two, once the above projects are operational, they can add significantly to the revenues (more than what I have modeled, I like to be a little conservative in my modeling) as the manufacturing capacities will increase by approximately 23%. Increased revenues with extremely low valuations make the stock very attractive with huge upside. A P/E of 3 or a book value of 1 can double to 5 times the stock price from here.
Management:
Promoters and promoter group shareholding (non-encumbered) as of the latest quarter ending 30 September 2011 was approximately 47%. Promoters have maintained their large shareholding showing their confidence in the company. Management understands the business pretty well and has consistently and opportunistically added plants in strategic locations to maximize profits and efficiencies. They have grown net fixed assets by 5x to approximately 17bn Rupees (USD 340m) in last 7 years by reinvesting cash in the company. EBITDA has increased by approximately 6.6x during that period.
Cash and liquidity position:
As of 30 September 2011, company’s cash position increased significantly by 767% to Rupees 9.8bn (USD 196m). This was mainly due to a gain of Rupees 6.37bn (USD 127m) on sale of 8% stake in March 2011 and 11% in November 2010 in one of its subsidiary companies (Polyplex Thailand Public Company Ltd. (PTL)). With this sale, the consolidated holding of Polyplex Group in PTL has reached 51.0%. The company is using this money for the projects mentioned above. Excluding the sale cash position increased by 209% on a Y-o-Y basis to approximately Rupees 3.5bn (USD 70m). As of 30 September 2011, company had a leverage of 1x, net leverage of -0.2x and interest coverage of 32.7x. It generated a free cash flow of Rupees 3.4bn (USD 69m, 14% of sales) for FY 2010-2011. Huge cash position along with strong free cash flows and large unutilized credit lines shall be quite adequate for the company in any kind of stress situation and gives it financial flexibility to take advantage of any opportunities in the future.
Other positives:
1) Appreciation of Yuan can make Chinese exports of PET films expensive, which may benefit Polyplex. As mentioned above, the company has manufacturing or distribution presence in the key regional markets for an efficient delivery model and to mitigate foreign exchange and export trade risk.
2) With technology out there to recycle plastic, it will only get better and more efficient.
3) Use of plastic will never go away. Its been growing and will keep growing in the future. A lot of metal automobile parts are now been replaced by plastic in ever growing efforts to reduce costs due to lower consumer spending in the developed world.
Reason for low valuations:
1) The Indian stock market can be trader driven, as a lot of stock markets around the world are. Recently traders have been driving stock prices lower, irrespective of company’s valuations.
2) As in any market, valuations can remain distorted. So is the case in the Indian markets. A lot of companies are trading at a significant discount from their 52 week highs due to global concerns, the US debt and its fiscal deficit, PIIGS overall and Greek debt in specific, Chinese economy slowing down, etc.
3) For some reason I have noticed that the Indian market just values (or puts more emphasis on) the stand-alone company/results and not consolidated. This doesn’t make sense to me as I always look at the company on a consolidated basis and also analyze its subsidiaries. My guess is that the Indian market is just valuing the Indian company as a stand-alone not giving weight to the point that the Indian company is the holding company and has 51% stake in its main subsidiary Polyplex Thailand Ltd (PTL).
Risks:
1) A lot of companies in this industry have generated huge cash reserves, which are reinvested in adding capacities. If demand doesn’t increase in the way that the companies are expecting, we might see overcapacity and hence ample supply in a few years, which could result in decline in prices and margins. The company expects global PET film growth rates to range between 7-10% in the years 2011-15, with demand in Asia growing faster at between 10-12%. From the spate of announcements and lines on order with the machine vendors, it is very clear that the overall capacity addition during 2011 to 2013 is expected to be much higher than the growth in demand. High capacity additions in anticipation of future growth would create periods of high competition and result in lower margins. This is the main concern in the industry. In short to medium term there is a likelihood of excess supply due to new capacities being added while the growth in demand would be linear resulting in reduced margins.
2) One of the main raw materials for the company is crude oil. With crude prices very high company’s margins would shrink. That said, this is a common risk to the entire industry as the raw material price movement affects all industry participants.
3) A significant and sustained one-sided movement could result in substantial inventory gains or losses.
4) 80% of the company’s revenues are from overseas markets and approx 20% from India. To break it down, 29% from North America and 25% from Europe. As these developed markets are matured and these economies may experience a relatively stagnant or slow growth, the company may not experience a lot of demand from these countries, which is the major source of its revenue.
5) International trade in PET film has been subjected to trade defense measures for more than two decades through the imposition of anti-dumping duties or countervailing duties. Anti-dumping duty (AD) can be imposed on imports if the ex-factory prices of such imported products are proved to be lower than the local selling prices of the similar products in the export countries. The important markets adopting this measure are the EU and the US against several countries. Countervailing duty (CVD) can be imposed if the domestic government or government agency provides subsidy to the exporter. Such tariff measures result in increased prices, making it difficult to compete in those markets. In the last US Anti-dumping petition against producers of PET film from Thailand, China, Brazil and UAE, duties were imposed against China, UAE and Brazil in the range of 3.5% to 76.7%, but exports from Thailand were found to be not causing any harm to the US domestic industry. As previously mentioned, Polyplex has a manufacturing plant in Thailand. The company undertakes all safeguards to insulate against the risk arising out of anti-dumping actions and other trade barriers imposed by the importing countries. A geographically well-diversified manufacturing and distribution portfolio helps mitigate the adverse fall-out of any such actions. The company has also started a manufacturing facility in Alabama, USA to overcome this problem. That said, if such import duties or countervailing duties and/or anti-dumping policies are further levied on the countries in which the company has manufacturing plants, it can significantly impact the company’s revenues.
Mispricing in valuations:
The company is underestimating the fair value of its assets on its balance sheet as compared to the price it would get in the market. This is evident by reverse-calculating value of its subsidiaries. Before doing that calculation lets first list the subsidiaries of Polyplex Corporation, to understand its company structure. Polyplex has 4 manufacturing companies:
1) Polyplex Corporation, Ltd., India
2) Polyplex (Thailand) Public Company, Thailand (PTL)
3) Polyplex Europa Polyester Film Sanayi Ve Ticaret A. S.(Polyplex Europa).
4) Polyplex USA LLC (PU/Polyplex USA) USA
These manufacturing companies are where the value is since they have the main assets. Other than these manufacturing companies, Polyplex has 2 distribution centers in the US, (Polyplex Inc. USA), and in China (Polyplex Trading Co. Ltd. China).
Polyplex Corporation Ltd India, which is the holding company, had 70% stake (directly and/or through investment companies) in Polyplex (Thailand) Public Company, (PTL). PTL is the most important subsidiary of Polyplex Corporation as it has (directly and/or through investment companies) 100% stake in Polyplex Europa (manufacturing plant) and Polyplex USA LLC (manufacturing plant), 100% stake in the distribution company in China and 80% stake in the distribution company in the US. Below is the holdco opco structure.
Source: Polyplex Corporation Ltd.’s 2010-2011 annual report (fiscal year ending March)
In November 2010 and March 2011 Polyplex Corporation Ltd, India (the holding company) sold approximately 11% and 8% stake in PTL, respectively, for Rupees 6.37bn (USD 127m). With these sales the consolidated holding of Polyplex Corporation Ltd, India in PTL decreased from 70% to 51%. The value of this 51% stake in PTL as per the above sale price = (Rupees 6.37bn *51%) / 19% = Rupees 17.1bn (USD 342m). This should be the buying price or the market value of the remaining 51% holdings of subsidiaries, as per recent transactions. Adding tangible book value of Rupees 3.8bn (USD 76m) of the standalone company we get Rupees 20.9bn (17.1bn + 3.8bn). So this can be considered as the total market value of the holding company (Polyplex Corporation Ltd, India) as per the recent market transaction. This market value divided by no of shares outstanding gives a share price of Rupees 653 (208,982 / 319.80 = 653.48), the stock is trading at 160, a clear upside of 309%. A Rupee 7 yearly dividend (4.3% dividend yield) makes it even better.
Arbitrage between the subsidiary and the holding company:
Recently Polyplex was on the best 200 Asian companies under a billion list published by Forbes. Here is the link http://www.forbes.com/lists/2011/24/best-under-a-billion-11_land.html (page 15). The irony is that PTL, 51% of which is held by the parent company Polyplex Corporation Ltd, India, had sales of USD 384m and a market capitalization of USD 399m (P/E of 3.4x and Price to ttm sales of 1.04x) while its parent company in India had Sales of USD 512m and a market value of USD 95m (P/E of 0.5x and Price to ttm sales of 0.19x) unadjusted for any one time charges. This shows a clear arbitrage. Below is the table.
Table 6
Conclusion:
The market isn’t pricing Polyplex rightly. The market cap of the company is less than its cash on its balance sheet. Theoretically, at this price, you can buy the company for Rupees 5.2bn (USD 100m). Pay yourself a dividend of the entire money invested with the cash on the balance sheet of Rupees 9.9bn (USD 190m). The company will still have Rupees 4.8bn (USD 92m) left on its balance sheet, more than enough to meet its working capital requirements. With this basically you ended up owning the company for free. In the future years you can pay the entire free cash flow generated by the company to yourself as dividends. For FY 2011, the company generated a free cash flow of Rupees 3.4bn (USD 69m), 67% of the present market cap. Assuming that the free cash flow doesn’t grow and remains constant, you not only ended up owing the company for free but also have a return of 69% (69m/100m) of your total investment every year, if you end up buying the company at this price and pay the entire free cash flow to yourself as dividend. Not to forget, dividend in India is tax free.
Polyplex is trading at extremely attractive valuations and the down side is limited but the upside is huge (Table 1). That said, you can get stuck in the value trap for a long time. Consider this as a long term play. In short run the stock can go further down due to margin pressures and/or global market conditions. That would be the time to accumulate at even lower valuations. In a normal scenario with a P/E of 2.5x the upside can be approximately 70% to 100% in 2 years. A little higher multiple of 4 gives a return on investment of 200% in 2 years. In case of a bull run the industry multiples can expand and the company multiple can even reach 7 to 9, which was the case in early 2010. In that scenario the upside could be 400% to 500%.
Market is not always efficient; it over reacts to news, sometimes fails to analyze cooked books, legal language and at times doesn’t anticipate the obvious. You will always find opportunities if you dig in deep. If it was efficient, nobody would have profit from it.
- Suneet Chandvani
Notes:
1) Consolidated Financial Results include the results of the subsidiaries as described in the group structure (holco–opco structure) above.
2) All numbers, including but not limited to, EBITDA, Net income etc are adjusted to exclude any one time, non operational and/or non-cash charges and hence may not match as reported by the company.
3) It is very important to read the disclosure and disclaimer before making any investments based on the above article.
Disclosure: Long Polyplex Corporation Ltd. (Ticker:POLYPLEX, in National Stock Exchange of India a.k.a. NSE )
Disclaimer: It is very important to read the disclaimer before making any investments based on the above article.
Suneet Chandvani
