So, i've been reasearching this company - Polyplex Corporation over the entire weekend. Yes thats how i spend my weekends , really sad i know.
The positives
Right now Polyplex would seem like a solid investment, the one Graham or any other value investor would drool over. Other people have written extensively about the positives, just have to look up on the net. So, what are the positives from a valuation perspective:
At the end of FY2011, the company had a cash of Rs. 8,608 mn
That works out to approx Rs. 269 per share.
The stock is currently trading at 190 per share. Need i say more.
But wait, there is more. On top of the cash, the company has MF investments of Rs. 284 mn, which works out to another Rs. 9. So only on cash and cash equivalents the company has an upside potential of 46%, its unbelievable.
About the company
The company is into manufacturing of PET films which are used predominantly in flexible packaging. It has manufacturing in India, Thailand, Turkey, China and a new plant coming up in the USA. India contributes for about 20% of the revenues of the company and the remainder come from outside of India. The industry is expected to grow globally at the rate of 8.7% pa till 2015. This story just keeps getting better and better. But i'm not done yet.
Last year the company's topline (operating) grew by 103% from 12,666 mn to 25,704mn. It had a positive CFO of 4,904 mn (growth of 98%).
The negatives
But failing miserably to work enough on the bear case with my last investment, this time i will be a little more thorough. So lets check out what might go wrong with the astonishing story above.
1. Let me start with a caveat. This is a cyclical industry and as with all cyclical stocks there is always the big risk of buying too soon. The topline growth of 103% was a one off case because of prices of pet films doubling in 2011. This happened because of many reasons. Quoting from the annual report of Polyplex:
Market Developments
Demand continued to grow despite the Economic Crisis in 2008-09.
There had been inadequate / delayed capacity additions.
Structural changes:
Closure of some old uneconomic lines.
Diversion of capacity from packaging to industrial segment as well as conversion of thin film lines into
intermediate and thick films for new applications.
New applications
Optical industry /Photovoltaic (PV)
So, dont expect the abnormal growth to continue. In 2012, according to analyst estimates, the revenue will be 24,577 mn. Since the company has already achieved revenues of 18,377 in the first 3 quarters, i will say that is a fair estimate.
In the next 2 -3 years, a downturn is expected in the pet films industry with capacity outweighing demand. Demand supply gap is expected to increase from 500 MT in 2011 to 950 MT in 2012 to 1300 MT in 2013 before moderating to 1100 and 800MT in 2014 and 2015. So expect prices and margins of the company to go down. More research is needed to determine exactly how low the prices will go but from what i've read the experts are saying that prices have bottomed. But i will take that with a pinch of salt based on the demand supply situated i've highlighted above.
Source: http://www.pcifilms.com/main.asp?selection=News&marker=223&subsel=Have%20European%20BOPET%20film%20prices%20bottomed%20out?
2. The second negative are the high capital expenditures of the company over the next two years. The company has outlined a capex of 9,976 mn over the next 2 years. Increasing capacity at this time might be risky with overcapacity in the industry and all. So expect the free cash flows of the company to be -ve. FCF has been negative for 2009, 2010 and it should be negative for the next 2 years as well.
3. Margins might contract in the future because of increase in raw material prices. The company's raw materials are crude related and with the prices of crude going up, this could reduce margins further.
Valuation
At price earning basis the company is trading at 2.58 on 2012 estimated earnings.
At price to book, it is 0.28 (thats right)
Other companies in this industry are trading at similar PE multiples, although on PB basis, i think poplyplex is the winner (sarcasm intended :)).
In my very humble opinion, they should be trading at slight premium to other companies in this industry. Allow me to explain why.
Jindal Poly Film is in the exact same industry as Polyplex. JPF is trading at a PE of 3.7. On a little more research, I found out that JPF has been investing a lot of cash from this business into their other businesses such as Power giving a middle finger to the shareholders. Same is true of Uflex although it is strictly not in the same industry as Polyplex. Polyplex on the other hand has been investing all the surplus to the shareholders. Given that they have a lot of cash at the moment and whether it would have been in the best interest of shareholders if they rewarded the shareholders through a buyback? Is reinvesting all that money the right decision. That is a question to which i dont have an answer. But based on the share price, market has not taken their decision to reinvest all the money very kindly. But in my opinion, reinvesting the money in the same business shows the management is committed to doing this and they are not using this as a cash cow for other businesses.
So my dear friends, after all this analysis, i think i know which way i am heading. You can make your own decisions. Although if you do uncover anything i've missed here, please be so kind as to let me know. Any information will be much appreciated. Thanks.
The positives
Right now Polyplex would seem like a solid investment, the one Graham or any other value investor would drool over. Other people have written extensively about the positives, just have to look up on the net. So, what are the positives from a valuation perspective:
At the end of FY2011, the company had a cash of Rs. 8,608 mn
That works out to approx Rs. 269 per share.
The stock is currently trading at 190 per share. Need i say more.
But wait, there is more. On top of the cash, the company has MF investments of Rs. 284 mn, which works out to another Rs. 9. So only on cash and cash equivalents the company has an upside potential of 46%, its unbelievable.
About the company
The company is into manufacturing of PET films which are used predominantly in flexible packaging. It has manufacturing in India, Thailand, Turkey, China and a new plant coming up in the USA. India contributes for about 20% of the revenues of the company and the remainder come from outside of India. The industry is expected to grow globally at the rate of 8.7% pa till 2015. This story just keeps getting better and better. But i'm not done yet.
Last year the company's topline (operating) grew by 103% from 12,666 mn to 25,704mn. It had a positive CFO of 4,904 mn (growth of 98%).
The negatives
But failing miserably to work enough on the bear case with my last investment, this time i will be a little more thorough. So lets check out what might go wrong with the astonishing story above.
1. Let me start with a caveat. This is a cyclical industry and as with all cyclical stocks there is always the big risk of buying too soon. The topline growth of 103% was a one off case because of prices of pet films doubling in 2011. This happened because of many reasons. Quoting from the annual report of Polyplex:
Market Developments
Demand continued to grow despite the Economic Crisis in 2008-09.
There had been inadequate / delayed capacity additions.
Structural changes:
Closure of some old uneconomic lines.
Diversion of capacity from packaging to industrial segment as well as conversion of thin film lines into
intermediate and thick films for new applications.
New applications
Optical industry /Photovoltaic (PV)
So, dont expect the abnormal growth to continue. In 2012, according to analyst estimates, the revenue will be 24,577 mn. Since the company has already achieved revenues of 18,377 in the first 3 quarters, i will say that is a fair estimate.
In the next 2 -3 years, a downturn is expected in the pet films industry with capacity outweighing demand. Demand supply gap is expected to increase from 500 MT in 2011 to 950 MT in 2012 to 1300 MT in 2013 before moderating to 1100 and 800MT in 2014 and 2015. So expect prices and margins of the company to go down. More research is needed to determine exactly how low the prices will go but from what i've read the experts are saying that prices have bottomed. But i will take that with a pinch of salt based on the demand supply situated i've highlighted above.
Source: http://www.pcifilms.com/main.asp?selection=News&marker=223&subsel=Have%20European%20BOPET%20film%20prices%20bottomed%20out?
2. The second negative are the high capital expenditures of the company over the next two years. The company has outlined a capex of 9,976 mn over the next 2 years. Increasing capacity at this time might be risky with overcapacity in the industry and all. So expect the free cash flows of the company to be -ve. FCF has been negative for 2009, 2010 and it should be negative for the next 2 years as well.
3. Margins might contract in the future because of increase in raw material prices. The company's raw materials are crude related and with the prices of crude going up, this could reduce margins further.
Valuation
At price earning basis the company is trading at 2.58 on 2012 estimated earnings.
At price to book, it is 0.28 (thats right)
Other companies in this industry are trading at similar PE multiples, although on PB basis, i think poplyplex is the winner (sarcasm intended :)).
In my very humble opinion, they should be trading at slight premium to other companies in this industry. Allow me to explain why.
Jindal Poly Film is in the exact same industry as Polyplex. JPF is trading at a PE of 3.7. On a little more research, I found out that JPF has been investing a lot of cash from this business into their other businesses such as Power giving a middle finger to the shareholders. Same is true of Uflex although it is strictly not in the same industry as Polyplex. Polyplex on the other hand has been investing all the surplus to the shareholders. Given that they have a lot of cash at the moment and whether it would have been in the best interest of shareholders if they rewarded the shareholders through a buyback? Is reinvesting all that money the right decision. That is a question to which i dont have an answer. But based on the share price, market has not taken their decision to reinvest all the money very kindly. But in my opinion, reinvesting the money in the same business shows the management is committed to doing this and they are not using this as a cash cow for other businesses.
So my dear friends, after all this analysis, i think i know which way i am heading. You can make your own decisions. Although if you do uncover anything i've missed here, please be so kind as to let me know. Any information will be much appreciated. Thanks.
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