Emmbi Polyarns Limited (EPL) is tapping the capital markets with an IPO which opens on Monday the 1st of February and closes on Wednesday the 3rd of February. The price band is fixed in the range of Rs 40-45.

Business

EPL is in the business of manufacturing and selling FIBC (flexible intermediate bulk container) also known as jumbo bags, woven sacks, and various woven polymer based products such as Container liners, protective irrigation system, canal and tank liners and car covers. The company started as a trading unit in 1994 and set up its first manufacturing unit of 600 tons in 1997. Since then it has been continuously expanding and as of date has a capacity of 5000 tons per annum. The company supplies a major portion of its products to FMCG and branded food products.

EPL exports its products to over 14 countries and today 60% of the total sales are from exports while 40% are to the domestic market. Large bulk purchasers of the jumbo bags or woven sacks are the fertiliser and cement sectors. The company also makes products like geo-textiles, lumber covers and flexi tanks. There is no doubt that EPL has created a range of products and has a niche product range. The niche range certainly enjoys higher margins but many of these products are yet to be sold in the kind of quantity that would improve the margins to a speciality player.

EPL as a company has been able to create a portfolio of products which can cater to a large number of customers. As mentioned earlier the new range of speciality products enjoys substantially higher margins and this would be reflected in the year 2011-2012 when the full effect of the company’s expansion is available. It may also be mentioned that the major objective of the IPO is to raise money for expansion of its capacity from the present 5000 tons to a three and a half time increase of 17,800 tons.

Financials

The company achieved net sales of Rs 29.64 crs for the year ended March 2008, which grew by 29% to Rs 38.28 crs in March 2009. For the half year ended September 2009 the sales are at Rs 23.22 or on an annualised basis at Rs 46.44 crs implying a growth of Rs 21.3%. The net profit after tax is Rs 0.54 crs for March 2008, Rs 1.36 crs for March 2009 and Rs 1.21 crs for the half year ended September 2009. On an annualised basis the same for the half year would be Rs 2.43 crs. The net margins would be 1.82% for March 2008, 4.6% for March 2009 and 5.22% for the half year ended September 2009 indicating better margins because of better product mix.

EPL issued a bonus to its promoters in the half year ended September 2009 of 3:2 or 150% and the issued capital increased to 7.83 crs. Post issue the capital would increase to 17.41 crs.

Objects of the Issue

Valuations

Based on the pre issue capital of 7.83 crs the EPS for March 2008 is Rs 0.69 and Rs 1.74 for the year ended March 2009. Based on the half year ended September 2009 earnings on an annualised basis the same would increase to Rs 3.10.

However if we are to look at the valuations on a fully diluted basis the EPS would fall for the year ended March 2009 to Rs 0.78 and for the half year ended September 2009 on an annualised basis to Rs 1.40. Very clearly on the EPS front there is nothing much to cheer about and the price certainly looks extremely expensive.

Comparison

The company is primarily a jumbo bag manufacturer or woven sack manufacturer. Some of the players in this category include Jumbo Bag, Neo Corp International, Polyplex Corporation, Essel Propack, Ester Industries, Kaira Can and Jai Corp. Their price earnings multiple varies from just about 4 in the case of Ester Industries to 187 for Kaira Can. All these valuations are based on March 2009 numbers.

The price at which the company wants to sell the shares is in a price range of Rs 40-45. Based on the fully diluted EPS for March 2009 of Rs 0.78, the price earnings multiple would be 51.28 at the lower price band and Rs 57.69 at the higher price band. Similarly based on the EPs of Rs 1.40 for the half year ended September 2009, the price earnings multiple would be 28.57 at the lower end and 32.14 at the higher end. These valuations are by no means cheap and leave nothing on the table for an investor who takes risk in applying for a new issue and a small cap company.

Very clearly this is a sector which is growing and there is lot of expectation from the future. The growth prospects notwithstanding, there seems to be a time lag in which the sharp jump in capacity by EPL from 5000 tons to 8600 tons in the first stage and then to 17800 tons in the second stage will happen. The company also needs to have the order visibility and the project execution on time. Any delay in execution or significant order procurement will hurt the company as it is already a leveraged company and is paying a substantial portion of its profits towards payment of interest.

Risks

EPL is raising money for expanding its capacity from 5000 tons to 17800 tons a more than 350% jump. Its current capacity utilisation is yet to see the present 5000m tons capacity being fully utilised. The execution of such a big capacity expansion is a risk in itself and any delays could hurt the company. Secondly the order visibility required for such a major expansion is not there and if the company has to do make shift production of commodity goods its already thin margins could take a further beating.

Secondly the dilution by the promoter is quite substantial and the equity is more than doubling post the issue. This leaves no scope for further dilution in case the promoter needs to expand or raise further capital.

Thirdly this is a competitive industry and margin expansion will always be a challenge.

Even the grading by CARE talks about the relatively small size of operations, highly competitive and fragmented nature of the industry limiting the flexibility of the company and significantly large expansion project proposed by the company exposing it to attendant business risks.

Conclusion

All in all an extremely expensive offering where the issue is priced very aggressively and has more risks than rewards. Even though the future of the industry looks bright, it appears that post listing and after the expansion is in place with order visibility, may be a better time to enter the stock.

SEBI Disclaimer: – I do not intend to subscribe to the issue.