Plastene India Limited is tapping the capital markets with its IPO for 92.55 lac shares in a price band of Rs 81-84. The IPO has opened on Wednesday the 9th of May and closes on Monday the 14th of May. With just one day to go the subscription received so far is a mere 26% of the issue with not even a single bid from QIB’s. The retail portion has been subscribed 3% while the bulk of the subscription has come from HNI’s who have subscribed 1.65 times of their quota. The book is being made at the lower end of the price band at Rs 81. There have been quite a few instances in the past, where the HNI subscription gets withdrawn or at the time of submitting the ‘ASBA’ application the same gets technically rejected.
| Price Band | Rs 81 – 84 |
| Fresh Issue in shares | 92,55,290 Equity Shares |
| Offer for sale Issue Size in Rupees | Rs 74.97 crs at the lower end to Rs 77.74 crs at the upper end |
| Employee Reservation Portion | 55,290 Equity Shares |
| Net Issue in Shares | 92,00,000 Equity Shares |
| QIB’s | 46,00,000 Equity Shares |
| Non Institutional Investors | 13,80,000 Equity Shares |
| Retail Investors | 32,20,000 Equity Shares |
| Book Running Lead Manager | Motilal Oswal Investment Advisors Private Limited |
| Isssue Opening Date | Wednesday 9th May 2012 |
| Isssue closing date | Monday 14th May 2012 |
| IPO Grade | ICRA grade 3/5 indicating average fundamentals |
| Paid -up Capital Pre IPO | 2,64,93,189 Equity Shares |
| Paid -up Capital Post IPO | 3,57,48,479 Equity Shares |
| Market Cap post listing | Rs 289.56 crs at the lower end and Rs 300.29 crs at the upper end |
| Bid Lot | 75 Equity Shares |
| Bidding Amount for Retail | 2,325 Equity shares at Rs 84 or Rs 1,95,300 per application |
Business
The company began its manufacturing activity in 2005 when it set up its unit to manufacture woven sacks and woven fabric at NaniChirai unit in Gujarat. Currently the company manufactures Jumbo Bags also known as FIBC (Flexible Intermediate Bulk Containers), woven sacks, flexible packaging, woven fabric and tarpaulins. The company is also a distributor for Indian Oil for polypropylene in the state of Gujarat. The company has a total of six plants, four of which are located near the ports of Kandla and Mundra and two in Mehsana district of Gujarat. Currently about half the sales revenue is from exports and the company exports to 30 countries.
Being a distributor of IOC for polypropylene, about 3/4th of the raw materials are sourced indigenously and only about 1/4th of the same is imported. The company’s customers include leading players from the cement, fertilisers, salt, edible oil, food grains, sugar and rice industries. It has a presence wherever packaging plays a key role in retail and bulk packaging.
The company has set up a unit in Kandla Special Economic Zone which will allow the company a 50% tax exemption till 2015-16. To increase its sales efforts Plastene India proposes over the next two years to establish offices/warehouses in two overseas locations. The company also plans to spend on brand building and new products, liners for the bags to increase the applications and hence develop sales.
Objects of the Issue
The objects of the issue are as follows: –
| Rs in lacs | |
| Expansion of manufacturing facilities and new machinery at NaniChirai | 4934.60 |
| Expansion of Manufacturing facilities at Rajpur | 2807.49 |
| General Corporate Purposes | |
| Public Issue Expenses |
Financials
The company has reported revenues of Rs 313.30 crs in the year ended March 2010 which have risen sharply to Rs 484.42 crs in the year ended March 2011. In the current ten months ended January 2012, there is a substantial drop in sales to Rs 382 crs. Even if one were to annualise the sales at best they would be 458 crs. The company has a very large component of traded sales in the total sales which were at Rs 105 crs for March 2010, Rs 175 crs for March 2011 and Rs 77 crs for the ten month period January 2012.
| Ten months | |||
| Jan-12 | Mar-11 | Mar-10 | |
| Income | Rupees in Lacs | ||
| Net Sales of products manufactured by company | 30556.64 | 30986.03 | 20773.91 |
| Net Sales of products traded by company | 7693.96 | 17456.61 | 10556.18 |
| Net Sales | 38250.60 | 48442.64 | 31330.09 |
| Other Income | 290.31 | 682.27 | 544.86 |
| Increase (decrease) in inventories | -605.68 | 2884.93 | 1673.31 |
| Total Income | 37935.23 | 52009.84 | 33548.26 |
| Expenditure | |||
| Raw Material Consumed | 26978.51 | 39293.35 | 24124.35 |
| Staff Cost | 1602.36 | 1722.02 | 1189.99 |
| Other Manufacturing Expenses | 3245.43 | 3758.72 | 2574.42 |
| Adminstrative & Selling Expenses | 1779.50 | 1653.05 | 1381.94 |
| Interest | 2117.79 | 1896.97 | 1708.31 |
| Amortisation | 7.00 | 10.60 | 5.82 |
| Depreciation | 604.13 | 653.88 | 531.45 |
| Total Expenditure | 36334.72 | 48988.59 | 31516.28 |
| Profit Before tax and extraordinary items | 1600.51 | 3021.25 | 2031.98 |
| Provision for Taxation | |||
| Current Tax | 316.72 | 549.57 | 310.96 |
| Wealth Tax | 0.30 | 0.26 | 0 |
| Deferred Tax | 188.18 | 288.8 | 364.24 |
| Earlier Year Taxation | 47.35 | -8.29 | -9.61 |
| Earlier Year Income | 35.61 | 67.22 | 0.00 |
| Net Profit after Tax | 1012.35 | 2123.69 | 1366.39 |
| Net Adjustments | 9.30 | 24.03 | 68.54 |
| Net Profit after Tax and adjustments | 1021.65 | 2099.66 | 1297.85 |
| EPS | 3.86 | 7.93 | 4.90 |
| PE at lower | 21.00 | 10.22 | 16.53 |
| PE at upper | 21.78 | 10.60 | 17.15 |
| EPS and PE for ten months period ending January 2012 is not annualised. | |||
| Annualised basis the figures would be | |||
| Fully diluted and annualised EPS | 3.43 | ||
| PE AT LOWER | 23.62 | ||
| PE AT UPPER | 24.50 | ||
The net profit for the period ended March 2010 was Rs 13 crs which improved dramatically to Rs 21 crs in March 2011 and has fallen as dramatically in the ten month period to Rs 10.21 crs. The fact that the current result is for 10 months would on an annualised basis indicate in the region of 12.25 crs, substantially lower than the previous year. The margins seem to be under severe pressure and interest costs seem to have risen quite sharply.
The company has extremely high debtors and they seem to be rising. In the year ended March 2011, sundry debtors were at 67 days sales considering even the traded sales which were 36% of total sales. The same have risen sharply to 87 days even though the traded sales are now only 20% of the total sales. If one were to exclude traded sales and assume that there is no credit extended to these sales the debtor days in year ended March 11 were 105 days. This has increased sharply to 131 days in the 10 month period ended January 2012.
This explains why interest costs have risen sharply by 162 basis points from 3.91% of sales to 5.53% of sales.
The EPS of the company based on Pre-IPO capital of 264.93 lac shares is Rs 4.90 for the year ended March 2010, Rs 7.93 for March 11 and for the 10 month period ended January 2012 Rs 3.86. If the same were to be annualised and computed on a fully diluted basis of equity capital of 357.48 lac shares it would be Rs 3.43. The PE based on this EPS would be a staggering 23.62 times at the lower end of the price band of Rs 81 and 24.50 times at the upper end of the price band of Rs 84.
One is not sure whether at such valuations investors could ever make money.
Track Record of Merchant Bankers
The company has just one merchant banker, MotilalOswal Investment Advisors Private Limited. The banker has given details of four issues in which they acted as merchant bankers. At the end of the 30th day after listing, 2 issues were trading at a premium while 2 issues were trading at a discount. If one were to look at the performance based on closing prices of Friday the 11th of May, the performance would remain the same as two positive and two negative, but the scrips have interchanged.
What is not disclosed in the track record is the poor performance of an issue Galaxy Surfactants Limited which was handled by this merchant banker. The company had tapped the capital markets in May 2011 in a price band of Rs 325-340. The company allotted 8.89 lac shares at the top end of the price band to 3 anchor investors and on the day of closure of the QIB book received 59% subscription only. There was one day of subscription left for HNI’s and Retail investors. The HNI portion was subscribed 4% and retail portion a mere 11%. The overall issue was subscribed 30%. The issue was withdrawn.
The present issue has a lot of similarities with the issue of Galaxy Surfactants. The issue is in the month of May, is from the same merchant banker and suffers from the same problem of being extremely expensive. To add insult to injury, the merchant banker and the promoters of the company deem it fit to not even have a road show for the media and analysts in Mumbai which is the Financial Capital of India. Any issue planning to list on the premier stock exchanges of India whether it is the Bombay stock Exchange or the NSE, needs to have atleast a road show in Mumbai. The argument that the company is a Gujarat based company and therefore has road shows only at Ahmedabad and Rajkot does not hold good if the company plans to list at the exchanges in Mumbai and not a regional stock exchange like Ahmedabad.
Comparisons
The company has chosen to compare itself with nine other players from the jumbo bag or FIBC space and also flexible packaging manufacturers. Some of the woven sack and jumbo bag players are Flexituff International, Jumbo Bag, Kanpur Plastipack and EmmbiPolyarns. In flexible packaging comparisons have been done with Uflex, Paper Products, Karur KCP Packaging, RadhaMadhav and Glory Polyfilms.In the first category of jumbo bags and woven sacks the closest competitor is Flexituff International who has sales of Rs 148 for the December quarter and if annualised would be Rs 600 crs. The net margins enjoyed by Flexituff are 5.48% which is double that enjoyed by Plastene which clocks 2.69% as net margin.
Plastene is a smaller company, enjoys half the margin yet expects substantially higher valuations than the listed player. Surely there is something which we potential investors do not understand or what the company would like us to know.
It appears that realising there would be questions on the valuation which could be embarrassing; the company chose not to come to Mumbai for any road show.
Valuations
The shares of Plastene India are being offered on a fully diluted 10 month ended January 2012 annualised basis at a PE of 23.62 times at the lower end to 24.50 times at the upper end of the price band. This is based on the 10 months period ended January 2012 net profit of Rs 10.21 crs annualised, resulting in an EPS of Rs 3.86. The valuation is certainly steep and offers no scope for exit for the investor in the short to medium term.
Concerns
The valuations are extremely expensive and offer no scope for appreciation in the short or medium term. The industry is highly competitive and there were two companies which tapped the capital markets in September 2011 from the same field. Plastene was also expected to hit the market at that time but delayed the issue. Call it coincidence or any other name the performance for 2011 fiscal was impressive but has literally become half in the current year and is a major cause for worry. Almost all large players in this business have foreign offices or warehouses to offer just in time delivery to their buyers. High risk takers expecting the management of the company to bail out investors may apply. Retail investors should stay away as the share offers no fundamental gains on either valuation or the nature of business.
Conclusion
Plastene is one more example of greed of the promoter and the merchant banker in pricing the issue at extremely high valuations. There is no scope for appreciation in the short or medium term unless friendly intermediaries decide to bail out the company. The business is undergoing tough times what with the economic conditions in Europe. The performance in the current year for the company has been extremely poor and there are no signs of immediate reversal. With no immediate hope in either price or performance one should stay away from the issue of Plastene India Limited.
SEBI Disclaimer: – I do not intend to subscribe to the above issue.
