crisil research ier report kanpur plasticpack
TRANSCRIPT
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Kanpur Plastipack Ltd
Enhancing investment decisions
Init iating coverage
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Explanation of CRISIL Fundamental and Valuation (CFV) matrix
The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process
Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental
grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The
valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to
grade 1 (strong downside from the CMP).
CRISILFundamental Grade
Assessment CRISILValuation Grade
Assessment
5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)
4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)
3/5 Good fundamentals 3/5 Align (+-10% from CMP)
2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)
1/5 Poor fundamentals 1/5 Strong downside (
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December 29, 2010Fair Value Rs 40CMP Rs 31
Fundamental Grade 4/5 (Strong fundamentals)
Valuation Grade 5/5 (CMP has strong upside)
Industry Information technology
Polaris Software LimitedBusiness momentum remains intact
Fundamental Grade 2/5 (moderate fundamentals)Valuation Grade 5/5 (Strong upside from CMP)
Industry Bulk packaging
Kanpur Plastipack LimitedCapacity expansion and backward integration to drive growth
Kanpur Plastipack Ltd (KPL) manufactures flexible intermediate bulk containers
(FIBCs), which are used in bulk packaging, and PP/HDPE woven sacks. It alsoearns commissions as a stockist. The company has a manufacturing capacity of
10,000 MT. We assign KPL a fundamental grade of 2/5, indicating that its
fundamentals are moderate to other listed securities in India.
KPL to benefit from increased global and local acceptance of FIBCs
FIBCs are used in bulk packing of chemicals, minerals and other commodities.
The US$ 3 bn global FIBC industry is expected to grow at ~7% in volumes per
annum over the next two-three years, while the domestic industry is expected
to grow at 17% over the same period. Due to reliability and cost effectiveness,
FIBCs are increasingly being preferred for packaging. To cater to this potential
rise in demand, KPL is in the process of expanding its capacity from 10,000 MT
to 13,500 MT in two phases by FY13.
KPL is well placed in the international markets
Currently, 65% of KPLs revenues are from FIBC exports, which logged a 25%
CAGR in value terms during FY06-FY10. KPL caters to the overseas markets
through ~20 distributors. Italy, Germany and Spain account for 70-80% of this
business. Going forward, KPL plans to focus on North and South America.
Key negatives and monitorables
1) No price advantage due to undifferentiated nature of FIBCs. 2) Raw material
price volatility and inability to pass on the hike. 3) Freight burden on being
land-locked. 4) Inadequate supply of power from the grid impacts cost. 5)
Project execution delays could affect earnings. 6) Foreign exchange
fluctuations
Revenues to grow at a two-year CAGR of 24.5%CRISIL Equities expects KPLs revenues to increase at a CAGR of 24.5% to Rs
1,536 mn in FY12 due to capacity expansion and growth in end-user segments.
Margins are expected to improve to 9.2% in FY12 from 8.8% in FY10 driven by
better demand prospects and KPLs planned backward integration into multi-
filament yarn (MFY) which is expected to be operational in Q1FY12. EPS is
expected to increase from Rs 5 in FY10 to Rs 10 in FY12.
Valuation - current market price has strong upside
We have valued KPL based on the discounted cash flow method. Based on this,
the fair value is Rs 40 per share. We initiate coverage on KPL with a valuation
grade of 5/5, indicating that the market price has strong upside to our fair
value
KEY FORECAST
(Rs mn) FY08 FY09 FY10 FY11E FY12E
Operating income 745 1,014 991 1,137 1,536
EBITDA 64 113 87 100 142
Adj Net income 18 19 26 33 53
EPS-Rs 3.5 3.6 4.8 6.2 10.0
EPS growth (%) (15.5) 1.6 45.6 21.3 60.6
PE (x) 28.1 9.1 9.4 7.3 4.5
P/BV (x) 3.6 1.1 1.3 1.2 1.0
RoCE (%) 14.4 21.6 14.3 14.4 16.7
RoE (%) 15.3 12.6 15.2 17.2 23.5
EV/EBITDA (x) 12.3 4.2 6.7 6.6 5.4
Source: Company, CRISIL Equities estimate
NM: Not meaningful; CMP: Current Market Price
CFV MATRIX CHANGE
KEY STOCK STATISTICSNIFTY / SENSEX 6060/20256BSE/NSE ticker KANPRPLA
Face value (Rs per share) 10
Shares outstanding (mn) 5
Market cap (Rs mn)/(US$ mn) 164/4
Enterprise value (Rs mn)/(US$ mn) 591/13
52-week range (Rs) (H/L) 49 /17
Beta 0.5
Free float (%) 33%
Avg daily volumes (30-days) 17,480
Avg daily value (30-days) (Rs mn) 0.7
SHAREHOLDING PATTERN
PERFORMANCE VIS--VIS MARKET
Returns
1-m 3-m 6-m 12-m
Kanpur Plastipack -4% 14% 17% 74%
NIFTY 4% -1% 12% 15%
ANALYTICAL CONTACTSudhir Nair (Head, Equities) [email protected]
Arun Vasu [email protected]
Rabindra Basu [email protected]
Client servicing desk
+91 22 3342 3561 [email protected]
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1
2
3
4
5
Valuation Grade
Fundame
ntalGrade
Poor
Fundamentals
Excellent
Fundamentals
Strong
Downside
Strong
Upside
69.2% 69.2% 69.2% 69.2%
0.0% 0.0% 0.0% 0.0%0.0% 0.0% 0.0% 0.0%
30.8% 30.8% 30.8% 30.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dec-09 Mar-10 Jun-10 Sep-10
Promoter FII DII Others
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Kanpur Plastipack Limited
Table 1: Kanpur Plastipack: Business environment
Products FIBCs/non-FIBCs*
Product / service offering FIBCs Bags used in bulk packaging (67% of sales)
PP/HDPE woven sacks - sacks supplied to cement and fertiliser manufacturers in the domesticmarket, and for sugar ,fibre packing and chemicals in the exports market (33% of sales)
DCA/CS* for IOCLExports vs. domestic mix(FY10)
Exports-65% & Domestic-35%
Exports vs. domestic mix(FY12)
Exports-70% & Domestic-30%
Geographic presence Domestic northern and western markets Export markets: UK, Germany, Italy, France, Spain and the US
Market position The industry is fragmented with around 25 FIBC manufacturers KPL has a total capacity of 10,000 MT.
End market and top clients Domestic market: Sacks- cement and fertiliser manufacturers, FIBC- petrochemicals, carbonblack, chemicals, minerals, etc.
Export market: FIBCs to wholesale distributors
Key competitors Jai Corp, Jumbo Bags, Neo Corp International, Flexituff and Shankar PackagingFuture plans Manufacturing multi-filament yarn (MFY)Sales growth (FY08-FY10 2-yr CAGR)
16.5%
Sales forecast (FY10-FY12 2-yr CAGR)
24.5%
Demand drivers Increasing acceptance of FIBCs over other forms of packaging in domestic markets Growth in end-user industries Indian players are getting competitive vis-a-vis Chinese and Turkish players
Margin drivers Backward integrating into manufacturing MFY, which it currently procures to manufacture FIBC Commission arising from being IOCLs polymer stockist for Kanpur and western UP
* DCA- Del Credere Agent, CS- Consignee Stockist
Source: Company, CRISIL Equities
Figure 1:FIBCs are a sub-set of the overall packaging industry
Source: Indian Flexible Bulk Container Associat ion (IFIBCA)
Packaging industry$500bn
Flexible packaging$65bn
Flexible bulk packaging$18b
FIBCs $3bn
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Kanpur Plastipack Limited
Grading Rationale
Mid-sized FIBC-focused player
KPL manufactures FIBCs and non-FIBCs used in bulk packaging of chemicals,
minerals and other commodities. It has a total capacity of 10,000 MT. In FY10,the company produced 5389 MT of FIBC (~4 % of domestic FIBC production).
FIBC production. KPL exports 65% of its produce.
Some of its competitors are Shankar Packaging (Baroda), Flexituff (Indore), Big
Bags (Bangalore), Jumbo Bags (Chennai), Neo Corp International (Indore), and
Jai Corp (Mumbai). The closest listed player KPL can be compared to is Jumbo
Bags. KPL has higher capacity and utilisations vis-a-vis Jumbo bags but lags
behind in net realisations. Margins for both the companies lie in the 9-11%
range.
Peer comparisonKanpur Plastipack Jumbo Bags
FY08 FY09 FY10 FY08 FY09 FY10
Capacity 10000 10000 10000 6070 6070 6070
Capacity Utilisations 72% 87% 95% 81% 88% 67%
Realisations(Rs/Kg) 110.9 118.8 113.2 105.6 120 123
EBIDTA 64 113 87 60 66 49
EBIDTA % 9% 11% 9% 11% 9% 8%
Burgeoning global demand for FIBCs good for Indianmanufacturers
Since FIBC manufacturing is a labour- and power-intensive process, India, China
and Turkey are the major exporters of FIBC. Low labour costs, ease in
procurement of polymers and proximity to end markets give India a competitive
edge over other countries. Indias contribution of ~12.5% in volume to the
global market is expected to increase on the back of a rise in global demand for
FIBCs, benefiting players like KPL.
Figure 2: Comparative strengths Figure 3:Net importing and exporting countries
Country
Net
exports(Mn bags) Strengths Weakness
China 40 Price advantage Lack of consistency in
supply quantity and
quality
Lack of familiarity with
English
India 50 Consistent supply and
quality
Cheaper (except China)
Language (English) Price vis--vis China
Turkey 65 Proximity to EU market Cost inflation leading to
erosion of price
competitiveness
Source: Industry, CRISIL Equ it iesSource: Indian Flexible Bulk ContainerAssociat ion (IFIBCA)
-80
-60
-40
-20
0
20
40
60
80
Americas Europe China Middle eastAustralia India Turkey Africa
(mn bags)
Import Export
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Kanpur Plastipack Limited
like KPL, which is well-established globally
KPL started exporting FIBCs in early 2000. Export revenues from FIBCs
increased at a CAGR of 25% over 2006-10 and currently comprise around two-
thirds of its total revenues. UK, France Italy, Germany and Spain are its key
markets, the last three accounting for 70-80% of its export business.
KPLs overseas business is channelled through ~20 distributors, with whom KPL
enjoys a long-standing relationship based on superior pre- and post-sales
services and timely deliveries. The American market, which mostly procures its
FIBCs from China, is now looking to expand its vendor base and KPL hopes to
enter the new geography.
Figure 4: FIBC and non-FIBC - export revenue trend
Source: Company, CRISIL Equit ies
FIBCs gaining preference in the domestic market aswell
Currently, FIBC sale in India is estimated to be 7-10 mn bags per annum or
~2% of the domestic woven sacks market (Source: PP/HDPE woven sacks).
This is primarily used by export-oriented units.
FIBCs are usually used without pallets and are easier to handle and transport
compared to other forms of packaging. Hence, they are being increasingly used
in industries that require economical and reliable packaging at reduced logistical
costs, and are preferred to smaller packages (25 or 50 kg bags) and bulk
carriages. Industrial growth and substitution are expected to boost FIBC volume
growth by around 6-7% per annum globally over the next two-three years.
Demand for packaging products is dependent on industrial growth. The
domestic packaging industry is expected to grow by 13% per annum over the
next two-three years. Within the packaging industry, polymer-based products
like woven sacks, FIBCs, leno bags and wrapping fabric are expected to increase
at a CAGR of 17% during the period. Maximum growth in packaging product
consumption is expected in the FIBC segment, which is used for bulk packaging.
238
404437
599 586
96 8654
111 82
0
100
200
300
400
500
600
700
FY06 FY07 FY08 FY09 FY10
(Rs mn)
Export FIBC Export Non FIBC
Italy, Germany andSpain account for 70-80% of KPLs exportrevenues
FIBCs sold in India areestimated at 7-10 mnbags per annum
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Kanpur Plastipack Limited
Figure 5:Minerals and petrochemicals have highest share in
domestic FIBC use
Source: IFIBCA
KPL to benefit from domestic demand growth
KPL is expected to benefit from the growth in the domestic packaging industry
and the increasing acceptance of FIBCs over other forms of packaging.
Usage of FIBCs is expected to increase on the back of the following advantages
it offers over jute and paper bags:
FIBCs made from HDPE/PP are much lighter and save almost three to fivetimes of packaging material.
The lower material weight saves significant amount of energy during themanufacture of raw materials and conversion into bags. Jute bags require
almost 50% more energy and paper bags about 300% more energy
compared to synthetic bags.
Use of water and chemicals is comparatively lower. Synthetic bags, being lighter, reduce the use of fuel and energy during
transportation.
However, it is likely to remain focussed towards increasing demand from its
existing export markets and is also actively pursuing newer avenues in South
and North America.
Capacity expansion to aid growth
KPL is expanding its capacity from 10,000 MT in FY10 to 12,000 MT in FY11 and
further to 13,500 MT by FY13. Currently, KPL has an order book for the next
three months, which could increase on the back of increased demand, both local
and global.
Backward integration into multi-filament yarn toadd to top line
FIBCs made from lighter but stronger multi-filament yarn (MFY) are of superior
quality. KPL procures this material from external sources and is now setting up a
polypropylene-based 1,200 MT MFY facility.
Agro
Products, 2%
Carbon
Black, 16%
Minerals, 32%
Petro Chemicals,
28%
Chemicals,
22%
KPL to benefit from theincreasing acceptance ofFIBCs
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Kanpur Plastipack Limited
Of the total yarn produced, ~30% will be used internally and the rest is
expected to be sold in the domestic market. Currently, there is only one
manufacturer of MFY in the northern and eastern regions, leaving ample room
for KPL to market MFY.
This initiative will reduce costs by ~1-2% as it will replace the existing purchaseof MFY. MFY is expected to add ~Rs 100 mn to the top line from next year,
i.e.~10% to overall revenues. EBITDA margins are expected to be in the range
of 10-12%. The project capex is Rs 95 mn, of which Rs 60 mn will be funded by
debt and the rest through internal accruals and promoter contribution.
Recurring commission income, albeit miniscule
KPL was earlier a stockist for GAILs polymer business and has now become an
exclusive stockist for Indian Oil Corporation Ltds (IOCLs) polymer business in
Kanpur and western UP. In October 2010, it sold 1300 MT of polymer on which it
received a commission of ~Rs400/tonne. Revenue from this source is expected
to increase over the next two years as the company, given better operating
profitability in this business, is focused towards selling higher volumes through
this route.
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Kanpur Plastipack Limited
Key Negatives
No price advantage due to undifferentiated natureof FIBCs
FIBC being an undifferentiated product lacks branding power. Larger players
like Sintex and Essel Propack can mitigate increased price, thanks to their
diversified portfolio. But for smaller players like Kanpur Plastipack pricing
remains an area of concern.
Raw material price volatility and inability to pass onthe hike
The main raw material used in the manufacture of FIBC is polypropylene, which
is a crude oil derivative, and subject to price fluctuations. Raw material cost
accounts for ~75% of total operating costs; any variation in its prices could
impact EBIDTA margins. In the past, KPL has been able to only partially pass on
the increase in raw material costs to its customers which impacted margins.
Figure 6:EBIDTA margin vs. raw material as a % to sales trend
Source: Company,CRISIL Equit ies
Freight burden on being land-locked
Kanpur is land-locked and hence transportation is done by road, which increases
the travel time and the cost of freight. Exports contribute the most to KPLs
revenues and its dependence on road transport to move its products to the ports
which are far off reduces its netbacks from exports.
68%
70%
69%
67%
66%5%
7%
9%
11%
9%
0%
2%
4%
6%
8%
10%
12%
64%
65%
66%
67%
68%
69%
70%
71%
FY06 FY07 FY08 FY09 FY10
Raw material % to sales EBIDTA %
Inc in power &
other manuf cost
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Kanpur Plastipack Limited
Figure 7:Freight as a % of sales KPL vs Jumbo Bags
Source: Company,CRISIL Equit ies
Power availabilityUttar Pradesh being a power deficit state, KPL was compelled to install its own
generation unit (gensets) whose power cost is higher than that availed from the
grid. In FY10, when KPL had to increasingly use its own generation units, power
cost (as a percentage of sales) increased 114 bps y-o-y which impacted
margins.
Power consumption FY06 FY07 FY08 FY09 FY10
Purchased units 87.0% 88.5% 85.8% 84.8% 73.0%
Own generation units 13.0% 11.5% 14.2% 15.2% 27.0%
Rate of purchased Units 3.82 3.80 3.95 4.05 4.13
Rate of own units 7.4 10.26 7.19 5.83 6.35
Power as % to sales 6.2% 5.1% 4.8% 4.8% 5.9%
Source: Company, CRISIL Equities
If the power situation in Uttar Pradesh does not improve, the company will be
increasingly dependent on its own generation unit, which would put pressure on
its margins.
7%
6%
6%
7%
4%
3%
5%
4% 3% 3%
0%
1%
2%
3%
4%
5%
6%
7%
8%
1 2 3 4 5
Kanpur Plastipack Jumbo Bags
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Kanpur Plastipack Limited
Key Monitorables
Project execution delays could affect earnings
KPL is in the process of executing two new projects. The 2,000-MT FIBC capacity
expansion at a capex of Rs 83.5 mn is expected to get completed by January
2011. It is also putting up a 1,200 MT MFY capacity at a capex of Rs 95 mn,
which is expected to get ready by Q1FY12. Any delay in the execution of these
projects could affect the companys business prospects.
Foreign exchange fluctutations
KPL earns 65% of its revenues from exports. The company covers ~60% of its
exports and enjoys a natural hedge as it imports ~25% of its raw materials.
Foreign currency gain or loss has an impact on the profitability of the company.
Increased volatility on this front could affect KPLs margins.
Forex as a % of PBTRs mn FY07 FY08 FY09 FY10
PBT 22.3 28.1 28.5 39.7
Foreign exchange(gain)/loss -3.1 -0.5 39.1 -0.4
% to PBT -13.8 -1.8 137.1 -0.9
Source: Company, CRISIL Equities
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Kanpur Plastipack Limited
Financial Outlook
Demand to boost KPLs revenues over the next twoyears
In FY10, revenues dipped by 2% y-o-y due to lower export sales. However, we
expect KPLs revenues to increase at a two-year CAGR of 24.5% to Rs 1,536 mn
in FY12 primarily driven by volume growth of FIBCs on the back of capacity
expansion and increasing global demand. Robust growth from packaging and
higher acceptance of FIBCs in the domestic market will also aid growth.
Figure 8: Revenue mix of KPLs revenues Figure 9:Sales trend Rs in mn
Source: Company, CRISIL Equit ies Source: Company, CRISIL Equit ies
EBITDA margins to remain 8-9% in the next twoyears
We expect EBITDA margins to improve by 40 bps to ~9.2% in FY12 due to
better demand, the companys backward integration into multi-filament yarn
and commission from being IOCLs stockist.
Figure 10: EBITDA and EBITDA margins RHS
Source: Company, CRISIL Equit ies
28%38%
33% 35%
59%
56%57%
57%
13%7% 10% 8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY07 FY08 FY09 FY10
Plastic Products- Domestic FIBC Export sales Non-FIBC Exports sales
726
1,008
986
1,133
1,53014
36
-2
15
35
-5
0
5
10
15
20
25
30
35
40
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
FY08 FY09 FY10 FY11E FY12E
(%)(Rs mn)
Net Sales YoY Growth [RHS]
64 113 87 100 142
8.6
11.1
8.8 8.8 9.2
0
2
4
6
8
10
12
0
20
40
60
80
100
120
140
160
FY08 FY09 FY10 FY11E FY12E
(%)(Rs mn)
EBIDTA EBIDTA [RHS]
We expect revenues to see
a two-year CAGR of 24.5%
EBIDTA to increase from Rs 87mn in FY10 to Rs 142 mn inFY12
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Kanpur Plastipack Limited
PAT to grow at a CAGR of ~43.9%; EPS to increasefrom Rs 5 in FY10 to Rs 10 in FY12
KPLs PAT is expected to double from Rs 26 mn in FY10 to Rs 53 mn in FY12
driven by healthy revenue growth and expansion in EBITDA margins. EPS is also
expected to double from Rs 5 in FY10 to Rs 10 in FY12.
Figure 11: EPS and PAT margins
Source: Company, CRISIL Equit ies
RoE expected at 23.5% in FY12
RoE is expected to increase from 15.2% in FY10 to 23.5% in FY12 on the back
of better operating profitability.
Figure 12: RoE and RoCE
Source: Company, CRISIL Equit ies
3 45
6
10
2.5
1.9
2.6
2.9
3.4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0
2
4
6
8
10
12
FY08 FY09 FY10 FY11E FY12E
(%)(Rs)
EPS PAT [RHS]
14.4
21.6
14.3 14.4
16.7
15.3
12.6
15.2
17.2
23.5
0
5
10
15
20
25
FY08 FY09 FY10 FY11E FY12E
Return on Capital Employed (RoCE) (%) Return on equity (RoE) (%)
EPS is expected to increasefrom Rs. 5 in FY10 to Rs. 10in FY12
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Kanpur Plastipack Limited
Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of
management quality, apart from other key factors such as industry and business
prospects, and financial performance. Overall, we feel that the management has
strong domain expertise and will drive the companys growth going forward.
Business is largely family-driven
The chief decision-making powers are vested with the family. Mr Mahesh Swarup
Agarwal is the first-generation promoter responsible for setting up KPL. The
company went into BIFR in the early 1990s and during this period Mr Manoj
Agarwal (MD), son of the CMD, assisted in running the business and making it
profitable. Mr Shashank Agarwal (director) and son of the MD has been
associated with the company for over a year and has been instrumental in new
business initiatives like IOCLs polymer stockist, polymer trading with guidance
from his grandfather and setting up of the MFY unit. Mr. A.K Bhatnagar(executive director), a textile technologist from IIT, Delhi has been with the
company for 30 years and contributed to the growth and success of KPL.
Experienced second line of management
Based on our interactions with various business heads finance, production and
marketing - we believe that KPL has an experienced second line of management
with 20-25 years of experience each in their respective domains.
Mr Sunil Mehta (vice president - production) has been with the company since
2002. A textile engineer by profession, he has over 20 years of experience in thewoven sacks industry. Mr Nitin Ghodgaonkar (general manager - exports) joined
the company in 2004 and brings with him over 20 years of experience in
overseas marketing of FIBCs. Mr D. S. Kapoor (general manager - finance and
commercial) is an ICWA by qualification and has over 25 years of experience in
finance. He has been with the company for a decade.
Decision making lieslargely with the family
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Kanpur Plastipack Limited
Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of
corporate governance and management quality, apart from other key factors
such as industry and business prospects, and financial performance. In this
context, CRISIL Equities analyses shareholding structure, board composition,
typical board processes, disclosure standards and related-party transactions.
Any qualifications by regulators or auditors also serve as useful inputs while
assessing a companys corporate governance.
Overall, corporate governance presents good practices supported by a strong
and fairly independent board. The current board is well experienced in the
industry. We believe that the company's corporate governance practices are
adequate and meet the minimum required levels.
Board composition
The board consists of eight directors, four of whom are independent, three are
family members and one is a whole-time director, which meets the SEBI listing
guidelines. Mr Mahesh Swarup Agarwal, 83 years, is the executive chairman of
the board. He is the founder of KPL. Given the background of directors, we
believe that the board at KPL is fairly diversified.
Board processes
The company has various committees audit, remuneration and investor
grievance - in place to support corporate governance practices. CRISIL Equities
assesses from its interactions with the companys independent directors that thequality of agenda papers and the level of discussions at the board meetings are
good and they meet at timely and regular intervals. The audit committee is
chaired by an independent director, Mr S.M. Jain, who was the CMD of Fertilisers
and Chemicals Travancore Ltd and Paradeep Phosphates Ltd.
The companys quality of disclosure can be considered good, judged by the level
of information and details furnished in annual reports and other publicly
available data. We feel that the independent directors are well aware of the
business of the company and are fairly engaged in all the major decisions,
reflecting well on the company's corporate governance practices.
The companys corporategovernance practices are
adequate and meet theminimum required levels
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Kanpur Plastipack Limited
Valuation Grade: 5/5
We have valued KPL based on the discounted cash flow (DCF) method. Based on
this method, we arrived at a fair value of Rs 40 per share. At the current market
price of Rs 31 per share (December 29, 2010), the stock trades at P/E multiples
of 5.0x and 3.1x its estimated FY11 and FY12 EPS of Rs 6 and Rs 10,respectively. The fair value of Rs 40 gives implied P/E multiples of 6.5x and 4.0x
FY11 and FY12 earnings, respectively. We initiate coverage on the company with
a valuation grade of 5/5, indicating that the market price has strong upside to
our fair value.
Key assumptions to our valuation
We have made explicit forecasts from FY12 to FY16. We have assumed cost of equity of 18.8%, considering its undiversified
business, liquidity in the stock market and leverage.
We have taken terminal growth rate of 3% beyond the explicit forecastperiod.
Table 7: Sensitivity analysis of terminal WACC and terminalgrowth rate
Terminal growth rate
Ter
minalWACC
1.0% 2.0% 3.0% 4.0% 5.0%
11.4% 48 61 78 99 127
12.4% 33 44 57 73 93
13.4% 21 30 40 53 68
14.4% 12 19 27 37 4915.4% 3 9 16 24 33
Source: Company, CRISIL Equities
Figure 13: One-year forward P/E band Figure 14: One-year forward EV/EBITDA band
Source: BSE, Company, CRISIL Equit ies Source: BSE, Company, CRISIL Equit ies
0
10
20
30
40
50
60
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
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Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
(Rs)
Kanpur Plastipack 3x 5x 8x
100
150
200
250
300
350
400
450
500
550
600
Mar-07
May-07
Jul-07
Sep-07
Nov-07
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(Rs mn)
EV 3x 4x 5x
We assign a fair value of Rs 40per share and initiatecoverage with a valuationgrade of 5/5
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CRISIL EQUITIES | 15
Kanpur Plastipack Limited
Figure 15: P/E premium / discount to NIFTY Figure 16: P/E movement
Source: NSE/BSE, Company, CRISIL Equit ies Source: NSE/BSE, Company, CRISIL Equit ies
Peer valuation indicators
Companies M.cap Price/Earnings (x) EPS (Rs) RoE (%)(Rs mn) FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E
Kanpur Plastipack 164 6.4 5.0 3.1 4.8 6.2 10.0 15.2 17.2 23.5
Jumbo Bags 336 41 14.5 9.4 0.9 2.4 3.7 10.3 14.7 15
Source: CRISIL Equities
-90%
-85%
-80%
-75%
-70%
-65%
-60%
-55%
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Premium/Discount to NIFTY MEDIAN
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
1yr Fwd PE (x) MEDIAN PE
+1 std dev
-1 std dev
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CRISIL EQUITIES | 16
Kanpur Plastipack Limited
Company Overview
Kanpur Plastipack Ltd started in 1971 as a small SSI unit manufacturing PP
woven sacks and over the years graduated to manufacturing FIBCs. It became a
public limited company in December 1985. The promulgation of Jute Packaging
Order by the Government of India pushed KPL into exports in 1986 to generate
revenues. Subsequent to the order, HDPE woven sacks which were being
marketed for packing industrial products (fertiliser and cement) got drastically
affected which led to losses and the company became sick. The company was
referred to BIFR and was sanctioned a rehabilitation scheme by BIFR in 1992.
KPL got de-registered from BIFR in 2000.
KPLs revenues are generated from FIBC/PP/HDPE woven sacks and from beingan IOCL stockist. KPL began manufacturing FIBCs in 2000. KPL increased its
capacity in FY08 to 10,000 tonnes from 6,000 tonnes. Export markets contribute
65% to overall revenues as of FY10 and the balance is contributed by the
domestic market. Spain, Italy, Germany, UK and France are among its major
export markets. In the domestic market, it caters to the fertiliser and cement
industries.
KPL is mainly in the production of industrial packaging products which can
handle capacities ranging from 25 kgs to 2,500 kgs. Its manufacturing facilities
are located in Kanpur- two in the Panki industrial area and one at Udyog Kunj.
Production of FIBCs involves the conversion of PP granules to flat tapes that are
later woven into fabric, cut to size, printed and stitched for use. KPL has an
installed capacity of 10,000 tonnes per annum as on FY10.
Exports comprise 65% of its total manufacturing and the rest is sold in the
domestic market. The PP/HDPE woven sacks are used for packing fertiliser and
cement in the domestic markets. In export markets, they are used for packing
sugar, textile fibre and chemicals.
Figure 17 : Revenue break-up of domestic and
exports as of FY10
Figure 18 : Revenue break-up in domestic and
exports as of FY10
Source: Company, CRISIL Equit ies Source: Company, CRISIL Equit ies
KPL is the stockist for IOCLs polymer products and represents IOCL in Kanpur
and western UP. KPL receives a commission ~Rs400/tonne for the products sold.
Domestic, 35%
Exports, 65%
5.0%
87.8%
95.0%
12.2%
0%
20%
40%
60%
80%
100%
Domestic Exports
FIBC Non FIBC
Rs 328 mn Rs 66 8mn
As of October 2010, KPLstotal manufacturingcapacity stands at 10,000
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CRISIL EQUITIES | 17
Kanpur Plastipack Limited
Annexure: Financials
Source: Company, CRISIL Estimates
Income statement Balance Sheet
(Rs mn) FY08 FY09 FY10 FY11E FY12E (Rs mn) FY08 FY09 FY10 FY11E FY12E
Operating income 745 1,014 991 1,137 1,536 Liabilities
EBITDA 64 113 87 100 142 Equity share capital 53 53 53 53 53
EBITDA margin 8.6% 11.1% 8.8% 8.8% 9.2% Reserves 89 104 125 151 192
Depreciation 12 16 15 16 23 Minorities - - - - -
EBIT 52 97 72 84 119 Net worth 142 157 179 204 245
Interest 24 68 33 35 39 Convertible debt - - - - -
Operating PBT 28 29 39 49 79 Other debt 282 313 351 435 538
Other income 0 (0) 1 1 1 Total debt 282 313 351 435 538
Exceptional inc/(exp) (0) (0) 2 - - Deferred tax liability (net) 16 17 20 20 20
PBT 28 28 41 50 81 Total liabilities 440 488 550 659 803
Tax provision 10 10 14 17 28 Assets
Minority interest - - - - - Net fixed assets 262 259 274 341 414
PAT (reported) 18 19 27 33 53 Capital WIP - - 4 24 13
Less: Exceptionals (0) (0) 2 - - Total fixed assets 262 259 278 365 426
Adjusted PAT 18 19 26 33 53 Investments 3 3 3 3 3
Current assets
Ratios Inventory 109 127 178 181 223
FY08 FY09 FY10 FY11E FY12E Sundry debtors 116 139 127 145 199
Growth Loans and advances 37 28 33 44 60
Operating income (%) 13.7 36.1 (2.3) 14.7 35.1 Cash & bank balance 4 8 8 8 10
EBITDA (%) 48.1 75.4 (22.7) 15.0 41.3 Marketable securities - - - - -
Adj PAT (%) 26.2 3.3 34.5 29.0 60.6 Total current assets 266 303 345 379 492
Adj EPS (%) (15.8) 3.3 34.5 29.0 60.6 Total current liabilities 90 77 76 87 117
Net current assets 176 226 269 292 374
Profitability Intangibles/misc. expenditure - 0 0 0 0
EBITDA margin (%) 8.6 11.1 8.8 8.8 9.2 Total assets 440 488 550 659 803
Adj PAT margin (%) 2.5 1.9 2.6 2.9 3.4
RoE (%) 15.3 12.6 15.2 17.2 23.5 Cash flow
RoCE (%) 14.4 21.6 14.3 14.4 16.7 (Rs mn) FY08 FY09 FY10 FY11E FY12E
RoIC (%) 12.0 19.8 12.0 11.9 13.4 Pre-tax profit 28 28 40 50 81
Total tax paid (3) (8) (11) (17) (28)
Valuations Depreciation 12 16 15 16 23
Price-earnings (x) 28.1 9.1 6.4 5.0 3.1 Working capital changes (25) (46) (44) (22) (81)
Price-book (x) 3.6 1.1 0.9 0.8 0.7 Net cash from operations 11 (9) 0 27 (5)
EV/EBITDA (x) 12.3 4.2 5.8 5.9 4.9 Cash from investments
EV/sales (x) 1.1 0.5 0.5 0.5 0.5 Capital expenditure (116) (13) (35) (103) (84)
Dividend payout ratio (%) 33.9 20.0 22.8 18.8 20.1 Investments and others (3) - - - -
Dividend yield (%) 1.2 2.2 3.8 3.8 6.5 Net cash from investments (119) (13) (35) (103) (84)
Cash from financing
B/S ratios Equity raised/(repaid) 35 - - - -
Inventory days 62 55 76 68 62 Debt raised/(repaid) 77 31 39 84 103
Creditors days 38 23 21 21 21 Dividend (incl. tax) (6) (4) (6) (7) (12)
Debtor days 54 48 45 45 46 Others (incl extraordinaries) (2) (0) 2 - -
Working capital days 78 70 88 87 77 Net cash from financing 105 27 34 76 91
G ross asset turnover ( x) 2.9 2.9 2.7 2.7 3.0 Change in cash position (3) 4 (1) 1 2
Net asset turnover (x) 4.2 3.9 3.7 3.7 4.1 Closing cash 4 8 8 8 10
Sales/operating assets (x) 3.5 3.9 3.7 3.5 3.9
Current ratio (x) 2.9 3.9 4.5 4.3 4.2 Quarterly financials
Debt-equity (x) 2.0 2.0 2.0 2.1 2.2 (Rs mn) Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11
Net debt/equity (x) 2.0 1.9 1.9 2.1 2.2 Net sales 278 264 276 275 279
Interest coverage 2.2 1.4 2.2 2.4 3.0 Change (q-o-q) 32% -5% 5% 0% 1%
EBITDA 27 25 19 19 27
Per share Change (q-o-q) 37% -9% -22% 1% 40%
FY08 FY09 FY10 FY11E FY12E EBITDA margin 9.7% 9.3% 6.9% 7.0% 9.7%
Adj EPS (Rs) 3.5 3.6 4.8 6.2 10.0 PAT 10 15 (4) 5 13
CEPS 5.8 6.6 7.7 9.3 14.2 Adj PAT 10 2 (4) 5 13
Book value 26.8 29.7 33.7 38.5 46.1 Change (q-o-q) 88% -84% -391% -215% 162%
Dividend (Rs) 1.2 0.7 1.2 1.2 2.0 Adj PAT margin 3.4% 0.6% -1.6% 1.8% 4.8%
Actual o/s shares (mn) 5.3 5.3 5.3 5.3 5.3 Adj EPS 1.8 2.8 NM 1.0 2.5
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CRISIL EQUITIES | 18
Kanpur Plastipack Limited
Focus Charts
Revenue mix of KPLs revenues Sales trend increasing y-o-y
Source: CRISIL Research Source: Company, CRISIL Equit ies
EBITDA and PAT margins increasing trend RoCE and RoE on an upward trend
Source: Company, CRISIL Equit ies Source: CRISIL Equit ies
Stock price movement and traded volumes Shareholding pattern
Source: Company, CRISIL Equit ies Source: Company, CRISIL Equit ies
28%38%
33% 35%
59%
56%57% 57%
13%7% 10% 8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY07 FY08 FY09 FY10
Plastic Products- Domestic FIBC Export sales Non-FIBC Exports sales
726
1,008
986
1,133
1,53014
36
-2
15
35
-5
0
5
10
15
20
25
30
35
40
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
FY08 FY09 FY10 FY11E FY12E
(%)(Rs mn)
Net Sales YoY Growth [RHS]
8.6
11.1
8.8 8.89.2
2.5
1.9
2.62.9
3.4
0
2
4
6
8
10
12
14
FY08 FY09 FY10 FY11E FY12E
EBIDTA % PAT %
14.4
21.6
14.3 14.4
16.7
15.3
12.6
15.2
17.2
23.5
0
5
10
15
20
25
FY08 FY09 FY10 FY11E FY12E
Return on Capital Employed (RoCE) (%)
0
50000
100000
150000
200000
250000
0
5
10
15
20
25
30
35
40
45
50
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Traded Quantity Share Price (LHS)
69.2% 69.2% 69.2% 69.2%
0.0% 0.0% 0.0% 0.0%0.0% 0.0% 0.0% 0.0%
30.8% 30.8% 30.8% 30.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dec-09 Mar-10 Jun-10 Sep-10
Promoter FII DII Others
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