PIRAMAL GLASS CEYLON PLC

COMPANY UPDATE- 3QFY12

CRYSTAL CLEAR FUTURE WITH EXCELLENT 3QFY12 RESULTS

Thilina Ukwatta: thilina@asiacapital.lk

1

COMPANY UPDATE

Glass giant Piramal Glass Ceylon PLC (GLAS) is a domestic monopoly and

a manufacturer of flacconage glass for food and beverages, cosmetics,

perfumery, as well as pharmaceutical sectors. It offers unique flexibility

and a wider range of glass containers in different shapes and colours for

many industry segments, irrespective of volumes.

The company reported a net profit of LKR205.0 mn during three months

ended 3QFY12 as against the profit of LKR190.1 mn posted during the

corresponding previous year period. The nine month turnover grew by

22.8% from LKR3, 759.7 mn to LKR3, 060.5 mn compared to that of the

corresponding previous year period. Nine month net profit too

increased significantly by circa 47.1% compared to the same period of

previous year. Net profit moved up from LKR400.3 mn in cumFY11 to

LKR588.7 mn in cumFY12.

Furthermore, the four quarter trailing PE is at 7.4x (based on a Share

Price of LKR6.00 and an EPS of LKR0.81) when compared to the Sector

PE of 8.82x and Market PE of 12.92x. This bears witness that the

counter is UNDERVALUED compared to both sector and market.

On the 2nd of April 2012 EPF bought a 5% stake for LKR280.5 mn

increasing its overall holding to near 10% becoming the single largest

local shareholder. Entry to GLAS by the biggest local fund in the island is

a positive sign for both local and foreign investor caliber.

With the decision to switch from mass market exports to premium

exports of niche boutique wine bottles & assorted high end products,

the glass giant was compelled to import some generic bottles. This was

done to sustain long term customer relationship.

Moving forward with healthy performance, we expect the forward PE

multiples to be 6.9x and 5.6x in FY12 and FY13 respectively solely on

recurring earnings.

PIRAMAL GLASS CEYLON PLC

40

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100

110

Indexed Price Movement

GLASS MFG

MPI ASI

As at 02.04.2012 GLAS

Price/Index Movement

1 Month -4.8%

3 Months -23.1%

12 Months -48.7%

Total Issued Quantity (Mn) 950.1

Total Quantity in CDS (Mn) 921.1

Average Daily Turnover (LKR mn) 7.0

(USD mn) 0.1

Market Capitalization (LKR mn) 5,700.5

(USD mn) 44.5

PE 7.4

PBV 1.8

ROE 24.8%

DY (%) 5.0%

2

Piramal Glass Ceylon Plc (GLAS)

Presently is the sole glass container manufacture in the country. The

company is engaged in the process of manufacturing and distribution of

glass containers to both local and foreign markets. Company, which was

incorporated in 1955 under “Ceylon Glass Company”, was formed by a

group of investors including Sri Lankan Government, Mitsui of Japan and

The Development Finance Co-operation of Ceylon (DFCC). Recognized

in the Colombo Stock Exchange back in 1994, was acquired by Piramal

Glass Limited India in 1999, buying over the stake held by DFCC bank

(39.4%).

Piramal glass provides flaconnage to 90% of the Sri Lankan market, via

its sophisticated manufacturing plant based in Horana, while 7% is being

imported by the company from its parent Piramal Glass Limited India,

which highlights the fact that the company is catering to 97% of the

local Market.

The new glass production plant in Horana, commenced operations in

2009 runs on 5 production lines with a capacity of 215-250MT per day

that increased from a capacity of 120MT. The Production lines operate

with an efficiency ratio of 80%-85% under normal circumstances that

could go to a level at 90% as an when quantity produce increases. (At

the same time, during short run production the efficiency ratio

reduces). Piramal glass does not foresee any expansion strategies

towards the short run.

Glass employees 600 personnel, of which 400 falls under the permanent

carder of which around 100 are in the executive level, and

approximately 200 are on casual basis.

The company transacts with the prime local and export customers, of

which India covers up 60% of the exports market whilst New Zealand,

Australia, UK and Mauritius are amongst the other countries that the

company provides exports to.

3

QUARTERLY RESULTS QUARTERLY FINANCIAL PERFORMANCE

(180.0)

(80.0)

20.0

120.0

220.0

320.0

420.0

LKR

mn

Quarterly Performance

Gross Profit EBIT EBT Net Profit

-10%

-5%

0%

5%

10%

15%

20%

25%

-100

100

300

500

700

900

1,100

1,300

LKR

mn

Revenue vs QoQ Growth

Revenue QoQ gowth %

4

Source: Bloomberg

-10%

-5%

0%

5%

10%

15%

20%

0

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400

600

800

1,000

1,200

1,400

LKR

mn

Revenue Analysis

Revenue QoQ gowth %

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120

130

140

150

160 India Wholesale Price Index Caustic Soda and Soda Ash

0 500 1,000

Cost of sales

Distribution …

Administrati…

Finance cost

Income tax …

LKR mn

Expense Analysis

3QFY11 3QFY12

Peak Quarterly Revenue ………

GLAS turnover grew by 17.9% from LKR1, 166.1 mn to LKR1, 375.0 mn compared with that of the same period previous year. The drivers for this achievement were the 18% growth in local revenue and 17% in export revenue during 3QFY12 compared to 3QFY11.

Almost 100% of all export sales were conquered by premium market products, which brought about high realizations. The turnover was also well affirmed by the domestic sales growth of due to exceptional growth in the liquor bottles (predominantly by beer bottles) and aerated (carbonated) water bottles sector. On the whole, nine month ended 31st December 2011 revenue was reported at LKR3, 759.7 mn, a growth of 22.8% YoY compared to the corresponding period of the previous year.

Satisfactory Expense Levels ……… Cost of sales increased by circa 21.6% to LKR981.6 mn 3QFY12 compared to corresponding quarter of the previous year. Furthermore there was a circa 25.6% increase to LKR2.6 bn cumFY12 compared to LKR2.1 bn cumFY11. Escalating energy prices (LP Gas and Furnace Oil) coupled with inflationary raw material prices led to the respective rise in cost of sales.

Rise in global soda ash prices as depicted by the annexed chart

had heightened the production cost. Nevertheless, lower

customer bargaining power had blown over extra cost through

premium pricing.

Even though, the rise of cost of sales was quite antagonistic,

persistent endeavor towards productivity and quality

enhancements played a vital role in stabilizing the cost of

bottles despite of accelerated input costs. The company too

was able to significantly spread its heavy fixed production

overheads (accounting for circa 20% of production cost) over a

larger output base which derived through heavy demand.

The distribution cost decreased by circa 49.1% to LKR8.8 mn

3QFY12 compared to 3QFY11as result of reversal of excessive

provisions made at the beginning of FY12.

However, the administration expenses inclined 86.9% to

LKR120.8 mn 3QFY12 compared to 3QFY11. Inflation and

recruitment of essential personnel and other expenses

propelled the incline. As per the management, operations were

expanded and a wage increases led too led to this exorbitant

hike in administration expenses.

5

0%

5%

10%

15%

20%

25%

30%

35%

GP Margin

EBIT Margin

EBT Margin

NP Margin

Margin Analysis3QFY11

3QFY12

44%

19%

24%

13%

Cost Structure

Energy Labour

Fixed Overheads Variable Overheads

Apart from the above, the tax expense too decreased by

LKR8.7 mn due to a tax adjustment for the sale of imported

flacconage glass.

Dip in Margins ………

The quarterly gross profit increased circa 9.6% to LKR393.4 mn during 3QFY12 compared to 3QFY11. In addition the QoQ gross profit decreased by circa 8.4% compared to 2QFY12.

The GP margin declined from 30.9% 3QFY11 to 28.6% YoY

during 3QFY12. The prime reason was due to the above

mentioned escalating energy cost and imported raw material

(soda ash) price hikes.

The quarterly EBIT margin dipped YoY due to colossal admin

expenses. Nevertheless, reversal of distribution cost provision

contributed to curb the negativity.

In addition, the EBT margin showed a YoY dip to 15.3% 3QFY12

due to a dip in GP margin and increase in expenses. Despite of

low tax expense, reduction in quarterly EBIT margin lead to an

NP margin of mere 14.9% 3QFY12 compared to 16.3% 3QFY11.

Debt and Finance Cost………

Reduction in debt levels led to a lower finance cost in 3QFY12

compared to 3QFY11. The finance cost showed an impressive

circa 24.2% reduction YoY to LKR56.3 mn.

The future finance cost is a matter of concern for GLASS due to

a steady increase in interest over the past few months.

Furthermore depreciation of LKR against USD is negativity to the

dollar loan possessed by GLASS as more rupees will have to be

paid. This would adversely hit future bottom lines.

However, with healthy cash flows from operating activities,

GLASS plans to repay its residual debt to evade the above

mentioned adversity.

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80

0

500

1,000

1,500

2,000

2,500

3QFY11 3QFY12

LKR

mn

LKR

mn

Debt vs Finance Cost

Total Interest Bearing Debt Finance cost

6

RATIO ANALYSIS

Note 1: The ratios calculated above are based on assumptions and formulae of Asia Wealth Research which may differ

to those in the GLAS financial statements.

Note 2: As per the management, currently the factory operates at full capacity and there are no plans of capacity

expansion during FY13 and FY14. Hence the less rapid revenue growth is due to the future price hikes.

Note 3: We anticipate the GP Margins to stabilize around 30%-31% levels, with the decision to switch and focus its

production lines from standard product mix to premium product mix.

Note 4: The expected dip in the net profit margin during FY14E is due to the normal taxes (28%) which we anticipate

GLASS to confront due to the lapse in the tax holiday as per the BOI contract.

7

DUPONT ANALYSIS

Net Profit Margin

The net profit margin is subdivided as tax burden, interest

burden and EBIT margin.

The EBI margin is the operating profit per rupee of sales. GLAS

continuously changed its product mix switching from generic to

high end niche premium. Hence the gross profit margins were

robust since FY08, which later trickled to the operating profit.

These factors thickened the EBIT margins thus expected to

pursue in future.

The tax burden is the proportion of the company's profits

retained after paying income taxes. With the investment on

new factory during FY09 had brought the tax holiday.

Nevertheless this is expected to exhaust in FY13, hence the

benefit may be curtailed in the future.

The interest burden shows the effect of interest bearing debt on

the income statement. Heavy finance costs resulted in negative

PBT’s during FY09 and FY10. However, during FY11 the finance

cost drastically declined due to debt repayments and lowered

interest rates, hence led to a favourable interest burden.

Asset Turnover

The asset turnover measures the amount of sale generated

from the assets employed. During FY08 and FY09 heavy capital

investment strengthened the asset base, however did not lever

the revenue. Subsequently during FY09 and FY10revenue

growth was at 19% and 18% respectively, which revitalized the

asset turnover.

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

-70.0%

-50.0%

-30.0%

-10.0%

10.0%

30.0%

50.0%

70.0%

90.0%

FY06 FY07 FY08 FY09 FY10 FY11

NP

Ma

rg

in

Margin Analysis

NP Margin Tax Burden Interst Burden EBIT Margin

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0.5

1.0

1.5

2.0

2.5

3.0

FY06 FY07 FY08 FY09 FY10 FY11

Tim

es

Asset Turnover vs Equity Multiplier

Asset Turnover Equity Multiplier

8

Equity Multiplier

This measures the proportion of debt in GLAS’s capital

structure. Construction of the Horana factory was mainly

financed via expensive syndicated debt which elevated the

financial leverage. However constant repayments had lowered

the equity multiplier in FY11. This was due to healthy earnings

which increased the retained earnings that gave a solid equity

value.

ROE

All the above ratios combine to give the overall return for the

equity holders of the company. The staggering recovery in FY11

successfully converted the negative ROE into an impressive

20.7%. Despite of lower equity multiplier, growing profit

margins and asset utilization efficacy contributed to the overall

growth in ROE.

-20.0% -10.0% 0.0% 10.0% 20.0% 30.0%

ROE

FY11

FY10

FY09

FY08

FY07

FY06

9

Source: Department of Excise

THE PLAN FOR FUTURE

GLAS is expected to thrive from the surge in demand, from the North

East markets. The company currently enjoys a monopoly status locally

hence the bargaining power over its customers. Therefore, gives the

opportunity to pass on the increase in costs via selling price. This would

position the company to generate strong margins even though, at times

when cost of production increases.

Furthermore, alcohol consumption increasing, due to rising foreign

arrivals to the country, would definitely add value to its top line,

economic development taking place would increase per capita

consumption that would in turn contribute towards strong top line

growth. This is further justifiable as majority of its sales are captured by

Distilleries Company of Ceylon and Carsons Cumberbatch (Lion Brewery

and Ceylon Brewery), which would see their business performance

mounting with the country’s liquor consumption despite of the recent

tax hike as the products are price in-elastic.

The possibility of adding two more furnaces would expand its

production capacity by approximately 500MT per day (250MT each).

This would provide the opportunity of catering to the incremental

demand that will flow from its large customers upon the economic

developments and expected performance growth expected from them.

However we have not incorporated this capacity expansion into our

earnings forecast.

According to the senior management, if GLASS does not wish to expand

its capacity, a persistent growth in top line is only anticipated via change

in the product mix from standard to premium and via price hikes. We

have forecasted the future earnings of GLASS based on this assumption.

CONCERNS ON GLASS

As an organization with significant foreign contact, is highly exposed to

transaction risk (Foreign exchange risk). With the current rupee

depreciation against the dollar importation of soda ash would drive up

the costs, which would negatively affect the bottom-line. Furthermore

the energy cost accounts to 30%-35% of its cost of sales. Hence rise in

oil prices may curb the margins.

Although the company enjoys 97% of the Sri Lankan market, providing

flacconage solutions, in the long run there is possibility of its customers

opting imports instead of locally manufactured glass containers. This

would in turn place the bargaining power towards the customer.

In addition the use of glass packaging on food and drinks has been

heavily substituted by Polyethylene Terephthalate (PET) containers. This

0

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10

Litr

es

(mn

)

Total Sri Lankan Liquor Consumption

10

is a potential threat to the glass industry. Nevertheless due to chemical

inert and eco-friendly nature, glass containers are still preferred over

plastic bottles.

VALUATION

Current Status……………

Share is valued at 7.4x based on four quarter trailing earnings. The four quarter trailing PE is at 7.4x (based on a Share Price of LKR06.00 and an EPS of LKR0.81) when compared to the Sector PE of 8.8x and Market PE of 12.9x.

Based on a 52 week price movement the share hit its lowest price of LKR5.60 whilst during the Bull Run it hit the highest price of 11.80.

Future Prospects……….

P/E and PBV Based Valuation

Forecast FY12E earnings are in line to LKR821.0 mn. With the company functioning at full capacity of circa 240 metric tonnes per day and with a full pre-order book we expect the earnings to grow by 41.9% YoY in FY12E to LKR821.0 mn and a YoY growth of 24.4% FY13E to LKR1, 021.0 mn.

At a price of LKR6.00, with forecast EPS’s of LKR0.9 and LKR1.1 we derived at forward PE’s of 6.9x and 5.6x for FY12E and FY13E respectively.

Similarly, at a price of LKR6.00, with forecasted book values per share of LKR3.8 and LKR4.6 we derived a forward P/BV’s of 1.6x and 1.3x for FY12E and FY13E respectively.

Price Assimilation Based Valuation

Based on an analysis of a historic 52 week price movement, we derived a price volatility of 18.4% on a mean of LKR 8.38 and a price standard deviation of LKR1.54. Furthermore, if it is assumed that the same upside momentum is witnessed pushing the price to LKR 7.10 (from the current level of LKR6.00), the forward PE multiples would be 8.2x in FY12E and 5.8x in FY13E.

Moving forward, based on the highest price of LKR11.8, the forward PE

multiples would be13.6x in FY12E and 9.7x in FY13E.

*Price band LKR7.10 is based on an upside

growth of 18.4% derived via the 12 month

standard deviation of the market price.

**Price band LKR11.80 is the highest traded

price over the past 12 month period.

11

GLAS VS INDICES

*The radar charts used, benchmarks the GLAS

performance against the relevant index in terms of

PE, PBV, ROE and Dividend Yield.

-

0.50

1.00

1.50 PE

PBV

ROE

DY

ASI

GLAS

-

0.50

1.00

1.50

2.00

2.50

3.00 PE

PBV

ROE

DY

MFG

GLAS

12

FINANCIAL SUMMARY

Research

Assistant Manager - Research

Amali Perera (94-11)5320256 amali@asiacapital.lk

Corporates Economy

Minoli Mallwaarachchi (94-11)5320259 Dhanusha Pathirana (94-11)5320254 Nirmala Samarawickrama (94-11)5320253 Travis Gomez (94-11)5320000 Dilan Wijekoon (94-11)5320253

Thilina Ukwatta (94-11)5320000 Statistician

Shan Silva (94-11)5320251 Nuwan Pradeep (94-11)5320257 Yogini Yogarasa (94-11)5320361

Sales

Institutional Sales Retail Sales Sabri Marikar (94-11) 5320224 077 3-576868 sabri@asiacapital.lk Shiyam Subaulla (011)- 5320218 0773-502016 shiyam@asiacapital.lk

Niroshan Wijayakoon (94-11) 5320208 0777-713645 niroshan@asiacapital.lk Gagani Jayawardhana (011)- 5320236 0714-084953 gagani@asiacapital.lk

Niyaz Aboobucker (94-11) 5320213 0777-727352 niyaz@asiacapital.lk Priyantha Hingurage (011)- 5320217 0773-502015 priyantha@asiacapital.lk

Anura Hedigallage (94-11) 5320211 0777 -713663 anura@asiacapital.lk Neluka Rodrigo (011)- 5320214 0777-366280 neluka@asiacapital.lk

Manjula Kumarasinghe (94-11) 5320211 0777 -874310 manjula@asiacapital.lk Subeeth Perera (011)- 5320227 0714-042683 subeeth@asiacapital.lk

Chelaka Hapugoda (94-11) 5320240 0777 -256740 chelaka@asiacapital.lk

Chaminda Mahanama (94-11) 5320223 0777 -556582 mahanama@asiacapital.lk Hiran Bibile (94-11) 5320238 0777 -352032 hiran@asiacapital.lk Arshwin Amarasekara (94-11) 5320215 0773 -717220 arshwin@asiacapital.lk

Branches CSE Floor CSE,01-04, World Trade Centre, Colombo – 1. Thushara Adhikari (011)-5735122 0773-688202 adhikari@asiacapital.lk M G Suranjana (011)-5763539 0773-954994

Kiribathgoda Level 2-6,Udeshi City Shopping complex, No 94,Makola Rd,Kiribathgoda Danushka Boteju (011)-5634803 0716-270527 boteju@asiacapital.lk Suranga Harshana (011)-5734773 0783-452500 harshana@asiacapital.lk Kurunegala Union Assurance Building, No.6,1st Floor, Rajapilla Rd, Kurunagala. Asanka Samarakoon (037)-5628844 0773-690749 asanka@asiacapital.lk Gayan Nishsanka (037)-5642717 0777-105356 nishshanka@asiacapital.lk Bandula Lansakkara (037)-5643580 0773-925852 Matara E.H.Cooray Building, Mezzanine Floor, No:24, Anagarika Darmapala Mw, Sumeda Jayawardena (041)-5677525 0773-687307 sumeda@asiacapital.lk Matara Lalinda Liyanapathirana (041)-5677526 0778-628798 rishan@asiacapital.lk Galle Peoples Leasing Building, 2nd Floor, No.118,Matara Road, Galle Ruchira Hasantha (091)-5629998 0773-687027 ruchira@asiacapital.lk Ushan Sachith (091)-5676767 0778-628798 ushan@asiacapital.lk Negombo Asia Asset Finance, 171/1, Station Road, Negombo. Uthpala Karunatilake (031)-5676881 0773-691685 uthpala@asiacapital.lk Gayan Perera (031)-5676880 0772-544044 gayan@asiacapital.lk

Service Centers Kandy k3-L1,Level 01,kcc, No 5 ,Dalda Veediya, Kandy. Nilupul Hettiarachchi (081)-5628500 0773-691816 nilupul@asiacapital.lk Radhika Hettiarachchi (081)-5625577 0777-810694 radhika@asiacapital.lk Hambantota Hambanthota Chamber of Commerce, Thangalle Road, Hambantota. Gayan Sanjeewa (047)-5679240 0715-536309 sanjeewa@asiacapital.lk Anusha Muthumali (047)-5679241 0772-351716 muthu@asiacapital.lk Shermin Ranasinghe 0772-378352 shermin@asiacapital.lk Ampara 2nd Floor, T.K.S. Building, D.S. Senanayake Street, Ampara. Ravi De Mel (063)-5679071 0772-681995 ravide@asiacapital.lk Madushanka Rathnayaka (063)-5679070 0779-036577 shanka@asiacapital.lk Jaffna 11-8, First Floor, Stanley Road, Jaffna Gratian Nirmalan (021)-5671800 0777-567933 nirmal@asiacapital.lk S.Puviraj (021)-5671801 0775-096969 puviraj@asiacapital.lk Wennappuwa Asia Asset Finance, No.176, Negombo Road, Katuneriya. Sajith Iroshan (032)- 5673881 0773-740208 sajith@asiacapital.lk Sandun Athulathmudali (032)- 5673882 0772-533331 sranga@asiacapital.lk Moratuwa Asia Asset Finance, No.18, New De Zoysa Rd, Moratuwa. Hashan Lalantha (011)-5238662 lalantha@asiacapital.lk Charith Perera (011)-5238663 charithn@asiacapital.lk Panadura Asian Alliance Building, 293, Galle Road, Panadura Ranganath Wijetunga (038)-5670400 0715-120723 ranganath@asiacapital.lk Asanka Chaminda (038)-5670407 0713-559552 chaminda@asiacapital.lk

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