PLASTENE INDIA: High Valuation Makes the Issue Unattractive

Plastene India’s deteriorating performance in FY12 and high valuations make the IPO unattractive for retail investors, particularly considering the current market conditions. 

BUSINESS Plastene India is a Gujarat-based manufacturer of jumbo bags, or FIBC (flexible intermediate bulk container), and woven sacks with a capacity of 56,200 tonne per annum (TPA). The company also has distributorship from Indian Oil for supply of PP, HPDE and LLDPE in Kutch and Saurashtra. This not only generates commission income, but also reduces raw material costs by 0.5%. 

OBJECTS OF IPO The company wants to expand its existing facilities in Kutch and Rajpur for producing woven sacks and jumbo bags by 18.5%, besides introducing a new product — block bottom valve bags — with a capex of 77.4 crore by April 2013. 

FINANCIALS Plastene India’s net profit grew at a CAGR of 22.7% between FY08 and FY11, while net sales grew at 40.4%. However, the performance deteriorated in FY12. For the 10-month period ended January 2012, the company’s net profit was down 42.8% on 5.2% lower net sales. Its operating profit margin has remained between 9% and 12% in the past five years. 

VALUATIONS On the post-issue equity, the company’s annualised EPS for FY12 stands at 3.4. In the IPO price band, this translates into a price-toearnings ratio (P/E) of 23.8 to 24.7. The company’s peers such as Flexituff International, Jumbo Bags and Emmbi Polyarns are trading at P/E multiple between 7 and 23.3. 

CONCERNS Plastene India is carrying a leveraged balance sheet with debt-to-equity ratio of 1.6 as on end January 2012. This has impacted its profitability due to high interest costs. On an annualised basis its FY12 interest cost will be nearly 34%, up y-o-y at 25.4 crore, with the interest-coverage ratio barely around 2. The company’s working capital has nearly doubled in the past three years, with rising inventories and sundry debtors. The company has conflict of interest with a group company Plastene Polyfilms, which is in similar line of business. The company doesn’t have any long-term supply contracts with customers.