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Friday, October 28, 2016

Plastiblends India - ROI @ 129% in 18 Months

Dear Reader,

We are pleased to inform you that our Hidden Gem stock of Jan'15 - Plastiblends India Ltd (BSE Code: 523648, NSE Code: PLASTIBLEN) has given absolute returns of more than 129% to our Hidden Gems members within period of 2 years. Our team suggested Buy on Plastiblends India Ltd at price of Rs. 236.70 on 31 Jan'15 with a target price of Rs. 480. Target was already achieved in January this year and we suggested our members to continue to hold the stock, Plastiblends India stock made its 52 week high of Rs. 564.95 today and closed at Rs. 541.85 giving as on date returns of 129% to our Hidden Gems members.

Plastiblends India has good consistent profit growth of 34.8% over last 3 years, growth prospects of the company look bright with ongoing expansion plan.

Considering good demand and growth potential, the company is going through a Capex programme by increasing its manufacturing capacity. Company has successfully commenced commercial production in the new manufacturing unit at Palsana, Surat effective 25th March 2016. Moreover, considering market potential and demand, Plastiblends India plans to further increase the manufacturing capacity and has acquired land near Kolkata, West Bengal to set up a new manufacturing unit and intends to fund the same largely through internal accruals. 

Below is the summary of Plastiblends India Ltd shared by our team under Hidden Gem stock recommendation - Jan'15

1. Company Background:

Plastiblends India Ltd, a part of the Kolsite Group of Companies, is India’s largest manufacturer and exporter of color and additive masterbatches and thermoplastic compounds for the plastic processing Industry. The company’s products include white, black, color, additive, and functional masterbatches; electrically conductive compounds based on polyethylene and polypropylene with surface resistance; polywhite antifibrillation; transparent fillers; and fillers for HM carry/shopping bags. It also offers specialty products, such as masterbatches for BOPP films, PET filaments and yarns, PP filaments and fibers, conductive compounds, and biodegradable additives and compounds. The company supplies masterbatches through dealers to polymer producers and large processors in packaging, as well as medium and small scale processors. 

Headquartered in Mumbai, Plastiblends world class manufacturing, product development and application facilities are located in Daman and Roorkee.

Company’s masterbatches are used to impart colors and various special properties to the products manufactured from plastics. Masterbatches find applications in various plastic processing industries (for colouring, corrosion and hardness), such as flexible packaging (fast moving consumer goods and pharmaceuticals), paints, irrigation, pipings and telecommunications wires. Masterbatches are considered as a vital component in plastic industry worldwide, as it consists of pigments and additives which provides aesthetic looks as well as functional properties to polymer. With the development of anti-statics, flame retardant, anti-microbial Masterbatches, its demand is set to boost substantially across various end user industries. Additives are chemicals that improve physical properties and other characteristics of polymer. The improvement achieved in various functional properties of ordinary polymers using additive masterbatches is significant in polymer industry. 

Masterbatch Industry is highly fragmented with few major players and large number of small and medium players who account for majority of the market share. Plastiblends India Limited a leading manufacturer of masterbatches in organized sector with 12% market share, produces a wide variety of specialty and high performance masterbatches and compounds. Masterbatches constitute a highly successful and an essential segment of the global plastics industry.

The Company has in-house full-fledged Research & Development Department equipped with a wide range of lab machines, equipments, instruments and testing facilities that enables to deliver a broad spectrum of new & customized solution for tailor made product and formulations like bio-degradable masterbatches and masterbatches for BOPP Films, PP Yarns, Fibres etc. with excellent price benefit ratio. The Company also has technical experts with latest technical know-how & innovative abilities focusing on upgradation of the existing masterbatches and development of new products. The manufacturing units are highly automatic and equipped with sophisticated laboratory facilities to conduct stringent tests.

Manufacturing Facilities: Company operates with four facilities having manufacturing capacity above 75000 MT annually. Plastiblends extensive manufacturing facilities include three manufacturing units in the Union Territory of Daman (two owned and one on lease) and one unit in Roorkee, Uttarakhand, consisting of state of the art production lines employing advanced manufacturing technology to produce premium quality products. The manufacturing capacity includes: High speed, high capability LCM lines, Co rotation, Counter rotation Extruders, Specifically designed mixers, High end Computerised Gravimetric Systems and sophisticated Fully Computerised Process Control Systems, Electronically controlled Automatic Weighing and Bagging Systems and Extensive Raw Material & Finished goods stores and inventory management systems. These efficient production capacities ensure consistent product quality and lower production time enabling faster delivery to the customers. It has a product portfolio of 800 varieties in masterbatches in colors and additives.

The Kolsite Group: Plastiblends Ltd is a part of Kolsite Group which came into existence over five decades ago. The Kolsite Group, formed in 1960’s, is a leader in the manufacture of plastic extrusion plants and masterbatches. Today, Kolsite is a brand synonymous with quality and reliability with consistent commitment to develop and deliver premium quality products. The Kolsite Group primarily consists of 2 divisions: Machinery manufacturing & Processing. Each group company is a leader in its line of business with unrivaled domain competence.

The machinery manufacturing division consists of Kabra Extrusiontechnik Ltd. Kabra Extrusiontechnik Ltd is engaged in the manufacture of single and twin screw plastic extrusion plants with allied machines, is the market leader in the production of pipe extrusion lines.

The processing division consists of two companies – (i) Maharashtra Plastics & Industries and (ii) Plastiblends India Ltd. Maharashtra Plastics & Industries, has years of experience in the extrusion of HDPE / Polypropylene strapping and is one of the largest manufacturers.

Kolsite group has proven itself over the years, has strong financials, is a leader in most areas of operations and has investor friendly polices (like bonus issues and healthy dividend payments).

Product Range: Plastiblends Masterbatches merge seamlessly with plastics enhancing their performance and appearance. Company produces a large range of White, Black, Colour and Functional Masterbatches, Additives and Compounds suitable for all major plastic processing types.

Plastiblends products match international quality standards making them globally acceptable. Countries exported to include Italy, Canada, Australia, Middle East, SAARC countries etc. Currently, it exports to 60 countries, including South Africa, Kenya, Tanzania, the UAE, Sri Lanka and Bangaldesh, and generates 30% of export revenues

Company leadership position is determined by continuously meeting its customer’s requirements/expectations. Company uses latest manufacturing technologies and methods for design development and manufacture of high quality products to laid down specifications, both internal and those specified by the customers.

The Quality Assurance Process Flow Chart

Indian Masterbatch Market Forecast & Opportunities – 2018

Plastic industry is one of the fastest growing manufacturing sectors in India and the demand of plastics has surged up as a result of increased market penetration in industries such as packaging, agriculture, healthcare, aerospace, electronics, automotive, consumer goods, etc. Masterbatch is considered as a vital component in plastics industry worldwide, as it consists of pigments and additives which impart required color and characteristics to the end products.

According to India Masterbatch Market Forecast & Opportunities, 2018, the Masterbatch volume sales in India are expected to grow at 23% CAGR till 2018. The market for Masterbatch is driven by the growth in its end user industries as well as the increasing penetration of plastic products in the Indian market. However, use of plastics is being regulated by Ministry of Environment & Forests, Government of India, as solid plastic waste impacts the environment adversely and also causes blockage of gutters, sewerage system and drains. With the development of bio-additives, usage of masterbatches holds positive prospects for the manufacturing of bio-degradable plastics. Other important innovations such as development of anti-microbial masterbatches, flame retardant masterbatches, antioxidant masterbatches is set to drive the market for masterbatches across various end user industries.

The leading players in Masterbatches market in India are:
  • Plastiblends India
  • Clariant Chemicals
  • Poddar Pigments
Performance comparison of these companies is covered under Peer Group Comparison section.

2. Recent Developments: (as on 31 Jan'15)

i) Plastiblends to double capacity by 2015 - Dec'13

Plastiblends India Ltd will double its manufacturing capacity by this year. Along with some nominal expansions that will take place at its existing plants that are situated in Daman in Western India and Roorkee, Uttarakhand, the company is setting up a new manufacturing unit.
As per SN Kabra, Vice Chairman & Managing Director, company has expanded capacities by 25% in its existing facilities. Company is looking at setting up a new plant that will cater to demands of the export market. Most likely this plant will be situated in one of the Special Economic Zones (SEZs) in Gujarat. Close to 40% of the production from this new plant would service the export market.

At present the company is actively exporting its products to almost 60 countries with contribution of 30% in total revenue. Exports during last financial year were 1414.6 million as against 1316.4 million in the previous financial year registering an increase of 7.46 % over previous year. Company exports to various countries around the globe with strong presence in Middle East, Africa SAARC & CIS Countries. With the addition of a new manufacturing facility, the company’s total export business will increase by 50%.

ii) Increase in Share Holding by Promoters – Dec’14

During last 5 years, promoters have increase their stake in the company by 5.3%, from 56.5% in Mar’10 to 61.8% in Dec’14. 

Promoters continue to buy shares of their company. Being a small company with low market capital, the promoters buying shares from open market adds comfort in terms of associated downside risk in stock price in case of market correction.
At the end of Dec’ 14, promoter shareholding stands at 61.76%. During last financial year, promoters have increased their stake by 4.5%. During first nine months of FY 14-15, promoters have increased stake by 0.08%. Considering attractive valuations and good future prospects, we expect promoters will continue to buy the shares from open market to further increase their stake in the company.

Moreover, there has been no equity dilution for the last 10 years, which is very impressive. There is no issuance of new shares to raise capital, no dilution of stake by promoters which further strengthens the company’s positioning.

3. Financial Performance: (as on 31 Jan'15)

Plastiblends India net profit rises 1.14% in the September 2014 quarter

Net profit of Plastiblends India rose 1.14% to Rs 89.0 million in the quarter ended Sept 2014 as against Rs 88.0 million during the previous quarter ended Sept 2013. Sales rose 19.41% to Rs 1334.2 million in the quarter ended Sept 2014 as against Rs 1117.3 million during the previous quarter ended Sept 2013.

Plastiblends India net profit rises 4.36% in the June 2014 quarter

Net profit of Plastiblends India rose 4.36% to Rs 59.9 million in the quarter ended June 2014 as against Rs 57.4 million during the previous quarter ended June 2013. Sales rose 4.17% to Rs 1169.7 million in the quarter ended June 2014 as against Rs 1122.9 million during the previous quarter ended June 2013.

4. Peer Group Comparison:

In comparison to Poddar Pigments, Plasiblends India has healthier profit margins and has grown at a faster pace. Being larger in size, the stock also commands a slightly higher P/E and P/BV multiple. Further, the company has a healthy dividend policy, company has consistently paid 30-40% of PAT as dividend for the past many years

5. Key Concerns & Risks:

i) Increasing Competition from Domestic & Overseas Players: Company faces stiff competition in domestic and global market. Masterbatches is a scattered industry in India, with more than 250 players. Key operators in the organized segment hold about 50% of the market. Plastiblends competes with Clariant Chemicals and Poddar Pigments in the organized segment. Increasing competition from overseas manufacturers is putting pressure on the margins and affecting performance of Company.

ii) No Pricing Power: As company operates in highly fragmented industry, it would not be able to pass on rise in cost to its clients due to competition from unorganized sector. High volatility in crude oil prices can have negative impact on production costs

iii) Forex Exposure: Exports contribute about 30% of Plastiblends sales while it imports raw materials like titanium dioxide. In FY14, exports were valued at Rs. 141.7 crores while imports amounted to Rs. 140 crores. Hence, company is impacted to the extent of difference between export receivable days and import payable days.

6. Saral Gyan Recommendation: (as on 31 Jan'15)

i) Polymer consumption in India is poised to grow multifold, with the help of new developments in packaging applications, infrastructure growth, modernization of agriculture sector, improved healthcare facilities, improved lifestyle and disposable incomes, automobile demand and rural penetration. Masterbatch industry will get a direct benefit by this growth in polymer consumption. Plastiblends produces almost 800 grades of Masterbatches and has over 2,500 customers which include polymer producers like Reliance Industries, polymer processors like Supreme Industries, Cosmo Films, Jain Irrigation etc and plastic moulding companies like Nilkamal Plastics. About 10% of company’s sales are from direct sales to some large OEM clients while the rest is though a distribution network of about 70 dealers. Such a wide network enables Plastiblends to tap a larger number of customers

ii) Company’s EBITDA and PAT margins have increased from FY 11-12 to FY 13-14 with ROE and ROCE above 20%. During FY2012-14, it reported CAGR of 17% in revenues with the net profit margin improving by 100 basis points. Moreover, company has reduced its debt significantly during last financial year and total debt to equity ratio is at 0.23. With fall in crude prices, we believe company will show significant improvement in its profit margins by delivering strong growth in bottom line going forward.
iii) Plastiblends has a strong balance sheet with a debt to equity ratio of less than 0.3x. With limited capex needs and strong internal cash generation, we expect the debt on books to remain at the same levels. Investment in gross block accompanied with higher sales will result in better return ratios.

iv) Product obsolescence is a common feature in the masterbatch and other plastic product industry, hence product innovation is the master key to future growth. Plastiblends focus on R&D has enabled it to introduce new products in this segment in addition to the manufacturing of more than 800 grades of masterbatches. Product innovations, competitive cost structure, higher domestic market share and continuous penetration into the exports markets makes the company well placed to capture the surge in demand for masterbatches.

v) Plastiblends key raw materials include polymers, titanium dioxide and pigments. Polymer is one of the major raw material and is directly co related with international crude prices. As crude prices have fallen significantly during last couple of months, company operating margins are expected to improve with increase in profitability.

vi) Company focus towards value added products in its portfolio is expected to improve its product mix in next 2 years. This will help company to achieve its target by increasing export revenue contribution from 30% to 50% in next couple of years. Company has increased its capacity from 52000 MT in 2011 to 75000 MT in 2014. Company is now looking to grow in terms of volumes by exporting to new markets to meet increase in demand of organized sector.

vii) Management has rewarded shareholders by paying consistent dividend since last 14 years. Company has been maintaining a healthy dividend payout above 20%, dividend yield at current market price is 2.1%. With expected increase in revenue and profitability in coming quarters, we believe company dividend payout to increase significantly.

viii) As per our estimates, Plastiblends India Ltd can deliver bottom line of 368.7 million for full financial year 2014 – 15, annualized EPS of Rs. 28.4 with forward P/E ratio of 8.3X for FY 2014-15, which makes stock an attractive bet at current market price for long term investors.

ix) On equity of Rs. 64.97 million, the estimated annualized EPS for FY 14-15 works out to Rs. 28.4 and the Book Value per share is Rs. 116.6. At current market price of Rs. 236.7, stock price to book value is 2.

Considering improvement in demand outlook and better operating efficiency coupled with focus on higher revenues from exports and value added products, Saral Gyan team recommends “Buy” on Plastiblends India Ltd at price of Rs. 236.70 for target of Rs. 480 over a period of 12 to 24 months.

Buying Strategy:
  • 70% at current market price of 236.70
  • 30% at price range of 190-210 (in case of correction in stock price in near term)
Portfolio Allocation: 3% of your equity portfolio

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