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Dear Reader,
We are pleased to inform you that our Hidden Gem stock of May 2016 - Prima Plastics Ltd (BSE Code: 530589) which was released on 12th Jun'16 is giving as on date returns of more than 100% to our Hidden Gems members. Our team suggested Buy on Prima Plastics at price of Rs. 152.30 on 12 June 2016 with a target price of Rs. 290. We are glad to inform our readers that stock has already achieved its target price, Prima Plastics has made its 52 week high of Rs. 310 today and currently trading at Rs. 306 giving as on date returns of 101% to our Hidden Gems members within period of 1 year.
In Dec'16 quarter, net profit of Prima Plastics rose 25.33% to Rs 3.81 crore against Rs 3.04 crore during the previous quarter ended December 2015. Sales declined 23.20% to Rs 22.18 crore in the quarter ended December 2016 as against Rs 28.88 crore during the previous quarter ended December 2015.
Prima Plastics has recently completed its expansion. The new plant for manufacturing of plastic moulded articles at Ongole with an installed capacity of 1500 tons per annum approximately has been completed and the commercial production and operations at Ongole have commenced with effect from 17 February 2017. Moreover, the company's joint venture, Prima Dee-Lite Plastics at Camerron, West Africa has successfully completed expansion project recently to enhance its capacity of production. The company has almost doubled its capacity from 4500 tons per annum to 8500 tons per annum to meet growing demand. The commercial production at the plant has commenced on 03 January 2017.
Considering reasonable valuations and high earning visibility with recently completed expansion, we suggest our members to continue to hold the stock.
Below is the summary of Prima Plastics Ltd shared by our team under Hidden Gem stock of May'16 released on 12th June 2016.
1. Company Background:
Incorporated
in 1993, Prima Plastic is one of the largest player in the Plastic Moulded
Furniture (PMF) industry in India. Company designs and manufactures plastic
moulded furniture from chairs, baby chairs, dinning tables, stools and teapoys
in a wide range of attractive colors.
Prima Plastics has consistently increased its market share over the last few years and has consolidated its position as a brand leader in the garden & leisure furniture industry through careful product development and planned marketing. Company’s state of the art manufacturing process with virgin compounds made as per specifications ensures production of high quality and totally weather proof furniture.
Prima
Plastics is the third largest player in the plastic furniture segment after
Nilkamal and Wim Plast with a value market share of ~6%, it has a presence
across India with network of 275 distributors and over 5000 dealers. The
company sells its products in the northern and eastern markets through the
outsourcing model.
Manufacturing plants of the company are in Daman and Kerala in India and in Cameroon, Africa. During FY06, the company formed a 50% Joint Venture - Prima Deelite Plastics in Cameroon (Africa), it manufactures PMF and HDPE Woven Sack Bags. The company started this JV with an investment of Rs 1 crore (Prima’s share) in 2006. Since then there has been no further investment. This JV is performing extremely well and registered healthy financial performance in both the businesses of Plastic Articles and Woven Sack Bags.
Since
plastic products permeate the entire spectrum of daily use items and cover
almost every sphere of life like clothing, housing, construction, furniture,
automobiles, household items, agriculture, horticulture, irrigation, packaging,
medical appliances, electronics and electrical etc.
To
manufacture finished products, polymers are processed through various types of
techniques namely extrusion, injection moulding, blow moulding and roto
moulding.
Plastic consumption in many countries of Africa
is significantly low and offer good long term growth opportunity. A growing
economy with population of over 680 million and robust demand for plastic
products has made Africa a priority market for many international companies.
Prima Plastics has consistently increased its market share over the last few years and has consolidated its position as a brand leader in the garden & leisure furniture industry through careful product development and planned marketing. Company’s state of the art manufacturing process with virgin compounds made as per specifications ensures production of high quality and totally weather proof furniture.
The
company has received Top Exporter Awards by PLEXCONCIL India in the Moulded
Furniture Category for many years in a row since 1996. Company exports to USA,
Africa and the Middle East.
Manufacturing plants of the company are in Daman and Kerala in India and in Cameroon, Africa. During FY06, the company formed a 50% Joint Venture - Prima Deelite Plastics in Cameroon (Africa), it manufactures PMF and HDPE Woven Sack Bags. The company started this JV with an investment of Rs 1 crore (Prima’s share) in 2006. Since then there has been no further investment. This JV is performing extremely well and registered healthy financial performance in both the businesses of Plastic Articles and Woven Sack Bags.
To
continue growth momentum, Prima Plastics is expanding its capacity under
ongoing expansion in India and Africa. Prima Plastics is setting up new
capacity at Andhra Pradesh, which is expected to be operational by mid of this
year. Moreover, ongoing expansion of African JV is also expected to get
completed which will almost double its capacity.
Plastic Consumption & Growth Outlook in India & African Countries
Plastic Consumption & Growth Outlook in India & African Countries
Plastic
industry is making significant contribution to the economic development and
growth of various key sectors in the country such as: Automotive, Construction,
Electronics, Healthcare, Textiles, FMCG, etc. It has expanded at 11% CAGR over
the last five years to reach 12.2 million tonnes per annum in FY14.
Referring
to report issued by Tata Strategic, India’s per capita consumption of plastic
products is ~10 kg against 32 kg in Brazil, 45 kg in China, 65 kg in Europe and
109 kg in US. Current low per capita consumption level of plastic products in
India as compared to developed countries indicates that India offers a huge
opportunity over long term.
Additionally,
rising thrust on 100 smart cities will further propel the growth of plastic
industry. Considering the critical elements of any smart cities such as water
management, infrastructure, waste management, etc. the usage of plastics can
bring efficiency in all such fields and can therefore, make the smart cities more
sustainable and cost effective.
Packaging
industry in India has seen a strong penetration of plastics as compared to
global standards. However, agriculture sector still hasn't explored the
benefits of plastics to a large extent. Global average for plastics demand in
agriculture is 8% while India is substantially lower at only 2%.
Plastics
industry is one of the fastest growing industries in India. Compared to the
overall plastic industry which is growing at 11%, the major thermoplastics like
PE, PP, PVC, PS have grown at 8% per annum over the last five years to reach
8.7 MnTPA (million tonnes per annum) in FY14 from 6 MnTPA in FY09.
Polyethylene
(PE) is the most largely used plastic raw-material by Indian industry. Its
demand has grown at 8% per annum in last 5 years to reach 3.6 MnTPA in FY14.
Polyvinyl Chloride (PVC) is the second largest with the consumption growing
from 1.4 MnTPA in FY09 to 2.6 MnTPA in FY14 at growth rate of 13% p.a.
Commodity
plastics comprising of Polyethylene (PE), Polypropylene (PP), Polyvinyl
Chloride (PVC) and Polystyrene account for bulk of the plastic consumption in
India. Polyethylene (PE), accounts for the largest share i.e., 41% of total
consumption, while PP accounts for 25% of total consumption. Others include EPS
and PVC compounds.
Extrusion
process is the most commonly used process in India and accounts for 60% of
total consumption by downstream plastic processing industries. Injection
moulding is the second most popular process accounting for 25% of the
consumption. Blow moulding is used for 6% while Roto moulding 1%. The rest of
the plastic is processed through other processes.
India is a growing
market for plastics and consumes about 12.8 million tonnes of plastics annually
against the global consumption of 285 million tonnes per year.
The plastics and
polymer consumption is growing at an average rate of 10 percent and expected to
grow at higher pace during next 5 years. There
are several factors like low per-capita consumption, manufacturing focus, end
use industry growth, availability of feedstock, increasing urbanization,
changing lifestyle, demographic dividend etc. promoting growth of plastic
across India.
Economy of Africa have experienced strong
growth in past and is one of the fastest growing market for plastic products.
As per industry reports, the use of plastics in Africa has grown at a
compounded average growth rate (CAGR) of approximately 8.7% during the past six
years. Imports of plastics into Africa have grown between 23% and 41% during
this time. The use of plastics in East Africa is expected to grow by 3 times in
the next five years which indicates potential for strong growth in coming years.
2. Recent Developments: (as on 12th Jun'16)
i) Expanding Reach through Joint Venture in Other
Countries - Jun 2016
With success of Cameroon JV and experience of
exporting to other African and Central American nations, Prima plastics is
exploring the opportunity to set up manufacturing unit in the Central American market
via JV route to expand its geographic reach. The objective is to increase the
presence in the neighboring countries by putting up manufacturing unit by end
of current calendar year.
As per the management, they are at the
preliminary stage with local player to establish a new entity. The targeted capacity is likely to be 1500MT with
an investment of Rs. 10-12 crores. The management seems positive on this
development and plans to fund this expansion largely through internal accruals.
The moulded plastic furniture industry is growing at a faster pace in the
Central American market and offers good long term business opportunity for
international players.
ii) Capacity Expansion in India &
Cameroon (Africa) JV – Jan 2016
Under ongoing expansion, company is putting
up a 1500MT moulded furniture plant at Andhra Pradesh with a capex of Rs. 5-6
crores. The new plant will add 15% to Indian capacity with an additional
revenue potential of Rs. 15 to 20 crores. As per management, new plant would be
operational by July 2016. With additional capacity in place, the company is
also increasing distributors in south to grab market share in southern market.
Considering strong demand and robust growth
outlook, Prima Plastics has also taken up capacity expansion at its Cameroon JV
which will almost double its capacity.
iii) Close down of ACP (Aluminium Composite Panel)
Division – Jan 2015
Company
diversified into manufacturing of high quality PVDF coating Aluminium Composite
Panel with the brand name called “ALUMA” with annually installed capacity to
produce 1.2 million sq. mts in various sizes. Aluminium composite panel (ACP)
which are used in making building’s exteriors and interiors.
The
ACP division was started during construction boom to cater commercial real
estate segment. However, ACP division faced severe challenges due to a slowdown
in demand for aluminium panels and higher input cost, which caused the company
to incur continuous losses in FY10-14.
3. Financial Performance:
Prima Plastics
standalone net profit rises 135.86% in the March 2016 quarter
Net profit of Prima
Plastics rose 135.86% to Rs 4.05 crore in the quarter ended March 2016 as
against Rs 1.72 crore during the previous quarter ended March 2015. Sales rose
7.03% to Rs 27.41 crore in the quarter ended March 2016 as against Rs 25.72
crore during the previous quarter ended March 2015.
On
consolidated basis including Cameroon JV Operation, Prima Plastics has reported
growth of 83.4% at Rs 12.3 crore in FY16, while its revenue has grown by 9.32%
at Rs 129.2 crore. Its consolidated operating profit (EBITDA) has grown by
43.78% at Rs 19.84 crore along with operating profit margin expanding by 368 bps
for FY16 at 15.36%.
Prima Plastics
standalone net profit rises 328.17% in the December 2015 quarter
We expect company will deliver consolidated revenue CAGR of 20% in the next 3 years with further improvement in operating margins due to higher contribution from Joint Ventures. As company is expanding its capacity in India and Cameroon JV, we believe company will continue to post decent growth in sales and profits in coming quarters.
4. Peer Group Comparison: (as on 12th Jun'16)
On valuation parameters, Prima Plastics is
trading at significant discount compared to other listed players in the
Industry. Moreover, important financials like OPM (operating profit margin) and
ROE (return on equity) of Prima Plastics is much better compared to bigger
player like Nilkamal Ltd.
5. Key Concerns & Risks:
5. Key Concerns & Risks:
i) Rise
in Crude Oil Prices - The rise in prices of crude and similar impact on its bye
products will remain a concern for the Moulded Furniture business being its
major input material.
ii)
Competition from New Entrants – Plastic Moulded Furniture industry in past has
witnessed many new entrants with low capital base to serve the local market.
The new players are prune to un-ethical practices, such players will impact
local market in their area by offering low quality products at cheap rates.
6. Saral Gyan Recommendation:
i) The Per capita income of middle & lower middle class are rising in India and people living in rural India are also prospering due to higher value of their agriculture produce & agriculture lands. The per capita consumption of plastic is increasing in India but still very low when compared to western countries. Plastic moulded furniture is replacing conventional furniture made of woods and steel due to its various inherent advantages. Prima Plastics is well placed to take advantage of the sustained growth in PMF industry in India, the company is focusing to further penetrate in new territories of southern market with capacity expansion in Andhra Pradesh.
ii) The company’s key markets for international business are Africa, Middle East and Latin America. The export products are well established in the international market, the growth in export is very impressive as the company continue to receive repeated orders from its existing clients. Also, the Joint Venture Company at Cameroon is performing reasonably well and registered higher sales and profitability in both the businesses of Plastic Articles and Woven sack Bags. With ongoing expansion in African JV and expected entry into Latin America market via JV route in near term, we expect company to register much higher sales and profitability during next couple of years.
iii) As the company was unable to turn around its loss making ACP division, management decided to close down its ACP business in FY14-15 which was incurring losses since last many years. Company sold off the core plant of ACP division in Jan 2015. However, the land, building & other machinery were retained to accommodate additional requirement of factory space of plastic division and also to expand plastic business. This was a good move as management decided to focus completely on its core business i.e. plastic division which is doing well rather than putting continuous efforts to revive its ACP division. Moreover, it helped the company to strengthen its balance sheet with better financial performance and cash flow generation.
iv) Company has registered sales CAGR of 15.76% and profit CAGR of 10.09% during last 5 years with ROE of 11.46%. In last 5 years, the ROE (return on equity) looks low at 7-16%, however the numbers were low as the ACP division delivered negative returns on capital employed. If we consider only PMF business, return ratios have improved to above 20% since the last 2 years. Company is debt free with strong balance sheet, working capital days also reduced from average of 125 days in past to nearly 100 days which is another positive.
v) As of Mar’16, promoter’s shareholding in the company is at 58.85% which
is constant without any changes since last 4 years without pledging any shares.
Institution shareholding is negligible at 0.03%. Considering recent expansion,
debt free status and robust demand outlook for PMF Industry, we expect company will
continue to grow its sales and profitability, which can bring institutional
investment and there could be re-rating in the valuations of the stock in long
term.
vi) Management has rewarded shareholders by paying regular dividend since last 8 years. The company paid dividend of Rs. 1 per share from FY10-14 and later increased the dividend to Rs. 1.50 per share in FY14-15 with increasing profitability. As the company is debt free and plans majority of capacity expansion through internal accruals, we find dividend policy suitable in terms of sharing profit with minority shareholders and retaining the balance for future growth.
vii) As
per our estimates, Prima Plastics can deliver PAT of 15.50 crores for full
financial year 2016-17, annualized EPS of Rs 14.1 with forward P/E ratio of 10.8X
for FY16-17. Company’s valuation looks discounted compared to peer group
companies on account of better financials. With ongoing expansion in India
& Cameroon JV and robust demand outlook in domestic as well as African
markets, we believe company will continue to deliver strong revenue growth and
profitability going forward.
On equity of Rs. 11.00 crore, the estimated annualized EPS for FY 16-17 works out to Rs. 14.1 and the Book Value per share is Rs. 58.48. At current market price of Rs. 152.30, stock price to book value is 2.60.
i) The Per capita income of middle & lower middle class are rising in India and people living in rural India are also prospering due to higher value of their agriculture produce & agriculture lands. The per capita consumption of plastic is increasing in India but still very low when compared to western countries. Plastic moulded furniture is replacing conventional furniture made of woods and steel due to its various inherent advantages. Prima Plastics is well placed to take advantage of the sustained growth in PMF industry in India, the company is focusing to further penetrate in new territories of southern market with capacity expansion in Andhra Pradesh.
ii) The company’s key markets for international business are Africa, Middle East and Latin America. The export products are well established in the international market, the growth in export is very impressive as the company continue to receive repeated orders from its existing clients. Also, the Joint Venture Company at Cameroon is performing reasonably well and registered higher sales and profitability in both the businesses of Plastic Articles and Woven sack Bags. With ongoing expansion in African JV and expected entry into Latin America market via JV route in near term, we expect company to register much higher sales and profitability during next couple of years.
iii) As the company was unable to turn around its loss making ACP division, management decided to close down its ACP business in FY14-15 which was incurring losses since last many years. Company sold off the core plant of ACP division in Jan 2015. However, the land, building & other machinery were retained to accommodate additional requirement of factory space of plastic division and also to expand plastic business. This was a good move as management decided to focus completely on its core business i.e. plastic division which is doing well rather than putting continuous efforts to revive its ACP division. Moreover, it helped the company to strengthen its balance sheet with better financial performance and cash flow generation.
iv) Company has registered sales CAGR of 15.76% and profit CAGR of 10.09% during last 5 years with ROE of 11.46%. In last 5 years, the ROE (return on equity) looks low at 7-16%, however the numbers were low as the ACP division delivered negative returns on capital employed. If we consider only PMF business, return ratios have improved to above 20% since the last 2 years. Company is debt free with strong balance sheet, working capital days also reduced from average of 125 days in past to nearly 100 days which is another positive.
vi) Management has rewarded shareholders by paying regular dividend since last 8 years. The company paid dividend of Rs. 1 per share from FY10-14 and later increased the dividend to Rs. 1.50 per share in FY14-15 with increasing profitability. As the company is debt free and plans majority of capacity expansion through internal accruals, we find dividend policy suitable in terms of sharing profit with minority shareholders and retaining the balance for future growth.
On equity of Rs. 11.00 crore, the estimated annualized EPS for FY 16-17 works out to Rs. 14.1 and the Book Value per share is Rs. 58.48. At current market price of Rs. 152.30, stock price to book value is 2.60.
Considering improvement
in financials with better operating margins and debt free status post closure
of ACP division, high earning visibility with capacity expansion in India and
Cameroon JV with robust demand outlook for PMF products and expanding reach
into Latin American market via JV route, Saral Gyan team recommends “Buy” on Prima Plastics
Ltd at current market price of Rs. 152.30 for
target of Rs. 290 over a period of 12 to 24 months.
Buying
Strategy:
- 80%
at current market price of 152.30
- 20%
at price range of 130 - 135 (in case of correction in stock price in near
term)
Portfolio
Allocation: 3% of your equity portfolio.
To Read / Download Saral Gyan Hidden Gem - May'16 Research Report on Prima Plastics - Click Here
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Wish you happy & safe Investing.
Regards,
Team - Saral Gyan
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Wish you happy & safe Investing.
Regards,
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