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.
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.
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.
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.
Plastic Consumption & Growth Outlook in India & African Countries
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.
5. Key Concerns & Risks:
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.
- 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)
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Team - Saral Gyan