Stock Views on PG Foils

PG Foils has got the third largest aluminum foil capacity in India. This company has a total capacity of about 5,000 tonne per annum. The major customers for the product are pharmaceuticals and food industry. Besides pharmaceutical and food industry, this company also gives its product to various other industry segments, though in smaller quantities, but the major customer is pharmaceuticals and food.

The company is currently undergoing an expansion programme wherein the capacity will increase about 6,000 tonne per annum. This expansion will go on-stream fully in the month of November-December 2010 and this will take the total capacity of the company to about 11,000 tonne per annum. If you look at the financials of the company closely for the last two financial years, for FY09, this company reported a loss of about Rs 1.5 crore. In this loss this company had provided for an exceptional item of close to Rs 13 crore, the company had about Rs 8.5 crore of loss on forex hedging and this company provided for about Rs 4.5 crore on account of payment of premium for Keyman Insurance Policy which means total exceptional items of close to Rs 13 crore.

Again for FY10, there are exceptional items for Rs 13 crore, which includes payment of Keyman Insurance Policy of Rs 4.5 crore and loss investment of close to Rs 8 crore after providing for these two items, this company reported a profit after tax of Rs 4 crore. Now if you compare the valuation of this company with the peer group namely Essdee Aluminum, you will find that even though the capacity of Essdee Aluminum is about 3.5 times that of PG Foils, the revenues of Essdee Aluminum are 3.5 times, operating margins are double that of PG Foils but the marketcap of Essdee Aluminum is roughly 38 times the marketcap of PG Foils. There I find a huge differential in valuation of these two companies.

Now coming to the valuation of PG Foils on an independent basis, if you look at the balance sheet of the company as on today, the marketcap of the company is just about 40 crore. As on March 31, 2009, this company had debt of Rs 50 crore, there is 50% decrease in the interest cost in FY10—assuming a debt of Rs 30 crore as on March 31, 2010 takes the enterprise value of this company to 70 crore. As against the enterprise value of Rs 70 crore, this company has cash and cash equivalents of roughly 42 crore.

 

This company has been paying premium towards Keyman Insurance Policy for the past six years and I believe that the cash flows—we don't have the details of the Keyman Insurance Policy—but talking to people in the insurance industry, the potential payback, which this Keyman Insurance Policy can bring in on maturity can be potentially more than the marketcap of the company.

Now you have a company where it is available at practically less than its cash value for a business, which does a turnover of about Rs 170 crore, makes the operating profit margin of 12% and the capacity going up in November- December to more than double—I think this is undervaluation. This undervaluation is primarily because of the fact that the market has failed to look beyond the numbers, which are understated for various reasons. Given the potential cash which the Keyman insurance policy can bring in, the cash and cash equivalents which are there in the company and the potential growth which can happen on the completion of ongoing capacity expansion, I think these things make this stock a growth stock with the deep value at good margin of safety.