Stock Review: Jindal Poly Films

 

 

Higher margins in PET film business due to strong demand makes Jindal Poly Films an attractive long-term investment

 

THE steep rise in PET film prices has boosted the profitability of Jindal Poly Films. The company's expansion plans, strong balance sheet, healthy cash flows and expected sustainability of the buoyant BOPET film prices make the company an attractive long-term bet.

BUSINESS:

Jindal Poly Films (JPFL) is India's leading producer of flexible packaging films. The company has a 127,000-tonne per annum capacity of BOPET film and 180,000 tonne per annum of BOPP film. It also has a 53,600-TPA metallising capacity and 4500 TPA of coating capacity.

   Thick polyethylene terephthalate (PET) films (exceeding 50 microns) find application in photography/X-ray, electronics, printing, textile and document lamination. Thin films (below 50 microns) are used as flexible packaging in nonfood industrial items and decorative ribbons and labels. Better moisture retention properties render BOPP film more suitable for food products and cigarette cartons apart from applications as ready-made garment bags, adhesive tapes and print lamination. The company has backward integrated in the production of PET with an installed capacity of 120,000 TPA, which is being enhanced to 176,000 TPA in FY11 to meet growing demand.

GROWTH DRIVERS:

The BOPET film market has witnessed a sudden emergence of a demand-supply gap, which has boosted its prices and is expected to take more than one year to fill. On the one hand, capacity additions have been slow globally over the last couple of years with manufacturers in Western countries scaling down due to recession. On the other hand, the film has found several new uses, which is boosting its demand. The new-age flat screen TVs, touch screen enabled equipment including mobile phones and photovoltaic cells used in generating solar power are all using BOPET films and with their production increasing the demand for BOPET film has grown fast. Besides, the Indian textiles industry is also consuming a sizeable quantity of the film particularly for embroidery purpose. This has resulted in global demand growth jumping to nearly 20% annually, as against 8-9% estimated earlier.

   BOPET film prices have more than doubled in the last six months, while the cost of production remains the same.The industry has already been in the process of adding capacities. However, the incremental capacities over the next 12-18 months are likely to fall short of the demand growth. This has created a situation, where machinery suppliers are already fully booked for the next couple of years. This effectively means that the good times are likely to last over the next 12-18 months.

   There may be some demand shift towards BOPP films for packaging applications due to very high BOPET prices. However, this won't affect the growth prospects of the company since it has a large presence in BOPP films as well.

   The company itself is in an expansion mode. It has lined up capex of 1,600 crore, which will add 90,000 TPA to BOPET capacity, 132,000 TPA to BOPP capacity and 71,400 TPA of metallizing capacity in phases by FY13. Out of these, 60,000 tonnes of PET and 66,000 tonnes of PP capacities will be added in FY12 and the rest next year. The company is gradually also moving up in value chain by offering more innovative and technologically superior products such as PVDC coated films. It is planning to start silicon coating also.

FINANCIALS:

In the last five years, the company has grown at a compounded annual growth rate (CAGR) of 15.5%, while its net profit grew at 21% annually. The company has enjoyed strong operating cash flows and had debt-to-equity ratio at 0.35 as on September 30, 2010. Recently, the company carried out a share buyback, increased its dividends and issued 1:1 bonus to reward its shareholders. For the September quarter, the company's net profit jumped 359%, while net sales grew 78% as the full benefits of price growth kicked in. The operating margin for the quarter was more than twice its year ago level at 38.9%.

VALUATIONS:

At its current market price, the scrip is trading at 7.4 times its earnings for the last 12 months. The company is expected to end FY11 with net profit of around 480 crore, which discounts the current valuation just 5.3 times. Even though the scrip has had a healthy run-up over the last 3-4 months, the scrip appears attractive for medium-to-long term investors.