CRISIL Research Ier Report Kanpur Plasticpack

7/27/2019 CRISIL Research Ier Report Kanpur Plasticpack

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Kanpur Plastipack Ltd

Enhancing investment decisions

Init iating coverage


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Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process

Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental

grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The

valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to

grade 1 (strong downside from the CMP).

CRISILFundamental Grade

Assessment CRISILValuation Grade

Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)

4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)

3/5 Good fundamentals 3/5 Align (+-10% from CMP)

2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)

1/5 Poor fundamentals 1/5 Strong downside (


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CRISIL EQUITIES | 1

December 29, 2010Fair Value Rs 40CMP Rs 31

Fundamental Grade 4/5 (Strong fundamentals)

Valuation Grade 5/5 (CMP has strong upside)

Industry Information technology

Polaris Software LimitedBusiness momentum remains intact

Fundamental Grade 2/5 (moderate fundamentals)Valuation Grade 5/5 (Strong upside from CMP)

Industry Bulk packaging

Kanpur Plastipack LimitedCapacity expansion and backward integration to drive growth

Kanpur Plastipack Ltd (KPL) manufactures flexible intermediate bulk containers

(FIBCs), which are used in bulk packaging, and PP/HDPE woven sacks. It alsoearns commissions as a stockist. The company has a manufacturing capacity of

10,000 MT. We assign KPL a fundamental grade of 2/5, indicating that its

fundamentals are moderate to other listed securities in India.

KPL to benefit from increased global and local acceptance of FIBCs

FIBCs are used in bulk packing of chemicals, minerals and other commodities.

The US$ 3 bn global FIBC industry is expected to grow at ~7% in volumes per

annum over the next two-three years, while the domestic industry is expected

to grow at 17% over the same period. Due to reliability and cost effectiveness,

FIBCs are increasingly being preferred for packaging. To cater to this potential

rise in demand, KPL is in the process of expanding its capacity from 10,000 MT

to 13,500 MT in two phases by FY13.

KPL is well placed in the international markets

Currently, 65% of KPLs revenues are from FIBC exports, which logged a 25%

CAGR in value terms during FY06-FY10. KPL caters to the overseas markets

through ~20 distributors. Italy, Germany and Spain account for 70-80% of this

business. Going forward, KPL plans to focus on North and South America.

Key negatives and monitorables

1) No price advantage due to undifferentiated nature of FIBCs. 2) Raw material

price volatility and inability to pass on the hike. 3) Freight burden on being

land-locked. 4) Inadequate supply of power from the grid impacts cost. 5)

Project execution delays could affect earnings. 6) Foreign exchange

fluctuations

Revenues to grow at a two-year CAGR of 24.5%CRISIL Equities expects KPLs revenues to increase at a CAGR of 24.5% to Rs

1,536 mn in FY12 due to capacity expansion and growth in end-user segments.

Margins are expected to improve to 9.2% in FY12 from 8.8% in FY10 driven by

better demand prospects and KPLs planned backward integration into multi-

filament yarn (MFY) which is expected to be operational in Q1FY12. EPS is

expected to increase from Rs 5 in FY10 to Rs 10 in FY12.

Valuation - current market price has strong upside

We have valued KPL based on the discounted cash flow method. Based on this,

the fair value is Rs 40 per share. We initiate coverage on KPL with a valuation

grade of 5/5, indicating that the market price has strong upside to our fair

value

KEY FORECAST

(Rs mn) FY08 FY09 FY10 FY11E FY12E

Operating income 745 1,014 991 1,137 1,536

EBITDA 64 113 87 100 142

Adj Net income 18 19 26 33 53

EPS-Rs 3.5 3.6 4.8 6.2 10.0

EPS growth (%) (15.5) 1.6 45.6 21.3 60.6

PE (x) 28.1 9.1 9.4 7.3 4.5

P/BV (x) 3.6 1.1 1.3 1.2 1.0

RoCE (%) 14.4 21.6 14.3 14.4 16.7

RoE (%) 15.3 12.6 15.2 17.2 23.5

EV/EBITDA (x) 12.3 4.2 6.7 6.6 5.4

Source: Company, CRISIL Equities estimate

NM: Not meaningful; CMP: Current Market Price

CFV MATRIX CHANGE

KEY STOCK STATISTICSNIFTY / SENSEX 6060/20256BSE/NSE ticker KANPRPLA

Face value (Rs per share) 10

Shares outstanding (mn) 5

Market cap (Rs mn)/(US$ mn) 164/4

Enterprise value (Rs mn)/(US$ mn) 591/13

52-week range (Rs) (H/L) 49 /17

Beta 0.5

Free float (%) 33%

Avg daily volumes (30-days) 17,480

Avg daily value (30-days) (Rs mn) 0.7

SHAREHOLDING PATTERN

PERFORMANCE VIS--VIS MARKET

Returns

1-m 3-m 6-m 12-m

Kanpur Plastipack -4% 14% 17% 74%

NIFTY 4% -1% 12% 15%

ANALYTICAL CONTACTSudhir Nair (Head, Equities) [email protected]

Arun Vasu [email protected]

Rabindra Basu [email protected]

Client servicing desk

+91 22 3342 3561 [email protected]

1 2 3 4 5

1

2

3

4

5

Valuation Grade

Fundame

ntalGrade

Poor

Fundamentals

Excellent

Fundamentals

Strong

Downside

Strong

Upside

69.2% 69.2% 69.2% 69.2%

0.0% 0.0% 0.0% 0.0%0.0% 0.0% 0.0% 0.0%

30.8% 30.8% 30.8% 30.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-09 Mar-10 Jun-10 Sep-10

Promoter FII DII Others


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CRISIL EQUITIES | 2

Kanpur Plastipack Limited

Table 1: Kanpur Plastipack: Business environment

Products FIBCs/non-FIBCs*

Product / service offering FIBCs Bags used in bulk packaging (67% of sales)

PP/HDPE woven sacks - sacks supplied to cement and fertiliser manufacturers in the domesticmarket, and for sugar ,fibre packing and chemicals in the exports market (33% of sales)

DCA/CS* for IOCLExports vs. domestic mix(FY10)

Exports-65% & Domestic-35%

Exports vs. domestic mix(FY12)

Exports-70% & Domestic-30%

Geographic presence Domestic northern and western markets Export markets: UK, Germany, Italy, France, Spain and the US

Market position The industry is fragmented with around 25 FIBC manufacturers KPL has a total capacity of 10,000 MT.

End market and top clients Domestic market: Sacks- cement and fertiliser manufacturers, FIBC- petrochemicals, carbonblack, chemicals, minerals, etc.

Export market: FIBCs to wholesale distributors

Key competitors Jai Corp, Jumbo Bags, Neo Corp International, Flexituff and Shankar PackagingFuture plans Manufacturing multi-filament yarn (MFY)Sales growth (FY08-FY10 2-yr CAGR)

16.5%

Sales forecast (FY10-FY12 2-yr CAGR)

24.5%

Demand drivers Increasing acceptance of FIBCs over other forms of packaging in domestic markets Growth in end-user industries Indian players are getting competitive vis-a-vis Chinese and Turkish players

Margin drivers Backward integrating into manufacturing MFY, which it currently procures to manufacture FIBC Commission arising from being IOCLs polymer stockist for Kanpur and western UP

* DCA- Del Credere Agent, CS- Consignee Stockist

Source: Company, CRISIL Equities

Figure 1:FIBCs are a sub-set of the overall packaging industry

Source: Indian Flexible Bulk Container Associat ion (IFIBCA)

Packaging industry$500bn

Flexible packaging$65bn

Flexible bulk packaging$18b

FIBCs $3bn


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CRISIL EQUITIES | 3


Grading Rationale

Mid-sized FIBC-focused player

KPL manufactures FIBCs and non-FIBCs used in bulk packaging of chemicals,

minerals and other commodities. It has a total capacity of 10,000 MT. In FY10,the company produced 5389 MT of FIBC (~4 % of domestic FIBC production).

FIBC production. KPL exports 65% of its produce.

Some of its competitors are Shankar Packaging (Baroda), Flexituff (Indore), Big

Bags (Bangalore), Jumbo Bags (Chennai), Neo Corp International (Indore), and

Jai Corp (Mumbai). The closest listed player KPL can be compared to is Jumbo

Bags. KPL has higher capacity and utilisations vis-a-vis Jumbo bags but lags

behind in net realisations. Margins for both the companies lie in the 9-11%

range.

Peer comparisonKanpur Plastipack Jumbo Bags

FY08 FY09 FY10 FY08 FY09 FY10

Capacity 10000 10000 10000 6070 6070 6070

Capacity Utilisations 72% 87% 95% 81% 88% 67%

Realisations(Rs/Kg) 110.9 118.8 113.2 105.6 120 123

EBIDTA 64 113 87 60 66 49

EBIDTA % 9% 11% 9% 11% 9% 8%

Burgeoning global demand for FIBCs good for Indianmanufacturers

Since FIBC manufacturing is a labour- and power-intensive process, India, China

and Turkey are the major exporters of FIBC. Low labour costs, ease in

procurement of polymers and proximity to end markets give India a competitive

edge over other countries. Indias contribution of ~12.5% in volume to the

global market is expected to increase on the back of a rise in global demand for

FIBCs, benefiting players like KPL.

Figure 2: Comparative strengths Figure 3:Net importing and exporting countries

Country

Net

exports(Mn bags) Strengths Weakness

China 40 Price advantage Lack of consistency in

supply quantity and

quality

Lack of familiarity with

English

India 50 Consistent supply and

quality

Cheaper (except China)

Language (English) Price vis--vis China

Turkey 65 Proximity to EU market Cost inflation leading to

erosion of price

competitiveness

Source: Industry, CRISIL Equ it iesSource: Indian Flexible Bulk ContainerAssociat ion (IFIBCA)

-80

-60

-40

-20

0

20

40

60

80

Americas Europe China Middle eastAustralia India Turkey Africa

(mn bags)

Import Export


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CRISIL EQUITIES | 4


like KPL, which is well-established globally

KPL started exporting FIBCs in early 2000. Export revenues from FIBCs

increased at a CAGR of 25% over 2006-10 and currently comprise around two-

thirds of its total revenues. UK, France Italy, Germany and Spain are its key

markets, the last three accounting for 70-80% of its export business.

KPLs overseas business is channelled through ~20 distributors, with whom KPL

enjoys a long-standing relationship based on superior pre- and post-sales

services and timely deliveries. The American market, which mostly procures its

FIBCs from China, is now looking to expand its vendor base and KPL hopes to

enter the new geography.

Figure 4: FIBC and non-FIBC - export revenue trend

Source: Company, CRISIL Equit ies

FIBCs gaining preference in the domestic market aswell

Currently, FIBC sale in India is estimated to be 7-10 mn bags per annum or

~2% of the domestic woven sacks market (Source: PP/HDPE woven sacks).

This is primarily used by export-oriented units.

FIBCs are usually used without pallets and are easier to handle and transport

compared to other forms of packaging. Hence, they are being increasingly used

in industries that require economical and reliable packaging at reduced logistical

costs, and are preferred to smaller packages (25 or 50 kg bags) and bulk

carriages. Industrial growth and substitution are expected to boost FIBC volume

growth by around 6-7% per annum globally over the next two-three years.

Demand for packaging products is dependent on industrial growth. The

domestic packaging industry is expected to grow by 13% per annum over the

next two-three years. Within the packaging industry, polymer-based products

like woven sacks, FIBCs, leno bags and wrapping fabric are expected to increase

at a CAGR of 17% during the period. Maximum growth in packaging product

consumption is expected in the FIBC segment, which is used for bulk packaging.

238

404437

599 586

96 8654

111 82

0

100

200

300

400

500

600

700

FY06 FY07 FY08 FY09 FY10

(Rs mn)

Export FIBC Export Non FIBC

Italy, Germany andSpain account for 70-80% of KPLs exportrevenues

FIBCs sold in India areestimated at 7-10 mnbags per annum


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CRISIL EQUITIES | 5


Figure 5:Minerals and petrochemicals have highest share in

domestic FIBC use

Source: IFIBCA

KPL to benefit from domestic demand growth

KPL is expected to benefit from the growth in the domestic packaging industry

and the increasing acceptance of FIBCs over other forms of packaging.

Usage of FIBCs is expected to increase on the back of the following advantages

it offers over jute and paper bags:

FIBCs made from HDPE/PP are much lighter and save almost three to fivetimes of packaging material.

The lower material weight saves significant amount of energy during themanufacture of raw materials and conversion into bags. Jute bags require

almost 50% more energy and paper bags about 300% more energy

compared to synthetic bags.

Use of water and chemicals is comparatively lower. Synthetic bags, being lighter, reduce the use of fuel and energy during

transportation.

However, it is likely to remain focussed towards increasing demand from its

existing export markets and is also actively pursuing newer avenues in South

and North America.

Capacity expansion to aid growth

KPL is expanding its capacity from 10,000 MT in FY10 to 12,000 MT in FY11 and

further to 13,500 MT by FY13. Currently, KPL has an order book for the next

three months, which could increase on the back of increased demand, both local

and global.

Backward integration into multi-filament yarn toadd to top line

FIBCs made from lighter but stronger multi-filament yarn (MFY) are of superior

quality. KPL procures this material from external sources and is now setting up a

polypropylene-based 1,200 MT MFY facility.

Agro

Products, 2%

Carbon

Black, 16%

Minerals, 32%

Petro Chemicals,

28%

Chemicals,

22%

KPL to benefit from theincreasing acceptance ofFIBCs


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CRISIL EQUITIES | 6


Of the total yarn produced, ~30% will be used internally and the rest is

expected to be sold in the domestic market. Currently, there is only one

manufacturer of MFY in the northern and eastern regions, leaving ample room

for KPL to market MFY.

This initiative will reduce costs by ~1-2% as it will replace the existing purchaseof MFY. MFY is expected to add ~Rs 100 mn to the top line from next year,

i.e.~10% to overall revenues. EBITDA margins are expected to be in the range

of 10-12%. The project capex is Rs 95 mn, of which Rs 60 mn will be funded by

debt and the rest through internal accruals and promoter contribution.

Recurring commission income, albeit miniscule

KPL was earlier a stockist for GAILs polymer business and has now become an

exclusive stockist for Indian Oil Corporation Ltds (IOCLs) polymer business in

Kanpur and western UP. In October 2010, it sold 1300 MT of polymer on which it

received a commission of ~Rs400/tonne. Revenue from this source is expected

to increase over the next two years as the company, given better operating

profitability in this business, is focused towards selling higher volumes through

this route.


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CRISIL EQUITIES | 7


Key Negatives

No price advantage due to undifferentiated natureof FIBCs

FIBC being an undifferentiated product lacks branding power. Larger players

like Sintex and Essel Propack can mitigate increased price, thanks to their

diversified portfolio. But for smaller players like Kanpur Plastipack pricing

remains an area of concern.

Raw material price volatility and inability to pass onthe hike

The main raw material used in the manufacture of FIBC is polypropylene, which

is a crude oil derivative, and subject to price fluctuations. Raw material cost

accounts for ~75% of total operating costs; any variation in its prices could

impact EBIDTA margins. In the past, KPL has been able to only partially pass on

the increase in raw material costs to its customers which impacted margins.

Figure 6:EBIDTA margin vs. raw material as a % to sales trend

Source: Company,CRISIL Equit ies

Freight burden on being land-locked

Kanpur is land-locked and hence transportation is done by road, which increases

the travel time and the cost of freight. Exports contribute the most to KPLs

revenues and its dependence on road transport to move its products to the ports

which are far off reduces its netbacks from exports.

68%

70%

69%

67%

66%5%

7%

9%

11%

9%

0%

2%

4%

6%

8%

10%

12%

64%

65%

66%

67%

68%

69%

70%

71%

FY06 FY07 FY08 FY09 FY10

Raw material % to sales EBIDTA %

Inc in power &

other manuf cost


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CRISIL EQUITIES | 8


Figure 7:Freight as a % of sales KPL vs Jumbo Bags

Source: Company,CRISIL Equit ies

Power availabilityUttar Pradesh being a power deficit state, KPL was compelled to install its own

generation unit (gensets) whose power cost is higher than that availed from the

grid. In FY10, when KPL had to increasingly use its own generation units, power

cost (as a percentage of sales) increased 114 bps y-o-y which impacted

margins.

Power consumption FY06 FY07 FY08 FY09 FY10

Purchased units 87.0% 88.5% 85.8% 84.8% 73.0%

Own generation units 13.0% 11.5% 14.2% 15.2% 27.0%

Rate of purchased Units 3.82 3.80 3.95 4.05 4.13

Rate of own units 7.4 10.26 7.19 5.83 6.35

Power as % to sales 6.2% 5.1% 4.8% 4.8% 5.9%


If the power situation in Uttar Pradesh does not improve, the company will be

increasingly dependent on its own generation unit, which would put pressure on

its margins.

7%

6%

6%

7%

4%

3%

5%

4% 3% 3%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1 2 3 4 5

Kanpur Plastipack Jumbo Bags


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CRISIL EQUITIES | 9


Key Monitorables

Project execution delays could affect earnings

KPL is in the process of executing two new projects. The 2,000-MT FIBC capacity

expansion at a capex of Rs 83.5 mn is expected to get completed by January

2011. It is also putting up a 1,200 MT MFY capacity at a capex of Rs 95 mn,

which is expected to get ready by Q1FY12. Any delay in the execution of these

projects could affect the companys business prospects.

Foreign exchange fluctutations

KPL earns 65% of its revenues from exports. The company covers ~60% of its

exports and enjoys a natural hedge as it imports ~25% of its raw materials.

Foreign currency gain or loss has an impact on the profitability of the company.

Increased volatility on this front could affect KPLs margins.

Forex as a % of PBTRs mn FY07 FY08 FY09 FY10

PBT 22.3 28.1 28.5 39.7

Foreign exchange(gain)/loss -3.1 -0.5 39.1 -0.4

% to PBT -13.8 -1.8 137.1 -0.9



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CRISIL EQUITIES | 10


Financial Outlook

Demand to boost KPLs revenues over the next twoyears

In FY10, revenues dipped by 2% y-o-y due to lower export sales. However, we

expect KPLs revenues to increase at a two-year CAGR of 24.5% to Rs 1,536 mn

in FY12 primarily driven by volume growth of FIBCs on the back of capacity

expansion and increasing global demand. Robust growth from packaging and

higher acceptance of FIBCs in the domestic market will also aid growth.

Figure 8: Revenue mix of KPLs revenues Figure 9:Sales trend Rs in mn

Source: Company, CRISIL Equit ies Source: Company, CRISIL Equit ies

EBITDA margins to remain 8-9% in the next twoyears

We expect EBITDA margins to improve by 40 bps to ~9.2% in FY12 due to

better demand, the companys backward integration into multi-filament yarn

and commission from being IOCLs stockist.

Figure 10: EBITDA and EBITDA margins RHS


28%38%

33% 35%

59%

56%57%

57%

13%7% 10% 8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY07 FY08 FY09 FY10

Plastic Products- Domestic FIBC Export sales Non-FIBC Exports sales

726

1,008

986

1,133

1,53014

36

-2

15

35

-5

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FY08 FY09 FY10 FY11E FY12E

(%)(Rs mn)

Net Sales YoY Growth [RHS]

64 113 87 100 142

8.6

11.1

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(%)(Rs mn)

EBIDTA EBIDTA [RHS]

We expect revenues to see

a two-year CAGR of 24.5%

EBIDTA to increase from Rs 87mn in FY10 to Rs 142 mn inFY12


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PAT to grow at a CAGR of ~43.9%; EPS to increasefrom Rs 5 in FY10 to Rs 10 in FY12

KPLs PAT is expected to double from Rs 26 mn in FY10 to Rs 53 mn in FY12

driven by healthy revenue growth and expansion in EBITDA margins. EPS is also

expected to double from Rs 5 in FY10 to Rs 10 in FY12.

Figure 11: EPS and PAT margins


RoE expected at 23.5% in FY12

RoE is expected to increase from 15.2% in FY10 to 23.5% in FY12 on the back

of better operating profitability.

Figure 12: RoE and RoCE


3 45

6

10

2.5

1.9

2.6

2.9

3.4

0.0

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1.0

1.5

2.0

2.5

3.0

3.5

4.0

0

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4

6

8

10

12


(%)(Rs)

EPS PAT [RHS]

14.4

21.6

14.3 14.4

16.7

15.3

12.6

15.2

17.2

23.5

0

5

10

15

20

25


Return on Capital Employed (RoCE) (%) Return on equity (RoE) (%)

EPS is expected to increasefrom Rs. 5 in FY10 to Rs. 10in FY12


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Management Overview

CRISIL's fundamental grading methodology includes a broad assessment of

management quality, apart from other key factors such as industry and business

prospects, and financial performance. Overall, we feel that the management has

strong domain expertise and will drive the companys growth going forward.

Business is largely family-driven

The chief decision-making powers are vested with the family. Mr Mahesh Swarup

Agarwal is the first-generation promoter responsible for setting up KPL. The

company went into BIFR in the early 1990s and during this period Mr Manoj

Agarwal (MD), son of the CMD, assisted in running the business and making it

profitable. Mr Shashank Agarwal (director) and son of the MD has been

associated with the company for over a year and has been instrumental in new

business initiatives like IOCLs polymer stockist, polymer trading with guidance

from his grandfather and setting up of the MFY unit. Mr. A.K Bhatnagar(executive director), a textile technologist from IIT, Delhi has been with the

company for 30 years and contributed to the growth and success of KPL.

Experienced second line of management

Based on our interactions with various business heads finance, production and

marketing - we believe that KPL has an experienced second line of management

with 20-25 years of experience each in their respective domains.

Mr Sunil Mehta (vice president - production) has been with the company since

2002. A textile engineer by profession, he has over 20 years of experience in thewoven sacks industry. Mr Nitin Ghodgaonkar (general manager - exports) joined

the company in 2004 and brings with him over 20 years of experience in

overseas marketing of FIBCs. Mr D. S. Kapoor (general manager - finance and

commercial) is an ICWA by qualification and has over 25 years of experience in

finance. He has been with the company for a decade.

Decision making lieslargely with the family


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Corporate Governance

CRISILs fundamental grading methodology includes a broad assessment of

corporate governance and management quality, apart from other key factors

such as industry and business prospects, and financial performance. In this

context, CRISIL Equities analyses shareholding structure, board composition,

typical board processes, disclosure standards and related-party transactions.

Any qualifications by regulators or auditors also serve as useful inputs while

assessing a companys corporate governance.

Overall, corporate governance presents good practices supported by a strong

and fairly independent board. The current board is well experienced in the

industry. We believe that the company's corporate governance practices are

adequate and meet the minimum required levels.

Board composition

The board consists of eight directors, four of whom are independent, three are

family members and one is a whole-time director, which meets the SEBI listing

guidelines. Mr Mahesh Swarup Agarwal, 83 years, is the executive chairman of

the board. He is the founder of KPL. Given the background of directors, we

believe that the board at KPL is fairly diversified.

Board processes

The company has various committees audit, remuneration and investor

grievance - in place to support corporate governance practices. CRISIL Equities

assesses from its interactions with the companys independent directors that thequality of agenda papers and the level of discussions at the board meetings are

good and they meet at timely and regular intervals. The audit committee is

chaired by an independent director, Mr S.M. Jain, who was the CMD of Fertilisers

and Chemicals Travancore Ltd and Paradeep Phosphates Ltd.

The companys quality of disclosure can be considered good, judged by the level

of information and details furnished in annual reports and other publicly

available data. We feel that the independent directors are well aware of the

business of the company and are fairly engaged in all the major decisions,

reflecting well on the company's corporate governance practices.

The companys corporategovernance practices are

adequate and meet theminimum required levels


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Valuation Grade: 5/5

We have valued KPL based on the discounted cash flow (DCF) method. Based on

this method, we arrived at a fair value of Rs 40 per share. At the current market

price of Rs 31 per share (December 29, 2010), the stock trades at P/E multiples

of 5.0x and 3.1x its estimated FY11 and FY12 EPS of Rs 6 and Rs 10,respectively. The fair value of Rs 40 gives implied P/E multiples of 6.5x and 4.0x

FY11 and FY12 earnings, respectively. We initiate coverage on the company with

a valuation grade of 5/5, indicating that the market price has strong upside to

our fair value.

Key assumptions to our valuation

We have made explicit forecasts from FY12 to FY16. We have assumed cost of equity of 18.8%, considering its undiversified

business, liquidity in the stock market and leverage.

We have taken terminal growth rate of 3% beyond the explicit forecastperiod.

Table 7: Sensitivity analysis of terminal WACC and terminalgrowth rate

Terminal growth rate

Ter

minalWACC

1.0% 2.0% 3.0% 4.0% 5.0%

11.4% 48 61 78 99 127

12.4% 33 44 57 73 93

13.4% 21 30 40 53 68

14.4% 12 19 27 37 4915.4% 3 9 16 24 33


Figure 13: One-year forward P/E band Figure 14: One-year forward EV/EBITDA band

Source: BSE, Company, CRISIL Equit ies Source: BSE, Company, CRISIL Equit ies

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Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

(Rs mn)

EV 3x 4x 5x

We assign a fair value of Rs 40per share and initiatecoverage with a valuationgrade of 5/5


17/22



Figure 15: P/E premium / discount to NIFTY Figure 16: P/E movement

Source: NSE/BSE, Company, CRISIL Equit ies Source: NSE/BSE, Company, CRISIL Equit ies

Peer valuation indicators

Companies M.cap Price/Earnings (x) EPS (Rs) RoE (%)(Rs mn) FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Kanpur Plastipack 164 6.4 5.0 3.1 4.8 6.2 10.0 15.2 17.2 23.5

Jumbo Bags 336 41 14.5 9.4 0.9 2.4 3.7 10.3 14.7 15

Source: CRISIL Equities

-90%

-85%

-80%

-75%

-70%

-65%

-60%

-55%

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Premium/Discount to NIFTY MEDIAN

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

1yr Fwd PE (x) MEDIAN PE

+1 std dev

-1 std dev


18/22



Company Overview

Kanpur Plastipack Ltd started in 1971 as a small SSI unit manufacturing PP

woven sacks and over the years graduated to manufacturing FIBCs. It became a

public limited company in December 1985. The promulgation of Jute Packaging

Order by the Government of India pushed KPL into exports in 1986 to generate

revenues. Subsequent to the order, HDPE woven sacks which were being

marketed for packing industrial products (fertiliser and cement) got drastically

affected which led to losses and the company became sick. The company was

referred to BIFR and was sanctioned a rehabilitation scheme by BIFR in 1992.

KPL got de-registered from BIFR in 2000.

KPLs revenues are generated from FIBC/PP/HDPE woven sacks and from beingan IOCL stockist. KPL began manufacturing FIBCs in 2000. KPL increased its

capacity in FY08 to 10,000 tonnes from 6,000 tonnes. Export markets contribute

65% to overall revenues as of FY10 and the balance is contributed by the

domestic market. Spain, Italy, Germany, UK and France are among its major

export markets. In the domestic market, it caters to the fertiliser and cement

industries.

KPL is mainly in the production of industrial packaging products which can

handle capacities ranging from 25 kgs to 2,500 kgs. Its manufacturing facilities

are located in Kanpur- two in the Panki industrial area and one at Udyog Kunj.

Production of FIBCs involves the conversion of PP granules to flat tapes that are

later woven into fabric, cut to size, printed and stitched for use. KPL has an

installed capacity of 10,000 tonnes per annum as on FY10.

Exports comprise 65% of its total manufacturing and the rest is sold in the

domestic market. The PP/HDPE woven sacks are used for packing fertiliser and

cement in the domestic markets. In export markets, they are used for packing

sugar, textile fibre and chemicals.

Figure 17 : Revenue break-up of domestic and

exports as of FY10

Figure 18 : Revenue break-up in domestic and

exports as of FY10


KPL is the stockist for IOCLs polymer products and represents IOCL in Kanpur

and western UP. KPL receives a commission ~Rs400/tonne for the products sold.

Domestic, 35%

Exports, 65%

5.0%

87.8%

95.0%

12.2%

0%

20%

40%

60%

80%

100%

Domestic Exports

FIBC Non FIBC

Rs 328 mn Rs 66 8mn

As of October 2010, KPLstotal manufacturingcapacity stands at 10,000


19/22



Annexure: Financials

Source: Company, CRISIL Estimates

Income statement Balance Sheet

(Rs mn) FY08 FY09 FY10 FY11E FY12E (Rs mn) FY08 FY09 FY10 FY11E FY12E

Operating income 745 1,014 991 1,137 1,536 Liabilities

EBITDA 64 113 87 100 142 Equity share capital 53 53 53 53 53

EBITDA margin 8.6% 11.1% 8.8% 8.8% 9.2% Reserves 89 104 125 151 192

Depreciation 12 16 15 16 23 Minorities - - - - -

EBIT 52 97 72 84 119 Net worth 142 157 179 204 245

Interest 24 68 33 35 39 Convertible debt - - - - -

Operating PBT 28 29 39 49 79 Other debt 282 313 351 435 538

Other income 0 (0) 1 1 1 Total debt 282 313 351 435 538

Exceptional inc/(exp) (0) (0) 2 - - Deferred tax liability (net) 16 17 20 20 20

PBT 28 28 41 50 81 Total liabilities 440 488 550 659 803

Tax provision 10 10 14 17 28 Assets

Minority interest - - - - - Net fixed assets 262 259 274 341 414

PAT (reported) 18 19 27 33 53 Capital WIP - - 4 24 13

Less: Exceptionals (0) (0) 2 - - Total fixed assets 262 259 278 365 426

Adjusted PAT 18 19 26 33 53 Investments 3 3 3 3 3

Current assets

Ratios Inventory 109 127 178 181 223

FY08 FY09 FY10 FY11E FY12E Sundry debtors 116 139 127 145 199

Growth Loans and advances 37 28 33 44 60

Operating income (%) 13.7 36.1 (2.3) 14.7 35.1 Cash & bank balance 4 8 8 8 10

EBITDA (%) 48.1 75.4 (22.7) 15.0 41.3 Marketable securities - - - - -

Adj PAT (%) 26.2 3.3 34.5 29.0 60.6 Total current assets 266 303 345 379 492

Adj EPS (%) (15.8) 3.3 34.5 29.0 60.6 Total current liabilities 90 77 76 87 117

Net current assets 176 226 269 292 374

Profitability Intangibles/misc. expenditure - 0 0 0 0

EBITDA margin (%) 8.6 11.1 8.8 8.8 9.2 Total assets 440 488 550 659 803

Adj PAT margin (%) 2.5 1.9 2.6 2.9 3.4

RoE (%) 15.3 12.6 15.2 17.2 23.5 Cash flow

RoCE (%) 14.4 21.6 14.3 14.4 16.7 (Rs mn) FY08 FY09 FY10 FY11E FY12E

RoIC (%) 12.0 19.8 12.0 11.9 13.4 Pre-tax profit 28 28 40 50 81

Total tax paid (3) (8) (11) (17) (28)

Valuations Depreciation 12 16 15 16 23

Price-earnings (x) 28.1 9.1 6.4 5.0 3.1 Working capital changes (25) (46) (44) (22) (81)

Price-book (x) 3.6 1.1 0.9 0.8 0.7 Net cash from operations 11 (9) 0 27 (5)

EV/EBITDA (x) 12.3 4.2 5.8 5.9 4.9 Cash from investments

EV/sales (x) 1.1 0.5 0.5 0.5 0.5 Capital expenditure (116) (13) (35) (103) (84)

Dividend payout ratio (%) 33.9 20.0 22.8 18.8 20.1 Investments and others (3) - - - -

Dividend yield (%) 1.2 2.2 3.8 3.8 6.5 Net cash from investments (119) (13) (35) (103) (84)

Cash from financing

B/S ratios Equity raised/(repaid) 35 - - - -

Inventory days 62 55 76 68 62 Debt raised/(repaid) 77 31 39 84 103

Creditors days 38 23 21 21 21 Dividend (incl. tax) (6) (4) (6) (7) (12)

Debtor days 54 48 45 45 46 Others (incl extraordinaries) (2) (0) 2 - -

Working capital days 78 70 88 87 77 Net cash from financing 105 27 34 76 91

G ross asset turnover ( x) 2.9 2.9 2.7 2.7 3.0 Change in cash position (3) 4 (1) 1 2

Net asset turnover (x) 4.2 3.9 3.7 3.7 4.1 Closing cash 4 8 8 8 10

Sales/operating assets (x) 3.5 3.9 3.7 3.5 3.9

Current ratio (x) 2.9 3.9 4.5 4.3 4.2 Quarterly financials

Debt-equity (x) 2.0 2.0 2.0 2.1 2.2 (Rs mn) Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11

Net debt/equity (x) 2.0 1.9 1.9 2.1 2.2 Net sales 278 264 276 275 279

Interest coverage 2.2 1.4 2.2 2.4 3.0 Change (q-o-q) 32% -5% 5% 0% 1%

EBITDA 27 25 19 19 27

Per share Change (q-o-q) 37% -9% -22% 1% 40%

FY08 FY09 FY10 FY11E FY12E EBITDA margin 9.7% 9.3% 6.9% 7.0% 9.7%

Adj EPS (Rs) 3.5 3.6 4.8 6.2 10.0 PAT 10 15 (4) 5 13

CEPS 5.8 6.6 7.7 9.3 14.2 Adj PAT 10 2 (4) 5 13

Book value 26.8 29.7 33.7 38.5 46.1 Change (q-o-q) 88% -84% -391% -215% 162%

Dividend (Rs) 1.2 0.7 1.2 1.2 2.0 Adj PAT margin 3.4% 0.6% -1.6% 1.8% 4.8%

Actual o/s shares (mn) 5.3 5.3 5.3 5.3 5.3 Adj EPS 1.8 2.8 NM 1.0 2.5


20/22



Focus Charts

Revenue mix of KPLs revenues Sales trend increasing y-o-y

Source: CRISIL Research Source: Company, CRISIL Equit ies

EBITDA and PAT margins increasing trend RoCE and RoE on an upward trend

Source: Company, CRISIL Equit ies Source: CRISIL Equit ies

Stock price movement and traded volumes Shareholding pattern


28%38%

33% 35%

59%

56%57% 57%

13%7% 10% 8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY07 FY08 FY09 FY10

Plastic Products- Domestic FIBC Export sales Non-FIBC Exports sales

726

1,008

986

1,133

1,53014

36

-2

15

35

-5

0

5

10

15

20

25

30

35

40

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800


(%)(Rs mn)

Net Sales YoY Growth [RHS]

8.6

11.1

8.8 8.89.2

2.5

1.9

2.62.9

3.4

0

2

4

6

8

10

12

14


EBIDTA % PAT %

14.4

21.6

14.3 14.4

16.7

15.3

12.6

15.2

17.2

23.5

0

5

10

15

20

25


Return on Capital Employed (RoCE) (%)

0

50000

100000

150000

200000

250000

0

5

10

15

20

25

30

35

40

45

50

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Traded Quantity Share Price (LHS)

69.2% 69.2% 69.2% 69.2%

0.0% 0.0% 0.0% 0.0%0.0% 0.0% 0.0% 0.0%

30.8% 30.8% 30.8% 30.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-09 Mar-10 Jun-10 Sep-10

Promoter FII DII Others


21/22

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The Equity Group at CRISIL Research provides a wide range of services including:

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22/22

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Documents

CRISIL Research Ier Report Kanpur Plasticpack