Plastene India IPO Review by KM Global (Avoid)

Review By K.M. Global Financial Services Ltd on May 15, 2012

Issue Period: May 9th-15th
Price Band (Rs): 81-84
Issue Size (Rs Cr): 75 - 77
Mcap (Rs Cr): 268 - 275
Grading (1 to 5): Grade 3
Promoter: Prakash H. Parekh
Listing: NSE, BSE
Grey Market: Discount
BRLM: Motilal Oswal

Plastene India Limited, incorporated in, 1998, was involved in importing plastic scrap and reprocessing it to manufacture agglomerates which were sold to various plastic manufacturers. In 2005, the company ventured into the manufacturing of woven sacks and woven fabrics for servicing the domestic salt, cement and fertilizer industries.

The company gradually expanded its product portfolio and started manufacturing FIBC (Flexible Intermediate Bulk Containers), flexible packaging, tarpaulin, multifilament yarn and master batch. In 2007, the company opened its second manufacturing unit in Rajpur village, Gujarat, to primarily manufacture woven bags and FIBC. Currently, the annual manufacturing capacity is 56,200 metric tons, of which 1,200 metric tons was added in FY 2012. The funds will be used for capacity expansion at Nani Chirai & Rajpur and should be completed by April 2013.

Concerns

Low Profit Margins - Plastene faces stiff competition from other packaging companies. This is reflected in the PAT margins which have typically ranged from 2 to 4%. Raw material and currency movements add to margin volatility.
Clients facing economic slowdown -The companies' key clients are in the fertilizer and cement industries. These are vulnerable to a slowdown in government spending and an economic slowdown.
Listed peers trading at a cheaper valuation - Plastene's peers in the packaging industry are trading at P/E below 5 while Plastene will be listed at a ratio of over 8 times earnings
Labour intensive business - The firm employed over 1,800 people and remains vulnerable to rising wage inflation

Industry Overview

The Indian Packaging industry is growing at the rate of 22-25 per cent per annum. In the next five years, the sector is expected to triple to around $ 60 bn.
More than 80 percent of the total packaging in India constitutes rigid packaging. The remaining 20 percent comprises flexible packaging.

Plastene's Operations:

Client List: Plastene's customers include some of India's leading players in cement, fertilizers, salt, edible oil, food grains, sugar and rice industry: Indian Oil, Tata Chemicals Limited, Ultratech Cement, Flexicon.
Export growth a positive: Currently, Plastene exports to more than 30 countries and derived approximately 49% sales from international market.
Wide Range of Products: A diverse product portfolio comprising of FIBCs, woven sacks, BoPP laminated bags, tarpaulin, woven fabric, sulzer fabric and other products largely used for captive consumption
Experienced Management: The promoter of the company and his team have been in the packaging business for over 14 years and have grown significantly in size and scale.
Future Strategy: Intends to introduce new products like container liners, conductive bags, block bottom valve bags and food grade Jumbo bags.

Conclusion / Investment Strategy

We recommend that investors avoid subscribing to the IPO of Plastene India as the underlying business of the company is volatile and the stock has been valued above its listed peers.

Reviewer recommends Avoid to the issue.