The company has large capacities and global ambitions

Jindal Poly Films (JPFL), the largest manufacturer of flexible packaging films in India, is coming out with a public issue for expanding capacities and improving liquidity of its shares. The company manufactures and sells biaxially-oriented polyethylene terephthalate (BOPET) films, biaxially- oriented polypropylene (BOPP) films, metallised films and coated films in the films segment. It also manufactures and sells partially-oriented yarn (POY) and manufactures polyester chips for captive consumption. JPFL’s films are used in labels, adhesive tapes, food packaging and wrapping for tobacco, consumer and textile products. BOPET films (including metallised films), BOPP films and polyester yarn and other products accounted for around 61%, 12% and 27% of its total sales in the nine months period ended December 2004.

JPFL acquired Rexor S.A.S. a French company, in November 2003 and gained access to a broad range of advanced metallised and coated film technologies.

The subsidiaries of JPFL are Jindal France S.A.S., Rexor S.A. and Hindustan Polyester. Hindustan Polyester is yet to commence production. Jindal France S.A.S. is the holding company of Rexor S.A.S. and its main income stream is the receipt of dividend.

JPFL is to expand its production capacity at Nasik and Khanvel to capitalise on the opportunity in flexible packaging industry. The current capacity for BOPET is 86000 tpa including the recent capacity expansion of 25000 tpa from which production commenced in March 2005. JPFL plans to expand BOPET film capacity by 82% and BOPP film capacity by 100% from the FY 2004 capacity levels. The company plans to raise Rs 300 crore from the market for funding its Rs 650 crore expansion plans. Expansion will be completed in phases by September 2006.

On 1 February 2005, German financial institution Deutsche Investitions – und Entwicklungsgesellschaft mbh (DEG acquired 1,300,000 equity shares on a preferential allotment made by the company at Rs 360 per share. The closing price of JPFL in BSE on 1 February 2005 was Rs 497.50 per share. Subsequently, 5,72,000 equity shares were allotted to DEG on conversion of preference shares purchased from the promoters by DEG. The price at which the preference shares were transferred to DEG by the promoters is not available. DEG approximately holds 9.5% of the pre-issue equity capital.

JPFL has entered an agreement with DEG to increase the free float to at least 28% through a primary issue to the general public within 18 months of DEG’s subscription.

Strengths

JPFL is the largest manufacturer of packaging films in India and has the fifth largest BOPET film manufacturing capacity in the world. The demand for BOPET in India is expected to grow around 14% for the next three years and the demand for BOPP is expected to be robust.

JFPL’s marketing network encompasses over 40 countries, covering a majority of the world market for BOPET film. JFPL is one of the largest exporters of BOPET films from India. It enjoys the advantage of being the only producer of BOPET films not subject to anti-dumping duties on BOPET films to EU

Its acquisition of Rexor in France has given it capabilities to offer a full range of thin and thick BOPET films and BOPP film products required by large flexible packaging converters and end-users.

Sales of JFPL have grown 18% CAGR, from Rs 307.8 crore in FY 2000 to Rs 702.99 crore in FY2005. The net profit has zoomed 56.8% CAGR, from Rs 8 crore in FY 2000 to Rs 75.82 crore in FY 2005. The interest liability is reducing on a regular basis. From Rs 19.8 crore in FY2000, to Rs 8.88 crore in FY2005, with a fall in all the years.

Sales of Rexor S.A., a 100% subsidiary of Jindal France S.A.S., more than doubled to 18140245 euros in the nine months compared to the full-year sales of 8459785 euros in FY 2004. Profit for this period more than quadrupled from 69134 euros to 299541 euros.

Weaknesses

The raw materials for JPFL’s business is crude oil-based goods like dimethyl terephthalate, mono-ethylene glycol, purified terephthalic acid and polypropylene homopolymers and copolymers. The prices of these materials are influenced by crude oil price movements.

The flexible packaging industry is witnessing capacity additions at a faster pace, whereas the demand is not catching up. As a result, the global capacity utilisation is around 70% only. There is a heavy capacity expansion in China, with utilisation rate of around 50%. Even though exports from China have not gone up substantially compared to its capacity, dumping by Chinese companies in future is not ruled out.

JFPL focuses more on export sales. As a result, cost of distribution and marketing is continuously rising, enhancing the foreign exchange risk of the company.

Valuation

The offer price band of Rs 360 – Rs 400 per share looks reasonable given that the current market price is hovering around Rs 500 per share. The price was around Rs 500 in the last six months. EPS for FY 2005 stood at Rs 27.0- Rs 27.8 on post-public issue equity of Rs 27.26-28.09 crore. P/E works out to 13-14 times. The book value of the company, as on 31^t March 2005, was Rs 213.37 per share. The product range of JPFL does not fully match that of other companies. But Cosmo Films, Flex Industries, Garware Polyester and Polyplex Corporation are the nearest comparable ones. All these companies had reported poor results in FY 2005 due to high raw material costs (JPFL’s results were surprisingly favourable, going against the industry trend) and are trading in the P/E range of 4 to 15 times.