Kanpur Plastipack Ltd

Initiating coverage

Enhancing investment decisions

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).

CRISIL Fundamental Grade

5/5 4/5 3/5 2/5 1/5

Assessment
Excellent fundamentals Superior fundamentals Good fundamentals Moderate fundamentals Poor fundamentals

CRISIL Valuation Grade

5/5 4/5 3/5 2/5 1/5

Assessment
Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP)

Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company.

Disclaimer:
This Company-commissioned Report (Report) is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / Report are subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assumes the entire risk of any use made of this data / Report. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person especially outside India or published or copied in whole or in part, for any purpose.

Polaris Software Limited Kanpur Business momentum Plastipack remains intact Limited
Capacity expansion and backward integration to drive growth
Fundamental Grade Valuation Valuation Grade Grade Industry Industry 2/5 (Strong (moderate fundamentals) 4/5 fundamentals) 5/5 (CMP (Strong upside from CMP) 5/5 has strong upside) Bulk packaging Information technology

December 29, 2010

Fair Value Rs 40 CMP Rs 31

CFV MATRIX CHANGE

Excellent Fundamentals

Fundamental Grade

5 4 3 2 1

Kanpur Plastipack Ltd (KPL) manufactures flexible intermediate bulk containers (FIBCs), which are used in bulk packaging, and PP/HDPE woven sacks. It also earns 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. Project 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 multifilament 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 4) Inadequate supply of power from the grid impacts cost. 5) delays could affect earnings. 6) Foreign exchange execution

Poor Fundamentals

Valuation Grade
Strong Downside Strong Upside

KEY STOCK STATISTICS

NIFTY / SENSEX BSE/NSE ticker Face value (Rs per share) Shares outstanding (mn) Market cap (Rs mn)/(US$ mn) Enterprise value (Rs mn)/(US$ mn) 52-week range (Rs) (H/L) Beta Free float (%) Avg daily volumes (30-days) Avg daily value (30-days) (Rs mn) 6060/20256 KANPRPLA 10 5 164/4 591/13 49 /17 0.5 33% 17,480 0.7

SHAREHOLDING PATTERN
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Dec-09 Promoter Mar-10 FII Jun-10 DII Sep-10 Others 69.2% 69.2% 69.2% 69.2% 30.8% 0.0% 30.8% 0.0% 30.8% 0.0% 30.8% 0.0%

KEY FORECAST
(Rs mn) Operating income EBITDA Adj Net income EPS-Rs EPS growth (%) PE (x) P/BV (x) RoCE (%) RoE (%) EV/EBITDA (x) FY08 745 64 18 3.5 (15.5) 28.1 3.6 14.4 15.3 12.3 FY09 1,014 113 19 3.6 1.6 9.1 1.1 21.6 12.6 4.2 FY10 991 87 26 4.8 45.6 9.4 1.3 14.3 15.2 6.7 FY11E 1,137 100 33 6.2 21.3 7.3 1.2 14.4 17.2 6.6 FY12E 1,536 142 53 10.0 60.6 4.5 1.0 16.7 23.5 5.4

PERFORMANCE VIS--VIS MARKET

Returns 1-m Kanpur Plastipack NIFTY -4% 4% 3-m 14% -1% 6-m 12-m 17% 12% 74% 15%

ANALYTICAL CONTACT
Sudhir Nair (Head, Equities) Arun Vasu Rabindra Basu Client servicing desk +91 22 3342 3561 clientservicing@crisil.com snair@crisil.com avasu@crisil.com rbasu@crisil.com

Source: Co mpan y, CRISIL Equ ities estimate NM: Not meaningful; CMP: Current Market Price

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Kanpur Plastipack Limited

Table 1: Kanpur Plastipack: Business environment
Products Product / service offering FIBCs/non-FIBCs* FIBCs Bags used in bulk packaging (67% of sales) PP/HDPE woven sacks - sacks supplied to cement and fertiliser manufacturers in the domestic market, and for sugar ,fibre packing and chemicals in the exports market (33% of sales) DCA/CS* for IOCL Exports vs. domestic mix (FY10) Exports vs. domestic mix (FY12) Geographic presence Market position End market and top clients Exports-65% & Domestic-35% Exports-70% & Domestic-30% Domestic northern and western markets Export markets: UK, Germany, Italy, France, Spain and the US The industry is fragmented with around 25 FIBC manufacturers KPL has a total capacity of 10,000 MT. Domestic market: Sacks- cement and fertiliser manufacturers, FIBC- petrochemicals, carbon black, chemicals, minerals, etc. Export market: FIBCs to wholesale distributors Key competitors Future plans Sales growth (FY08-FY10 2-yr CAGR) Sales forecast (FY10-FY12 2-yr CAGR) Demand drivers Jai Corp, Jumbo Bags, Neo Corp International, Flexituff and Shankar Packaging Manufacturing multi-filament yarn (MFY) 16.5% 24.5% 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: Co mpan y, CRISIL Equ ities

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

Packaging industry $500bn

Flexible packaging $65bn Flexible bulk packaging $18b FIBCs $3bn

Sou rce: Ind ian Fl ex ib le Bu lk Cont aine r Associat ion (I FI BCA)

CRISIL EQUITIES | 2

Kanpur Plastipack Limited

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 comparison
Kanpur Plastipack FY08 Capacity Capacity Utilisations Realisations(Rs/Kg) EBIDTA EBIDTA % 10000 72% 110.9 64 9% FY09 10000 87% 118.8 113 11% FY10 10000 95% 113.2 87 9% Jumbo Bags FY08 6070 81% 105.6 60 11% FY09 6070 88% 120 66 9% FY10 6070 67% 123 49 8%

Burgeoning global demand for FIBCs good for Indian manufacturers

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

Net exports Country (Mn bags) Strengths China 40 Price advantage Weakness Lack of consistency in supply quantity and quality Lack of familiarity with English India 50 Consistent supply and quality Cheaper (except China) Language (English) Turkey 65 Proximity to EU market Price vis--vis China Cost inflation leading to erosion of price competitiveness

Figure 3:Net importing and exporting countries

(mn bags) 80 60 40 20 0 -20 -40 -60 -80 Americas Europe China Middle east Australia India Export Turkey Africa

Import

Sou rce: Ind ian Fl ex ib le Bu lk Cont aine r Sou rc e: Indus tr y, C RI SI L Equ it ies Associ at ion ( I FI BCA)

CRISIL EQUITIES | 3

Kanpur Plastipack Limited

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 twothirds 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.

Italy, Germany and Spain account for 7080% of KPLs export revenues

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

(Rs mn) 700 600 500 400 300 200 100 0 FY06 FY07 Export FIBC 238 96 86 54 FY08 111 FY09 Export Non FIBC 82 FY10 404 437 599 586

Sou rc e: Com pan y, CR I SIL Equ it ies

FIBCs gaining preference in the domestic market as well

Currently, FIBC sale in India is estimated to be 7-10 mn bags per annum ~2% or 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.

FIBCs sold in India are estimated at 7-10 mn bags per annum

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Kanpur Plastipack Limited

Figure 5:Minerals and petrochemicals have highest share in domestic FIBC use
Chemicals, 22% Agro Products, 2% Carbon Black, 16%

Petro Chemicals, 28% Minerals, 32%

Sou rce: I FI BCA

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:

KPL to benefit from the increasing acceptance of FIBCs

FIBCs made from HDPE/PP are much lighter and save almost three to five times of packaging material. The lower material weight saves significant amount of energy during the manufacture 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 to add 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.

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Kanpur Plastipack Limited

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 purchase of 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.

CRISIL EQUITIES | 6

Kanpur Plastipack Limited

Key Negatives
No price advantage due to undifferentiated nature of 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 on the 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

71% 70% 70% 69% 68% 67% 66% 65% 64% FY06 FY07 FY08 FY09 FY10 EBIDTA % 69% 68% 9% 7% 67% Inc in power & other manuf cost 66% 11% 9% 10% 12%

8%

6%

5%

4%

2%

0%

Raw material % to sales

Sou rc e: Com pan y, CRI SI L E qui ties

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.

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Kanpur Plastipack Limited

Figure 7:Freight as a % of sales KPL vs Jumbo Bags
8% 7% 6% 5% 4% 3% 2% 1% 0% 1 2 Kanpur Plastipack 3 4 Jumbo Bags 5 3% 5% 4% 3% 7% 6% 6% 4% 7%

3%

Sou rc e: Com pan y, CRI SI L E qui ties

Power availability
Uttar 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 Purchased units Own generation units Rate of purchased Units Rate of own units Power as % to sales FY06 87.0% 13.0% 3.82 7.4 6.2% FY07 88.5% 11.5% 3.80 10.26 5.1% FY08 85.8% 14.2% 3.95 7.19 4.8% FY09 84.8% 15.2% 4.05 5.83 4.8% FY10 73.0% 27.0% 4.13 6.35 5.9%

Source: Co mpan y, CRISIL Equ ities 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.

CRISIL EQUITIES | 8

Kanpur Plastipack Limited

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 PBT
Rs mn PBT Foreign exchange(gain)/loss % to PBT FY07 22.3 -3.1 -13.8 FY08 28.1 -0.5 -1.8 FY09 28.5 39.1 137.1 FY10 39.7 -0.4 -0.9

Source: Co mpan y, CRISIL Equ ities

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Kanpur Plastipack Limited

Financial Outlook
Demand to boost KPLs revenues over the next two years
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.

We expect revenues to see a two-year CAGR of 24.5%

Figure 8: Revenue mix of KPLs revenues

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY07 Plastic Products- Domestic FY08 FY09 FY10 Non-FIBC Exports sales 28% 38% 33% 35% 59% 56% 57% 13% 7% 10% 8%

Figure 9:Sales trend Rs in mn

(Rs mn)
1,800 1,600 1,400 36 35

(%)
40 35 30 25 15 986 1,008 726 -2 1,133 1,530 20 15 10 5 0 -5 FY08 FY09 Net Sales FY10 FY11E FY12E

57%

1,200 1,000 800 600 400 200 0 14

FIBC Export sales

YoY Growth [RHS]

Sou rc e: Com pan y, CR I SIL Equ it ies

Sou rc e: Com pan y, CR I SIL Equ it ies

EBITDA margins to remain 8-9% in the next two years

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.

EBIDTA to increase from Rs 87 mn in FY10 to Rs 142 mn in FY12

Figure 10: EBITDA and EBITDA margins RHS

(Rs mn)
160 140 120 100 80 60 40 20 64 0 FY08 FY09 EBIDTA FY10 FY11E EBIDTA [RHS] FY12E 113 87 100 142 0 2 8.6 8.8 8.8 11.1

(%)
12

9.2

10 8 6

Sou rc e: Com pan y, CR I SIL Equ it ies

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Kanpur Plastipack Limited

PAT to grow at a CAGR of ~43.9%; EPS to increase from 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.

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

Figure 11: EPS and PAT margins

(Rs)
12 3.4 10 2.5 1.9 10 4 6 2 3 4 5 2.6 3.5 2.9 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY08 FY09 EPS FY10 FY11E PAT [RHS] FY12E

(%)
4.0

Sou rc e: Com pan y, CR I SIL Equ it ies

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

25 21.6 20 15.3 15 14.4 10 12.6 14.3 14.4 15.2 16.7 23.5

17.2

0 FY08 FY09 FY10 FY11E FY12E

Return on Capital Employed (RoCE) (% )

Return on equity (RoE) (%)

Sou rc e: Com pan y, CR I SIL Equ it ies

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Kanpur Plastipack Limited

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

Decision making lies largely with the family

(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 the woven 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.

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Kanpur Plastipack Limited

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 the quality 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 corporate governance practices are adequate and meet the minimum required levels

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Kanpur Plastipack Limited

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.

We assign a fair value of Rs 40 per share and initiate coverage with a valuation grade of 5/5

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 forecast period.

Table 7: Sensitivity analysis of terminal WACC and terminal growth rate

Terminal growth rate Terminal WACC 1.0% 11.4% 12.4% 13.4% 14.4% 15.4% 48 33 21 12 3 2.0% 61 44 30 19 9 3.0% 78 57 40 27 16 4.0% 99 73 53 37 24 5.0% 127 93 68 49 33

Source: Co mpan y, CRISIL Equ ities

Figure 13: One-year forward P/E band

(Rs) 60 50 40 30 20 10 0

Figure 14: One-year forward EV/EBITDA band

(Rs mn) 600 550 500 450 400 350 300 250 200 150 100

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Kanpur Plastipack

3x

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EV

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5x

Sou rc e: B SE, Co mpan y, C RI SI L Equ it ies

Sou rc e: B SE, Co mpan y, C RI SI L Equ it ies

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Nov-10

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Kanpur Plastipack Limited

Figure 15: P/E premium / discount to NIFTY
-55% -60% -65% -70% -75% -80% -85% -90%
Jan-08 Jan-09 Jan-10 Nov-07 Nov-08 Nov-09 May-07 May-09 May-10 May-08 Sep-07 Sep-08 Sep-09 Nov-10 Mar-08 Mar-07 Mar-09 Mar-10 Jul-07 Jul-08 Jul-09 Jul-10 Sep-10

Figure 16: P/E movement

10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0
Jan-08 Jan-09 Nov-07 Nov-08 Nov-09 Jan-10 May-07 May-09 May-10 May-08 Nov-10 Mar-07 Mar-08 Mar-09 Mar-10 Jul-07 Jul-08 Jul-09 Sep-07 Sep-08 Sep-09 Jul-10 Sep-10

+1 std dev

-1 std dev

Premium/Discount to NIFTY

MEDIAN

1yr Fwd PE (x)

MEDIAN PE

Sou rc e: N SE/ BSE , Co mp an y, CRI SI L E qui ties

Sou rc e: N SE/ BSE , Co mp an y, CRI SI L E qui ties

Peer valuation indicators

Companies Kanpur Plastipack Jumbo Bags M.cap (Rs mn) 164 336 Price/Earnings (x) FY10 6.4 41 FY11E 5.0 14.5 FY12E 3.1 9.4 FY10 4.8 0.9 EPS (Rs) FY11E 6.2 2.4 FY12E 10.0 3.7 FY10 15.2 10.3 RoE (%) FY11E 17.2 14.7 FY12E 23.5 15

Source: CRISIL Equities

CRISIL EQUITIES | 15

Kanpur Plastipack Limited

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 being an 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.

As of October 2010, KPLs total manufacturing capacity stands at 10,000

Figure 17 : Revenue break-up of domestic and exports as of FY10

Domestic, 35 %

Figure 18 : Revenue break-up in domestic and exports as of FY10

100% Rs 328 mn Rs 66 8mn 12.2% 80%

60% 95.0% 40% Exports, 65% 87.8%

20% 5.0% Domestic FIBC Exports Non FIBC

0%

Sou rc e: Com pan y, CR I SIL Equ it ies

Sou rc e: Com pan y, CR I SIL Equ it ies

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. CRISIL EQUITIES | 16

Kanpur Plastipack Limited

Annexure: Financials
Income statement (Rs mn) Operating income EBITDA EBITDA margin Depreciation EBIT Interest Operating PBT Other income Exceptional inc/(exp) PBT Tax provision Minority interest PAT (reported) Less: Exceptionals Adjusted PAT Ratios F Y08 Growth Operating income (%) EBITDA (%) Adj PAT (%) Adj EPS (%) Profitability EBITDA margin (%) Adj PAT margin (%) RoE (%) RoC E (%) RoIC (%) Valuations Price-earnings (x) Price-book (x) EV/EBITDA (x) EV/sales (x) Dividend payout ratio (%) Dividend yield (%) B/S ratios Inventory days C reditors days Debtor days Working capital days Gross asset turnover (x) Net asset turnover (x) Sales/operating assets (x) C urrent ratio (x) Debt-equity (x) Net debt/equity (x) Interest coverage Per share F Y08 Adj EPS (Rs) C EPS Book value Dividend (Rs) Actual o/s shares (mn) 3.5 5.8 26.8 1.2 5.3 FY09 3.6 6.6 29.7 0.7 5.3 FY10 4.8 7.7 33.7 1.2 5.3 FY11E 6.2 9.3 38.5 1.2 5.3 FY12E 10.0 14.2 46.1 2.0 5.3 62 38 54 78 2.9 4.2 3.5 2.9 2.0 2.0 2.2 55 23 48 70 2.9 3.9 3.9 3.9 2.0 1.9 1.4 76 21 45 88 2.7 3.7 3.7 4.5 2.0 1.9 2.2 68 21 45 87 2.7 3.7 3.5 4.3 2.1 2.1 2.4 62 21 46 77 3.0 4.1 3.9 4.2 2.2 2.2 3.0 Quarterly financials (Rs mn) Net sales C hange (q-o-q) EBITDA C hange (q-o-q) EBITDA margin PAT Adj PAT C hange (q-o-q) Adj PAT margin Adj EPS Q2FY10 Q3FY10 Q4F Y10 Q1FY11 Q2FY11 278 32% 27 37% 9.7% 10 10 88% 3.4% 1.8 264 -5% 25 -9% 9.3% 15 2 -84% 0.6% 2.8 276 5% 19 -22% 6.9% (4) (4) -391% -1.6% NM 275 0% 19 1% 7.0% 5 5 -215% 1.8% 1.0 279 1% 27 40% 9.7% 13 13 162% 4.8% 2.5 28.1 3.6 12.3 1.1 33.9 1.2 9.1 1.1 4.2 0.5 20.0 2.2 6.4 0.9 5.8 0.5 22.8 3.8 5.0 0.8 5.9 0.5 18.8 3.8 3.1 0.7 4.9 0.5 20.1 6.5 8.6 2.5 15.3 14.4 12.0 11.1 1.9 12.6 21.6 19.8 8.8 2.6 15.2 14.3 12.0 8.8 2.9 17.2 14.4 11.9 9.2 3.4 23.5 16.7 13.4 Cash flow (Rs mn) Pre-tax profit Total tax paid Depreciation Working capital changes Net cash from operations Cash from investments C apital expenditure Investments and others Net cash from investments Cash from financing Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Others (incl extraordinaries) Net cash from financing C hange in cash position C losing cash 35 77 (6) (2) 105 (3) 4 31 (4) (0) 27 4 8 39 (6) 2 34 (1) 8 76 1 8 84 (7) 103 (12) 91 2 10 (116) (3) (119) (13) (13) (35) (35) (103) (103) (84) (84) FY08 28 (3) 12 (25) 11 FY09 28 (8) 16 (46) (9) F Y10 40 (11) 15 (44) 0 FY11E 50 (17) 16 (22) 27 FY12E 81 (28) 23 (81) (5) 13.7 48.1 26.2 (15.8) 36.1 75.4 3.3 3.3 (2.3) (22.7) 34.5 34.5 14.7 15.0 29.0 29.0 35.1 41.3 60.6 60.6 FY09 FY10 FY11E FY12E F Y08 745 64 8.6% 12 52 24 28 0 (0) 28 10 18 (0) 18 FY09 1,014 113 11.1% 16 97 68 29 (0) (0) 28 10 19 (0) 19 FY10 991 87 8.8% 15 72 33 39 1 2 41 14 27 2 26 50 17 33 33 FY11E 1,137 100 8.8% 16 84 35 49 1 81 28 53 53 FY12E 1,536 142 9.2% 23 119 39 79 1 Balance Sheet (Rs mn) Liabilities Equity share capital Reserves Minorities Net worth C onvertible debt Other debt Total debt Deferred tax liability (net) Total liabilities Assets Net fixed assets C apital WIP Total fixed assets Investments Current assets Inventory Sundry debtors Loans and advances C ash & bank balance Marketable securities Total current assets Total current liabilities Net current assets Intangibles/misc. expenditure Total assets 266 90 176 440 262 262 3 109 116 37 4 303 77 226 0 488 259 259 3 127 139 28 8 345 76 269 0 550 274 4 278 3 178 127 33 8 379 87 292 0 659 341 24 365 3 181 145 44 8 492 117 374 0 803 414 13 426 3 223 199 60 10 142 282 282 16 440 53 89 53 104 157 313 313 17 488 53 125 179 351 351 20 550 53 151 204 435 435 20 659 53 192 245 538 538 20 803 FY08 FY09 F Y10 FY11E FY12E

Source: Co mpan y, CRISIL Estimates

CRISIL EQUITIES | 17

Kanpur Plastipack Limited

Focus Charts
Revenue mix of KPLs revenues
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY07 Plastic Products- Domestic FY08 FY09 FY10 Non-FIBC Exports sales 28% 38% 33% 35% 59% 56% 57% 13% 7% 10% 8%

Sales trend increasing y-o-y

(Rs mn) 1,800 1,600 1,400 36 35 (%) 40 35 30 25 14 15 986 1,008 726 -2 1,133 1,530 20 15 10 5 0 -5 FY08 FY09 Net Sales FY10 FY11E FY12E

57%

1,200 1,000 800 600 400 200 0

FIBC Export sales

YoY Growth [RHS]

Sou rce: CR ISIL Res ea rch

Sou rc e: Com pan y, CR I SIL Equ it ies

EBITDA and PAT margins increasing trend

14 12 10 8 6 4 2 2.5 11.1 8.8 8.8 9.2 1.9 2.6 2.9 3.4

RoCE and RoE on an upward trend

25 21.6 20 15.3 15 14.4 10 12.6 14.3 14.4 15.2 16.7 17.2 23.5

8.6

0 0 FY08 FY09 EBIDTA % FY10 FY11E PAT % FY12E FY08 FY09 FY10 FY11E FY12E

Return on Capital Employed (RoCE) (%)

Sou rc e: Com pan y, CR I SIL Equ it ies

Sou rce: CR ISIL Equ it ies

Stock price movement and traded volumes

50 45 40 35 30 25 20 15 10 5 0 0 50000 100000 150000 200000 250000

Shareholding pattern
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Dec-09 Promoter Mar-10 FII Jun-10 DII Sep-10 Others 69.2% 69.2% 69.2% 69.2% 30.8% 0.0% 30.8% 0.0% 30.8% 0.0% 30.8% 0.0%

Jan-06

Jan-07

Jan-09

Jan-05

May-06

Jan-08

May-05

May-08

May-09

May-07

Jan-10

May-10

Sep-06

Sep-07

Sep-09

Sep-05

Traded Quantity

Share Price (LHS)

Sou rc e: Com pan y, CR I SIL Equ it ies

Sep-10

Sep-08

Sou rc e: Com pan y, CR I SIL Equ it ies

CRISIL EQUITIES | 18

CRISIL Independent Equity Research Team

Mukesh Agarwal Tarun Bhatia Chetan Majithia Sudhir Nair Nagarajan Narasimhan Ajay D'Souza Manoj Mohta Sachin Mathur Sridhar C Director Director, Capital Markets Head, Equities Head, Equities Director, Research Head, Research Head, Research Head, Research Head, Research +91 (22) 3342 3035 +91 (22) 3342 3226 +91 (22) 3342 4148 +91 (22) 3342 3526 +91 (22) 3342 3536 +91 (22) 3342 3567 +91 (22) 3342 3554 +91 (22) 3342 3541 +91 (22) 3342 3546 magarwal@crisil.com tbhatia@crisil.com chetanmajithia@crisil.com snair@crisil.com nnarasimhan@crisil.com adsouza@crisil.com mmohta@crisil.com smathur@crisil.com sridharc@crisil.com

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