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Brickwork Independent Research

As on January 24th, 2011 Garware Polyester Limited


SMALL CAP
Well established brand with advanced & integrated
Key Data
manufacturing facilities…
BSE Code 500655 Garware Polyester Limited (GPL) has well established brands
BSE ID GARWARPOLY
like Garware Suncontrol Film, GarFilm, & Global Window Films
Issued Shares 23.06 mn
Face Value 10.00 which are well recognized in both domestic and overseas market.
Market Cap. ` 3.81 bn (US$ 83.88 mn) Company has manufacturing facilities located strategically in
CMP `164.35 Aurangabad and Nashik district of Maharashtra having a capacity of
BSE Sensex 19,151.28 around 41000 MT for polyester film and 2210 MT for metallized film.
52-week High/Low 293.90/42.55
3M Avg Vol (No of Shares) 100260
Healthy growth in margins in a competitive industry…
Valuation Ratios The company registered net operating revenue of ` 267.83 Cr, a
Yr to 31 Mar FY 09 FY10 growth of 78.24% on y-o-y basis over Q3 FY10. On q-o-q basis it
12 M 6M showed a growth of 22.17% in Q3 FY11 as compared to Q2 FY11. PAT
Adj.EPS (`) 5.0 11.7
margins have also shown robust growth during Q3 FY11 at 374.28%
PER (x) NA 3.24
PBV (x) 0.3 1.5 on y-o-y basis over Q3 FY10. On q-o-q basis margins showed a
Dividend/Yield (%) 8.0 2.0 healthy growth of 51.08% in Q3 FY11 as compared to Q2 FY11.
EV (` bn) 3.8 6.7
EV/Sales (x) 0.7 N.M.
EV/EBITDA (x) 3.4 N.M.
Diverse product line with presence in both domestic
and overseas market…
Note: The figures for FY10 are only for 6 months, hence GPL has diversified into serving both domestic and overseas market
not comparable with FY09.
as well as value added products which is expected to enhance revenue
Shareholding Pattern (%) growth.
Sep'10 Dec '10
Promoters 57.51 57.68
Anti - Dumping Duty cause of concern for export market …
FIIs 0.45 0.93
DIIs 4.66 5.47 Export from India is subject to Antidumping Duties (AD) and
Public & Others 37.38 35.92 Countervailing Duties (CVD) ranging approximately from 6.4% -
36.4% in European Union (EU) and 7.17% - 65.59% in United States
Stock Chart (Relative to SENSEX)
750.00 (US). Such tariff measures results increase in delivered price of the
650.00 goods and thus making it difficult for the polyester companies to
550.00
450.00 compete with the domestic players.
350.00
250.00
150.00
50.00 Sumit Pol Milind Diwakar
21-Jan-10 21-Jul-10 21-Jan-11 sumit.pol@brickworkratings.com milind.d@brickworkratings.com
Garware Sensex Analyst Declaration: This report is without a management meet. We, Sumit Pol & Milind Diwakar
hereby certify that the views expressed in this report accurately reflect our personal views about the
subject securities and issuers. We also certify that no part of our compensation was, is, or will be,
directly or indirectly, related to the specific view expressed in this report. This report is not a
buy/sell/hold recommendation on the stock.
GARWARPOLY BRICKWORK

Name Designation COMPANY OVERVIEW:


Mr.S B Garware Chairman & MD
Vice- Chairman & Joint Garware Polyester Limited (GPL) was incorporated on 6th
Mrs Garware Modi
MD
Ms.Sarita Garware June, 1957 by Shri. B.D. Garware and was primarily engaged in
Joint MD
Mr.M S Adsul Director- Technical manufacturing of moulds and dyes for the plastic
Non-Executive
Mr.Dilip J Thakkar
Independent Director manufacturers. In 1976, company was merged with another
Non-Executive
B Moradian
Independent Director group company Garware Plastics and in 1977 it was renamed as
Non-Executive
N P Chapalgaonkar
Independent Director Garware Plastics and Polyesters Private Ltd (GPPPL). On 26th
Non-Executive
Dr.M C Agarwal
Independent Director May 1981 GPPPL was converted into a public limited company
Non-Executive
Mr.Ramesh P Makhija
Independent Director and is under the leadership of Mr. S.B. Garware (Chairman &
Non-Executive
Mrs.S S Garware Non-Independent Managing Director).
Director
Non-Executive
Ms.Sonia Garware Non-Independent GPL, headquartered at Mumbai, is one of the large
Director
manufacturers of polyester films in the country with presence
in both domestic and overseas market. GPL has two
subsidiaries namely Garware Polyester International Ltd and
“One of the large manufacturer of
Global Pet Films, Inc., based in U.K and U.S respectively,
polyester films with diverse product
which looks after the company’s marketing, supply and
range serving both domestic and
distribution activities.
overseas market”

Well established brand with advanced & integrated


manufacturing facilities….
GPL markets its product under its well recognized brands
Sales Break-up as on March 2010 namely- Garfilm, Garware Suncontrol Flim and Global Window
Films. It has four fully integrated manufacturing facilities
Overseas
, 39% located in Aurangabad and Nashik having a capacity of around

Domestic 41000 MT for polyester film and 2210 MT for metallized film.
, 61%

Business Operations:
Garware Polyester is engaged in manufacture of Bi-axially
(Source: CMIE) oriented polyethylene terephthalate film ( BoPET) film lines
used in flexible packaging, rigid PVC pipes, HIP Sheets,
metalized films for sari yarn, electrical insulation films, tea
wrapping film and value- added products like sun control films.
As on March 31, 2010, around 61% of sales for GPL were
contributed by domestic market while overseas market
contributed 39% of sales.

BRICKWORK INDEPENDENT RESEARCH 1


GARWARPOLY BRICKWORK
GPL has put thrust on R&D. The company has produced highly
innovative products such as sun control application film, x-ray film with
Product Lines
polyester base, matte, opaque and super clear polyester films.

Plain Diverse product line serving both domestic and overseas


Polyster
FIlms market…
a) Plain polyester film segment: GPL markets it under brand
Sun Control
Films name “Garfilm” and is sold in domestic market as well as in overseas
market such as China, Taiwan, Malaysia, Singapore, Korea, Brazil,
South Africa, Japan, U.K and Northern Ireland U.S.A. The film has
OHP Films
wide arrays of applications in food Packaging, electrical insulations, and
industrial applications.

TRDR Films
b) Sun control films: Company manufactures Polyester dyed films
which is used in the solar control applications and is among the only
Metallised
Polyster two players who manufacture this product. GPL has patented its
Films
unique technology of manufacturing these films with the Department of
Patents, United States. It is marketed under the brand “Garware
Suncontrol Film”. This film is patented in 16 countries and exported to
more than 40 destinations across the globe.

c) Overhead projection transparency film (OHP): It is a crystal


clear polyester film, used as a presentation medium on overhead
projectors. Other applications include Photocopying, report binding,

“ Garware Suncontrol Film is and Screen/Offset printing.

patented in 16 countries and


d) Tracing and drafting film (TRDR): It is a lacquered polyester
exported to more than 40
film suitable for manual drawings (on boards) as well as pen plotter
destinations across globe.”
drawings. Applications include; Civil plans, PCB designs, Engineering
drawings, Components design etc.

e) Metalized polyester film: GPL manufactures wide range of


metalized polyester film. Applications include Packaging - printing &
Lamination, textile dying & knitting.

BRICKWORK INDEPENDENT RESEARCH 2


GARWARPOLY BRICKWORK
Industry Prospects

India is one of the largest and fastest growing markets in the world
for flexible packaging and other polyester products. Polyester
“Polyester output is expected to production accounting for 80% of the total manmade fiber output is
grow by around 6-8 % in the next expected to grow by around 6-8 % for the next two years.
two years”
The total PET film capacity in India is about 360,000 tons, with the
surplus production generally being exported to overseas market.

A sudden spurt in global demand has boosted the BOPET film


prices, which is expected to grow further. The global demand for
BOPET film jumped due to its usage in solar power cells, touch-
screen panels of mobile phones and flat screen TVs etc.

In India, nearly 35,000 tonne of BOPET film is used annually by


garment embroiders. The traditional demand for packaged food is
also growing rapidly. India has emerged as the third largest
consumer of BOPET with 330,000 tonne of annual demand.
Industry sources estimate that there is nearly 10% gap between
demand and supply, which is unlikely to fill in too quickly. So most
“Increase in Anti- Dumping Duty
of the companies are now concentrating on capacity additions to
and Countervailing Duties can
compete with other polyester players and serve the increasing
impact the price competitiveness of
downstream demand.
the polyester exporting companies”
The global polyester industry has witnessed a significant shift in
production capacity from North America and Europe to the Asian
countries. In this, major capacity addition is done by China followed
by India and Taiwan. With increase in demand, increasing capacity
by other countries, and rising price pressures the Indian market
could witness significant capacity additions by the players.

Anti - Dumping Duty cause of concern for export market:


International Trade in polyester film has been subjected to trade
defense measures through imposition of Antidumping Duties (AD)
or Countervailing Duties (CVD). So any increase in these duties
could impact the price competitiveness and sales of the company
product.

BRICKWORK INDEPENDENT RESEARCH 3


GARWARPOLY BRICKWORK
Export from India is subject to AD and CVD duties ranging
approximately from 6.4% - 36.4% in EU and 7.17% - 65.59% in US.

Volatility in feedstock cost (PTA & MEG):


Both PTA and MEG which are crude oil derivatives are key inputs in
polyester making. Volatility in the prices of crude oil influences the
“Margins are vulnerable to profitability margins of the company, if the company is not able to
volatility in raw material prices” pass on the cost to the consumers or undertake cost control measures.
In H1 FY11 MEG was priced at 787 $/MT which is 25% higher than H1
FY 2010 and PTA at 886 $/MT in H1 FY11 which is 3 % higher than
H1 FY 2010.

Key growth drivers for the Industry:


a) Increase in disposable income:
New emerging middle class has discretionary income that spends on
electronic goods, houses, FMCG products, automobiles etc. Increasing
employment rate and growing economy has resulted in increase of
average disposable income.

b) Growth in retail sector:


With the expanding middle and upper class consumer base there is
“Average household disposable
increasing demand of retail outlets, there will also be opportunities in
income in India is expected to
India's tier II and III cities. Retail sales are estimated to grow from
grow by 6.1% per cent by 2025”
USD 353 billion in 2010 to USD 543.2 billion by 2014. Further as per
IBEF, sales through retail outlets will increase by 154% to reach USD
15.29 billion by 2014.

c) Increase in overseas and domestic demand:


Increasing demand from overseas countries which are relying on the
Asian countries for supply of polyester film as major capacity addition
is taking place in the developing countries like India and China which
are having low cost advantages. International market is expected to
grow around 4-6 % per annum. Robust growth in domestic market
and is expected to grow around 10-14 % per annum.

BRICKWORK INDEPENDENT RESEARCH 4


GARWARPOLY BRICKWORK

d) Strong R&D and technological advancement:

Application of BOPET films has found usage in several other products


such as new-age flat screen TVs, touch screen enabled equipment
including mobile phones and photovoltaic cells used in generating solar
power, Ceramic films, Infra-red films, and various other applications in
electronic and other products.

Industry Competitiveness:
The five forces model helps to determine the competitive intensity and
therefore the industry attractiveness. The existence of many players and
“Technology advancement number of brands makes the industry highly competitive. The Polyester
and in house R&D ensure industry framework has been analyzed on the basis of buyer and seller
company stays abreast bargaining power, threat of new entrants, threat of substitutes that
with latest innovations” determines the degree of rivalry among existing players.

Figure 1: Porter’s Five Forces Model


Threat of New Entrants:
Supplier Power: Moderate Moderate
• Moderate supply of raw materials • Initial high setup cost
like PTA and MEG. • Backward integration by big
• Susceptible to sharp movements in players.
raw material prices • Well established brands in market.

Degree of Rivalry: High


Large number players in the organized sector
Competition from ployester companies in
China

Buyer Power: High Threat of Substitutes: Low


• Fragmented and geographically • Cotton can be a threat for substitute
diversified industry, therefore buyer if its prices decline as compared to
can ask for price discounts ployester.
• Low switching costs •Use of plastic for packaging.
• Wide range of
products, specifications to meet
different needs

BRICKWORK INDEPENDENT RESEARCH 5


GARWARPOLY BRICKWORK

Healthy increase in margins in a competitive


industry…
“GPL has declared interim
2009 2010
dividend @ 15% per equity share (Consolidated figures) 12 M 6M
for year ending FY 2011” Net Operating Income (In ` Cr) 564.14 314.59
EBIDTA (In ` Cr) 110.20 60.94
PAT (In ` Cr) 11.44 27.02
Capital Structure:
Tangible Networth (In ` Cr) 233.12 255.76
PAT Margins
Debt (In ` Cr) 325.95 304.25
8.59 Debt/Tangible Networth(x) 1.40 1.19
9 Profitability:
8
7 Operating Profit Margin 19.53% 19.37%
6 Net Profit Margin 2.03% 8.59%
5 ROCE 13.90% 8.01%
4
3 2.03 ROE 4.91% 10.56%
2 1.07 Coverage Ratio:
1 Interest Coverage (x) 2.37 5.04
0
Liquidity Ratio:
18 mths 12 mths 6 mths
Quick Ratio 3.48 3.63
Current Ratio (x) 4.97 4.91
2008 2009 2010 Source: CMIE, Brickwork Ratings
Note: 2009 figures are as on September 30th for 12 months, and 2010 are
for 6 months as on March 31st 2010.

Growth in profit after tax stood at 373% in 2009-10 on


annualized basis. This was mainly due to increase in demand
Debt/Equity for polyester film, recovery in economic conditions and cost
control measures taken by the company.
2 1.84
1.8 During FY10, the company repaid certain outstanding term
1.6 1.4
1.4 1.19 loans and redeemed bond amounting to ` 0.44 Cr which has
1.2 resulted in improvement in debt equity ratio from 1.40x in
1
0.8 Sep’09 to 1.19x as on Mar’10. Interest coverage ratio has also
0.6
improved and stood at 5.04x in FY10 as compared to 2.37x in
0.4
0.2 FY09.
0
18 mths 12 mths 6 mths

2008 2009 2010

BRICKWORK INDEPENDENT RESEARCH 6


GARWARPOLY BRICKWORK

Quarterly Performance Review (Standalone Basis):

(` Cr) Q3 FY10 Growth Q3 FY11 Growth Q2 FY11


Net
“Robust growth in PAT margins Operating 150.11 78.42% 267.83 22.17% 219.22
in Q3 FY11 of 374.28% on y-o-y Revenue
EBIDTA 28.41 233.65% 94.79 60.09% 59.21
basis over Q3 FY10” PBT 10.77 649.30% 80.7 82.29% 44.27
PAT 10.77 374.28% 51.08 68.97% 30.23

During Q3 of FY11 the company registered net operating revenue


of ` 267.83 Cr, a growth of 78.24 % on y-o-y basis over Q3 FY10.
On q-o-q basis it showed a growth of 22.17% in Q3 FY11 as
compared to Q2 FY11.

PAT margins showed robust growth of 374.28% during Q3 FY11


on y-o-y basis over Q3 FY10. On q-o-q basis it showed a healthy
“Increase in demand and growth of 51.08% in Q3 FY11 over Q2 FY11. Improved operating
improved realization has lead revenue and profit margins were mainly due to improved
to better profitability for the realization, better management of operating costs and increase in
company in Q3 FY11” demand in both domestic and overseas market.

Peer Comparison:

Mkt Cap ROCE ROE P/E P/BV


As on March 31,2010 (` Cr) % % (x) (x)
Garware Polyester Ltd. 371.73 6.8 9.4 3.17 1.36
Polyplex Corporation Ltd. 911.08 13.0 37.6 12.29 3.84
Cosmo Films 231.82 15.43 9.9 4.86 0.73
Uflex Ltd. 1,124.58 4.5 9.0 4.76 0.97
Jindal Poly Films Ltd. 1,942.06 11.6 15.9 3.67 1.25
Source: CMIE

GPL was trading at a P/E multiple of 3.13 which was lower than
its peers and having ROCE of 6.8% and ROE of 9.4%, comparable
to its peers like Uflex Ltd.

Capacity utilization:

Capacity utilization stood at 99% in Sep 2009 (12 months) and


53% for Mar 2010 (6 months). GPL has a capacity of around
42000 MT for producing polyester film and metalized film.

BRICKWORK INDEPENDENT RESEARCH 7


GARWARPOLY BRICKWORK

“Wealth Creation” Considering increased in demand and pressure from its peers
which are aggressively increasing their capacities, it is expected that
Value today for every `100 invested
Garwarpoly Sensex going forward company may increase its production capacity.
3 Months 62.49 100.35
6 Months 125.90 114.21
Key Risk Factors:
1 Year 355.15 115.08
3 Year 176.72 99.10
5 Year 353.63 216.32 Fluctuating raw material prices:

Raw materials used in production of polyester are basically crude


oil derivatives namely Monoethylene Glycol (MEG) and Purified
“Increase in price for key raw Terephthalic Acid (PTA), so any fluctuation in the prices of the
materials like PTA and MEG crude oil has a direct impact on the margins of the company. Crude
could impact the profitability oil prices have shown a volatile trend in the past with prices ranging
margins” from USD 71.98 to 88.7 per bbl.

Increase in price for key raw materials like PTA and MEG could
impact the profitability margins if company is not able to pass on
the cost to customers or undertake initiatives to reduce the costs.
As per Mar’10 (6 months) figures, PTA had a significant share on
Raw Material Consumption total raw material cost (59.27%) followed by MEG (22.43%).
Breakup (%)
Procurement of raw materials at a cost effective price as well as
efficient management of the inventory will be key to control
18% 0.06 %
DMT production costs.
PTA
59%
MEG Fluctuation of foreign currency:
Others Polyester films market has a huge export potential. GPL exports its
22.43% product to nearly 40 destinations across the globe. So exposure to
foreign currency fluctuation against domestic currency would be a
considerable risk for it.

Indian rupee appreciated by almost 9% against U.S. dollar in the


last sixteen months. Rupee has also appreciated against other
currencies including the Euro, Chinese Renminbi and Japanese
Yen. India has been growing at relatively higher rates strengthening
the domestic currency which could affect the export
competitiveness of the firm.

BRICKWORK INDEPENDENT RESEARCH 8


GARWARPOLY BRICKWORK

The Road Ahead…

There is a huge market potential for India’s polyester


producers considering the increase in demand and emergence
“Significant increase in demand of new niche market segments for polyester products. The
and realizations will boost sales, growth in domestic market is estimated at about 14% and
margins and profits in FY 11” growth in international market at about 6%. This favorable
supply demand situation is expected to improve the
profitability for polyester companies.

The Company is well-diversified both in terms of products and


geographical presence. It serves to both retail and industrial
market, domestically as well as internationally. Growth in
domestic market is expected to be higher in near future due to
higher domestic consumption leading to strong growth in
FMCG, CPG and auto sectors.

The risk factors for the company remain the input cost
exposure to crude derivative prices, product obsolescence risk
resulting from regulatory changes and forex exposures
resulting from globally diversified operations.

“Geographic diversification
Given the highly competitive nature of the industry along
supported by efficient forex
with presence of big players, strategic initiatives taken by the
risk management is key to
company towards geographical and product diversification
remain competitive in the
while controlling costs would be key to maintain
industry”
competitiveness in the market.

BRICKWORK INDEPENDENT RESEARCH 9


GARWARPOLY BRICKWORK

Annexure I:

Profit & Loss Statement (Consolidated):


(` Cr)
30.09.08 30.09.09 31.03.10
18 M 12 M 6M
SALES 968.52 598.17 331.77
Less: Indirect Taxes 66.07 34.03 17.18
INCOME FROM OPERATIONS: 902.45 564.14 314.59
COST OF PRODUCTION:
Raw material expenses 490.75 270.66 156.68
Packaging expenses 0.00 0.00 0.00
Purchase of finished goods 0.00 0.00 0.00
Power, fuel & water charges 85.96 55.04 31.76
Compensation to employees 57.21 39.12 24.07
Royalties, technical know-how fees, etc. 0.00 0.00 0.00
Lease rent & other rent 1.63 1.14 0.67
Repairs & maintenance 17.39 11.05 5.65
Insurance premium paid 3.47 1.73 0.65
Outsourced mfg. jobs (incl. job works, etc.) 24.27 13.43 9.63
TOTAL COST OF PRODUCTION: 680.68 392.17 229.11
Change in stock -2.15 -20.92 -3.57
GROSS PROFIT 219.62 151.05 81.91
Selling, General & Admin. Exp. 69.67 40.85 20.97
EBIDTA 149.95 110.20 60.94
Depreciation / Amortization 49.15 32.51 16.11
EBIT 100.80 77.69 44.83
Interest paid 70.13 46.52 12.10
PROFIT BEFORE TAX, OTHER INCOME &
EXTRAORDINARY ITEMS 30.67 31.17 32.73
Other Income 2.05 2.65 1.43
PROFIT BEFORE TAX & EXTRAORDINARY ITEMS 32.72 33.82 34.16
Provision for direct taxes 7.43 12.27 0.06
PAT BEFORE EXTRAORDINARY ITEMS 25.29 21.55 34.10
Prior period & extraordinary expenses 15.62 10.11 7.08
PAT 9.67 11.44 27.02
Source: CMIE
Note: Company has changed its accounting year from October-September to April – March for the FY2010, so the
financial results are reported for 6 months as on March 31, 2010.

BRICKWORK INDEPENDENT RESEARCH 10


GARWARPOLY BRICKWORK

Annexure II:

Balance Sheet (Consolidated):


(` Cr)
30.09.08 31.09.09 31.03.10
18 M 12 M 6M
Liabilities
SHARE CAPITAL, RESERVES & SURPLUS
Issued equity capital 22.80 23.00 23.00
Paid up preference capital 54.46 54.46 54.46
Reserves & surplus 162.36 171.54 194.18
Less: Expenses not written off 0.33 0.15 0.06
TOTAL NETWORTH 239.62 249.00 271.64
MINORITY INTEREST: 0.00 0.00 0.00
BORROWINGS:
Secured borrowings 407.26 325.02 303.94
Unsecured borrowings 5.05 0.93 0.31
NET DEFFERED TAX LIABLITY 2.50 14.44 14.44

TOTAL LIABLITIES 654.43 589.39 590.33

Assets
NET FIXED ASSETS 400.08 375.80 364.67
INTANGIBLE ASSETS 15.88 15.88 15.88
INVESTMENTS 36.76 36.76 36.76
CURRENT ASSETS, LOANS & ADVANCES (A):
Cash & bank balance 11.65 15.82 15.22
Other Current Assets 245.47 185.45 201.96
CURRENT LIABLITIES & PROVISIONS (B): 55.74 40.47 44.22
NET WORKING CAPITAL (A-B) 201.38 160.80 172.96
TOTAL ASSETS 654.10 589.24 590.27

Contingent liabilities 54.75 16.97 18.03


Source: CMIE
Note: Company has changed its accounting year from October-September to April – March for the FY2010, so the
financial results are reported for 6 months as on March 31, 2010.

BRICKWORK INDEPENDENT RESEARCH 11


GARWARPOLY BRICKWORK

Contact Details:
Jatin Vyas
Brickwork Ratings, Phone: +91-22-28389144
Email: jatin.v@brickworkratings.com

Disclaimer
This is a full report without management meet. All information contained in this document has been obtained by Brickwork Ratings from
sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such
information is provided 'as is' without any warranty of any kind, and Brickwork Ratings in particular, makes no representation or warranty,
express or implied, as to the accuracy, timeliness or completeness of any such information. All information contained herein must be construed
solely as statements of opinion, and Brickwork Ratings shall not be liable for any losses incurred by users from any use of this document or its
contents in any manner. Opinions expressed in this document are not the opinions of our holding company and of the subsidiary companies
and should not be construed as any indication of credit rating or grading of Brickwork Ratings for any instruments that have been issued or are
to be issued by any entity.

Published on behalf of The Stock Exchange Investors' Protection Fund

Bombay Stock Exchange Ltd.


P J Towers, Dalal Street, Mumbai. Tel: 22721233/34 www.bseindia.com

BRICKWORK INDEPENDENT RESEARCH 12

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