Plastics - Dolat

DOLAT CAPITAL

Analyst: Nehal Shah Associate: Mahvash AriyanfarTel : +9122 4096 9753 Tel : +9122 4096 9736E-mail: [email protected] E-mail: [email protected] October 5, 2011

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India ResearchIndex

Industry

Executive Summary..................................................................................................5

Indian Plastic Consumption......................................................................................6

Global Scenario………................................................................................................8

Innovation: Key to Growth & Margins.......................................................................9

Polymer Demand & Pricing.....................................................................................10

Plastic Composites.................................................................................................12

Major Companies: Key Parameters.........................................................................14

Companies

Supreme Industries

Investment Rationale.........................................................................................17

Company Background.......................................................................................25

Financials..........................................................................................................35

Sintex Industries

Investment Rationale........................................................................................37

Company Background......................................................................................59

Financials.........................................................................................................63

Time Technoplast


Company Background......................................................................................81

Financials.........................................................................................................86

Astral Poly Technik


Financials.........................................................................................................88

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India ResearchPlastic Industry: Executive SummaryWe believe plastic consumption in India is expected to grow at a healthy rateon the back of growing substitution, expanding middle income group andnew applications. Despite being an industry dominated by unorganised players(70% of the industry size), the organised players over the last few years haveoutpaced them in terms of growth through constant innovation and regularintroduction of niche products and thereby gradually eating into their shareHaving created a niche market for themselves, they have the wherewithal todeliver consistently, leading to value proposition for investors. In this spacewe like Supreme Industries, Sintex Industries, Time Technoplast and AstralPoly Technik — purely based on their business models and ability to generateconsistent returns.

Key Investment Rationale

Plastic consumption in India to grow at 15% CAGRWith India’s GDP growing at 8% annually and plastic products increasinglyfinding application in all sectors of the economy, replacing other competingproducts such as steel and aluminium, we expect demand to remain robust.The application of plastic is increasingly evident across sectors includingpackaging, agriculture, healthcare, aerospace, electronics and infrastructure.According to the All India Plastics Manufacturers’ Association (AIPMA), thedomestic consumption has been growing at 10-12% CAGR over the last decadeand is all set to reach the 12.5mn tonnes in 2012 from 9mn tonnes in 2010which will make India the third largest plastic consumer after US and China.

Innovation & introduction of value-added products: Key to growth & marginsThe key USP in any industry that is largely unorganised is to regularly innovateand come out with niche products at regular intervals. Sintex, Supreme, AstralTime have consistently followed this thumb rule and thus have been able togrow at a pace which is way above the industry average.

Plastic composites: Niche high growth enginePlastic composites are new age products and are ideal replacement forconventional materials such as steel, aluminium and wood on account of theirdurability, corrosion and maintenance free character. The Indian compositesindustry has grown at healthy 16-18% CAGR over the last five years, more thantwice the GDP growth rate. The burgeoning manufacturing sector and heavyinvestments in infrastructure is expected to provide an impetus to the Rs 63-bn Indian composite industry, which is expected to grow at 16-17% CAGR.From our coverage universe, Sintex and Time Technoplast have a presence inthe composites segment while Supreme Industries is currently putting up afacility to make composite cylinders. These companies will not only benefitfrom high growth in these segments but will also enjoy better margins ascompared to their bouquet of conventional plastic products.

Companies Rev CAGR PAT CAGR P/E ROE (%) ROCE (%) CMP (Rs) TP (Rs) Upside (%) RecoSupreme Ind. 17.5 24.1 8.4 32.1 26.7 188.0 246.0 35 BuySintex Ind. 21.6 16.2 4.8 19.5 16.4 112.0 174.0 60 BuyTime Technoplast 23.0 21.1 8.4 17.8 18.2 64.0 76.0 18 AccumulateAstral Poly. 39.0 38.3 6.7 28.8 29.8 190.0 226.0 19 BuyNote: CAGR: FY11-13E; P/E, ROE & ROCE based on FY13 numbers

Coverage Universe - Valuation Matrix

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India ResearchPlastic consumption in India to grow at a CAGR of 15%With India’s GDP growing at 8% annually and plastic products increasinglyfinding applications across various sectors of the economy replacing othercompetiting products like steel, aluminium, etc, demand is expected to remainrobust.

Plastic consumption in India by product / application

Source: Indo-Italian chambers of commerce & industry

According to AIPMA, India’s plastic consumption in 2010 stood at 9mn tonnesand has been growing at an annual average rate of 12%. With its true potential,consumption is all set to reach 12.5mn tonnes in 2012, which will make Indiathe 3rd largest consumer of plastics by 2012 after US and China (expectedconsumption by then – USA: 39mn tonnes and China: 31mn tonnes). Further,the consumption is expected to reach 18.9mn tonnes by 2015. To match thisfigure, we estimate India will require 42,000 new machines and USD 10bn ofprojected investment by 2015.

India’s plastic consumption (in million tonnes)

Source: AIPMA

In the past 40 years, India’s per capita plastic consumption increased from 1kgto 8 kg in 2010. By 2015, the figure is expected to reach 16kg according toAIPMA — a 15% CAGR over the next five years.

Growing plastic consumption

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India ResearchPlastic consumption linked to GDPYear GDP growth (%) Plastic consumption Times (x)

growth (%)2005-06 9.5 10.4 1.12006-07 9.6 11.3 1.22007-08 9.3 12.7 1.42008-09 6.8 6.8 1.02009-10 8.0 12.7 1.62010-11 8.5 12.5 1.5Source: Industry sources, Dolat Research

Except for FY09 where the impact of economic slowdown was clearly visible,the plastic consumption in India has been consistently growing at a rate higherthan that of overall GDP. Going forward, the industry experts believe that theconsumption is likely to grow by nearly 2x the GDP growth.

Overall turnover of the plastic processing industry – which currently stands atRs 850bn – is expected to touch Rs 1 trillion (demand potential from 9mntonnes in 2010 to 12.5mn tonnes in 2012) and further Rs to 1.3 trillion by 2015(equivalent demand pegged at 18.9mn tonnes). The industry’s growth resultedin the number of processing units growing from 25,000 in 2010 to 30,000 unitsin 2011. The exponential growth anticipated over the next three years will seethis number go up to 40,000 units. The industry, which currently employs over3.5mn people, directly and indirectly, is expected to employ close to 4mn in2012 and 7mn by 2015.

Vision 2015 set by the government2010 2015

Consumption @ 15% CAGR (mn tonnes) 9 18.9Per capita consumption (kg) 8 16Plastic industries turnover (Rs bn) 850 1,332Employment generation (nos in mn) 3.6 7.0Processing machines (nos) 84,836 125,636

Source: CIPET, Dolat Research

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India ResearchSince 1950, globally there has been an average annual increase in productionand consumption of plastic of around 9%, driven by consistent innovation.From 1.5mn tonnes in 1950, total production reached 230mn tonnes in 2009.

As far as global consumption is concerned, Asia has been the world’s largestconsumer for several years, accounting for about 30% of global consumption.Next to Asia is North America with 26%, followed by western Europe with23%. Worldwide plastic consumption is expected to grow at an average rate of5% until 2015.

Global per capita plastic consumption (kg) region-wise

Source: Plastic Europe Market Research Group (PERMG) in Plastic Europe 2008

*Note: India’s current per capita plastic consumption stands at 9kg and China at 25kg

Global plastic production trend (mn tonnes): Geographic distribution

Source : Plastic Europe Market Research Group (PERMG) in Plastic Europe 2008

Plastics: Global scenario

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India ResearchInnovation & introduction of value added products: Key to growth &margins

The key USP in any largely unorganised industry is to innovate and introduceniche products. Similarly, in the plastic industry, 70% of which is unorganised,regular innovation and introduction of niche products would play a key role increating markets for such products leading to value creation thereby resultingin sustainability of growth. We believe that Sintex, Supreme, Astral & Timehave been consistent in rolling out niche products through regular innovationand thus have been able to grow at a pace that is way above the industryaverage.

Brief overview of products from companies under our universe leading to value creation

Company Product Last 3 years Product CommentsRev. CAGR Margins (%)

Supreme XF Films 27% 22-24% Market leader and continues to expandSupreme PPP 21% 18-20% Market share of over 30% in various

productsSintex Prefabs – Utility 25% 19-20% One of the leaders in this segment and

buildings being already approved by 17 statesSintex Monolithic 72% 18-20% Only player with backward integration in

the form of manufacturing plastic formworkAstral CPVC Pipes 40% 20-22% Market leader with exclusive technology

rights from US based LubrisolTime Techno Drums & IBCs 23% 19-20% Market leader with 75% market share and

now expanding across AsiaSource : Dolat Research

Innovation: Key to Growth & Margins

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India ResearchPolymer availability at ease, however prices remain volatileDomestic polymer demand is expected to increase driven by healthy demandfrom the packaging, pipes & fittings, automobiles and other such industries.As far as demand for polypropylene (PP) is concerned, supply currentlyoutstrips demand and the gap is likely to widen as RIL and GAIL expand theircapacities. Also, with IOC expanding its polyethylene (PE) capacity, supply-side constraints will not persist. However in PVC, India continues to remaindependent on imports.

Estimated polymer consumption in India and consumption mix

Estimated polymer consumption in India FY11Polymer KT KT KT KT Share (%)

LDPE/EVA 475 LLDPE 1050 HDPE 1475 Total PE 3000 31Polypropylene 2700 Total Polyolefins 5700 59PVC 1925 20PS/EPS 300 3ABS/SAN/ASA 215 2Total Commodity Polymers 8140 85Other Polymers ETP (PC, PA, POM, ETP) 215 2PU 225 2All other (including thermosets) 300 3Total Other Polymers 740 8Commodity & other polymers 8880 93PET (Bottle, film, APET) 700 7Total Polymer Consumption 9580 100Source: Plastemart.com

Raw materials and their applications

Major Raw materials Applications

Polystyrene (PS) Audio tapes, video cassettes, kitchenware,cosmetics, appliances computer components,toys, vials, etc

High Density Polyethylene (HDPE) High-pressure pipes, telecom ducts, carrierbags, drums, pallets, injection- and blow-moulded products

Low Density Polyethylene (LDPE) Heavy-duty films, lamination films, extrusioncoating, and moulding

Polypropylene (PP) General-purpose BOPP films, furniture,kitchenware, luggage, sanitary products,automotive components, etc

Polyvinyl Chloride (PVC) Rigid pipes and fittings, building andconstruction materials, bottles, containers,toys, footwear, blood bags, IV-fluid bags, etc

Source: Dolat Research

Polymer Demand & Pricing

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India ResearchPolymer prices susceptible to movement in crude pricesThe plastic processing industry is susceptible to volatility in prices of its keyraw materials, which are linked to movement in crude prices as depicted inthe charts below. Thus any sustainable rise in crude prices will impact mediumterm demand and margins. It may be noted that in FY09, when crude pricesflared to around USD 150, most Indian plastic processing companies were hit.But that was only for a particular quarter as the surge was short-lived, therebylimiting the impact. We believe that since crude prices are likely to move in arange in the short to medium term, a limited fluctuation wouldn’t have mucheffect as the surge/fall in polymer prices is likely to be passed on to consumersconsidering the strong demand for plastic products.

Trend in polymer & crude prices over last three years

Source : Bloomberg

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India ResearchPlastic composites: Niche high growth engine

The production of composites involves combining polymer and glass fibre orcarbon fibre in order to produce a material that is lighter yet stronger thanconventional materials. Composites are new age products and are idealreplacement for conventional materials such as steel, aluminium and woodon account of its durability, resistance to corrosion and maintenance freecharacter. The growth in composite usage has been driven by an increasedawareness of its performance and increased demand for lightweightcomponents.

Of all the available materials, composites have the highest potential to replacewidely used steel and aluminum, because they offer better performance undervaried circumstances. Composites are 60-80% lighter than steel. In replacingaluminum parts composites can save 20-50% of the weight. Today it appearsthat composites are not just alternative materials, but have become thematerial of choice for many engineering applications.

The global composite industry is currently estimated at about USD 85bn. USand Europe account for about 75% of the global demand. The Asia-Pacificregion represents about 20% of the market and the rest of the world accountsfor the remainder. While US and EU are expected to grow at 1.8% and 2.3%CAGR respectively by 2013, Asia will see the highest growth at 5.3% CAGR.Globally, the market is expected to grow 3.3% CAGR by 2013.

The Indian composites industry has grown at healthy 16-18% CAGR over thepast five years, more than twice the GDP growth rate. The burgeoningmanufacturing sector and heavy investments in infrastructure are expectedto provide an impetus to the Rs 63bn Indian composite industry. It is expectedto grow 16-17% CAGR from USD 1.1bn (Rs 50bn) in 2008 to USD 2.7bn (Rs 120bn)by 2013.

Indian composite market size (Rsmn)

Source : Industry Sources, Dolat Research

Benefitting from opportunities predominantly prevalent in transport,infrastructure, wind energy and oil & gas segments, total compositesproduction, which was 368mn lbs (around 167,150 tonnes) in 2008 is expectedto increase to 794mn lbs (close to 360,940 tonnes) by 2013 at 16.6% CAGR.

Plastics Composites

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India ResearchComposite shipment (million lbs)


Indian plastic composite market: Vertical Mix


Demand Drivers

Major industry verticals Industry share Expected 3-4of demand (%) years CAGR

Pipe & Tank 30 17%Transportation & Automotive 21 14%Wind Energy 19 21%Electrical & Electronics 10 12%Construction 10 15%

Kemrock Industries (predominantly a plastic composite company) is themarket leader in the Indian composites space and has been growing at arevenue CAGR of 58% over the past four years. Among other companies,Sintex and Time Technoplast already have a presence in the segment whileSupreme Industries is in the midst of putting up a composite cylinders facility.These companies will not only benefit from high growth but will also enjoybetter margins as compared to their bouquet of conventional plastic products.

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India ResearchComposite presence in our coverage universe

Companies Composite Revenue Mix (%) Industry verticalsKemrock Industries 80% Mass transit, Construction,

Pipes, Wind Energy, etcSintex Industries 35% Electrical, Transportation,

Wind energy, Medicalimaging, etc

Time Technoplast 21% IBCs, batteries & LPGComposite Cylinders

Supreme Industries Nil LPG Composite Cylinders

Major Indian plastic processing companies – key operational and financial parametersCompanies Revenues (Rs mn) EBIDTA (Rs mn) EBIDTA (%) PAT (Rs mn)

FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13ESupreme Ind. 23,965 28,329 33,075 3,322 4,005 4,786 13.9 14.1 14.5 1,781 2,230 2,745Sintex Ind. 44,752 54,746 66,152 8,069 9,535 11,187 18.0 17.4 16.9 4,600 5,060 6,217Astral Poly 4,108 5,925 7,925 539 811 1,098 13.1 13.7 13.9 334 463 639Time Tech 12,753 15,868 19,280 2,360 2,833 3,375 18.5 17.9 17.5 1,110 1,260 1,586Finolex Ind. 19,747 21,343 22,011 2,399 2,604 2,843 12.1 12.2 12.9 762 552 593Nilkamal 13,178 15,504 18,160 1,361 1,627 1,913 10.3 10.5 10.5 534 590 717Jain Irrigation 41,528 50,067 59,640 7,589 9,592 11,495 18.3 19.2 19.3 2,807 3,513 4,636

Companies EPS (Rs) DPS (Rs) PE (x) EV/EBIDTA (x) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

Supreme Ind. 14.0 17.6 21.6 4.3 5.6 6.7 13.4 10.4 8.4 8.5 7.1 6.0Sintex Ind. 16.9 18.5 22.8 0.7 0.7 0.8 6.5 5.9 4.8 5.9 5.0 4.5Astral Poly 14.9 20.6 28.4 1.1 1.0 1.0 12.8 9.2 6.7 8.4 6.0 4.7Time Tech 5.1 6.0 7.5 0.6 0.7 0.8 12.6 10.8 8.6 8.0 6.9 5.7Finolex Ind. 6.1 4.4 4.8 3.0 4.0 4.0 10.5 14.5 13.3 5.2 5.5 5.0Nilkamal 37.5 39.5 48.0 4.0 0.0 0.0 7.1 6.8 5.6 4.7 4.2 3.6Jain Irrigation 7.4 9.1 12.0 1.0 1.4 1.5 19.5 15.8 12.0 10.1 8.5 7.1

Companies Market cap / Sales (x) Price / Book (x) Dividend Yield (%) ROE (%) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

Supreme Ind. 1.0 0.8 0.7 4.2 3.1 2.4 2.3 3.1 3.7 37.0 34.6 32.1Sintex Ind. 0.7 0.5 0.4 1.2 1.0 0.9 0.6 0.6 0.7 21.1 19.1 19.5Astral Poly 1.0 0.7 0.5 2.8 2.2 1.7 0.6 0.5 0.5 25.2 27.3 28.8Time Tech 1.1 0.9 0.7 2.0 1.7 1.4 0.9 1.1 1.2 16.4 16.4 17.8Finolex Ind. 0.7 0.4 0.4 1.2 1.2 1.0 4.8 6.3 6.3 12.6 16.4 16.9Nilkamal 0.3 0.3 0.2 1.1 1.0 0.9 1.5 0.0 0.0 17.4 14.7 15.5Jain Irrigation 1.3 1.1 0.9 3.5 3.1 2.5 0.7 1.0 1.0 20.3 20.3 21.4Source: Dolat Research, For companies other than our universe: Bloomberg estimates

Source : Company, Dolat Research

Major Companies - Key Parameters

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India ResearchThe plastics industry includes raw material suppliers like petrochemical andrefining firms, machinery manufacturers and plastic processors, most of whichare small-scale enterprises. The plastic industry can be classified into:

(A) Polymers manufacturers, called the ‘upstream segment; and(B) Polymers-to-plastic convertors, known as the ‘downstream’ segment.

The upstream polymer-makers are large players with globally competitiveplants and have witnessed consolidation to remain globally competitive. Thedownstream plastic processing industry on the other hand is highly fragmentedand consists of micro, small and medium units. Presently there are about30,000 registered plastic processing units, of which 75% are in the small-scalesector. This sector, however, accounts for only 25% of polymer consumption.The top 100 players account for just 20% of the industry turnover.

Plastic industry flow chart

Indian Plastic Industry Overview

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India Research

Classification of plastic products by processes used in India

Indian Plastic Processing Industry

Capacities process-wise

Capacity (kTA) Upto FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Upto FY10Extrusion 5,744 379 600 452 834 861 1,164 1,291 1,754 13,080Injection Moulding 1,984 207 231 279 360 430 527 430 752 5,198Blow Moulding 511 31 41 34 40 59 49 55 86 900Total 8,239 617 872 762 1,234 1,350 1,740 1,777 2,593 19,178



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FinancialsYear Net Sales % growth EBITDA OPM% PAT % growth Adj.EPS(Rs.) PER (X) EV/EBIDTA(x) ROANW(%) ROACE(%)FY10 19,866 20.0 2,855 14.4 1,470 73.7 11.6 15.7 9.4 40.9 28.6FY11 23,965 20.6 3,322 13.9 1,781 21.2 14.0 13.0 8.5 37.0 27.3FY12E 28,329 18.2 4,005 14.1 2,230 25.2 17.6 10.4 7.1 34.6 26.2FY13E 33,075 16.8 4,786 14.5 2,745 23.1 21.6 8.4 6.0 32.1 26.7Figure in Rs mn

Supreme Industries

CMP: Rs 182 Target Price: Rs 246 Buy

BSE Sensex 15,192NSE Nifty 4,751

Scrip Details

Equity Rs.254mnFace Value Rs.2/-Market Cap Rs.23bn

USD 472mn52 week High/Low Rs.234 / 136Avg. Volume (no) 122,171BSE Code 509930NSE Symbol SUPREMEINDBloomberg Code SI INReuters Code SUPI.BO

Shareholding Pattern as on June’11(%)Promoter 49.6MF/Banks/FIs 4.1FIIs 7.2Public / Others 39.1

We rate Supreme as preferred pick in this segment considering its diversified product portfolio, strong geographicreach and most importantly having a strict working capital which is a key differentiator vis-à-vis other plasticprocessors. This has enabled the company to enjoy higher return ratios over a sustained period of time. Thus webelieve that SIL will continue to command a premium over the other plastic processors.

Supreme Industries Limited (SIL), one of the largest plastic processors in India, is expected to reap benefits of itsongoing capacity expansions amidst strong demand outlook across its product portfolio. Revenues and PAT areexpected to exhibit a CAGR of 17.5% and 24.1% respectively from FY11-13. At CMP, SIL’s core business is attractivelyvalued at 9.4x FY13E earnings and 6x EV/EBIDTA. We initiate coverage on SIL with a Buy rating and TP of Rs246 onSoTP basis, representing an upside of 35% from the current levels.

Investment Rationale

Standing tall in an unorganised sectorWith over six decades of experience and through regular innovation andintroduction of cost-effective solutions, Supreme Industries (SIL) has createda place and brand for itself in a business dominated by the unorganisedsector. SIL is now acclaimed with having the most diversified range of products(over 7,000) resulting in market as well as customer diversification. With thebulk of revenues coming from supplies to OEMs and through distributionchannels, the company has been able to get assured and large volumes,resulting in revenue CAGR of around 20% over FY07-FY11.

Capacity expansion to drive growth, VAPs to drive marginsBacked by strong demand, SIL has planned an aggressive capex of Rs 10bnacross segments over five years. With this, SIL will see a volume CAGR of18.4% in FY11-13 from 225bn tonnes per annum (btpa) in FY11 to 315btpa inFY13 in terms of polymers processed. Apart from capex, SIL will continue toincrease its share of value-added products (VAPs) -- having margins upwardsof 17% -- by enhancing its focus on cross-laminated films (100% VAPs) andother VAPs that will help maintain or even increase its margins.

Clean balance sheet, strict working capital, strong dividend payoutsWe believe SIL will continue to maintain high RoE and RoCE due to: 1) healthytopline growth on the back of strong capex initiatives and higher fixed assetturnover, 2) increasing cash flows from core operations through strict controlof working capital, and 3) stable margins. Besides, SIL has been continuouslyrewarding shareholders with strong dividend payout ratio ranging 30-50%over three years. SIL has not raised capital in 15 years since the currentmanagement took over, despite its asset-heavy business. It, in fact, boughtback shares in FY09 at an average Rs 111 per share (pre-split).

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DOLAT CAPITAL


India ResearchSIL, with over six decades of experience and through regular innovation andintroduction of cost effective solutions, has created a place and brand foritself in a business that operates in a largely unorganised sector. The companyhas over 7,000 products -- the widest range in the sector -- resulting in marketas well as customer diversification. Though over 60% of the industry’s turnovercomes from the unorganised sector, SIL, over the years, has been able to cementits place in the industry and consistently achieve healthy growth (even duringthe FY08-09 recession) largely on account of the following factors:

Diversified model: With a large product portfolio spread across four divisionsviz piping systems, packaging films, consumer products and industrialproducts, SIL’s product portfolio is the most comprehensive, resulting inmarket as well as customer diversification.

Geographically diversified: With 19 plants across India and a combinedasset base of over Rs 9bn, SIL’s wide reach ensures better market share.

Regular innovation, cost-effective solutions: Consistent innovation hasgiven SIL a significant market shares across its portfolio. It enjoys a healthy10% share of the large plastic piping market (Rs 100-bn market, dominatedby unorganised players), 18% share in crates and 13% in furniture. It alsoenjoys a dominant position in value-added protective packaging, includingthe ‘XF’ films (a tri-extruded and cross-laminated film providing superiorpuncture and tear resistance) segment.

Consistently rising VAPs share: With consistent innovation in product-lines such as packaging films, furniture and plastic piping, VAPs contribute29.3% to SIL’s overall revenues and this is only likely to increase.

Bulk of revenues from OEMs: Apart from distribution channels, OEMsdominate SIL’s revenue stream, ensuring regular as well as large volumes .This has resulted in revenue CAGR of around 20% over the past five years.

Standing tall in the unorganised sector

DOLAT CAPITAL


India ResearchCompany’s four-pronged strategy

Capacity expansion to drive growth

With the Indian economy expected to grow over 8% in the next few years, theensuing higher disposable incomes will result in strong demand outlay forplastic products. Thus, SIL has planned a capex of around Rs 7bn over the nextfour years:

Segment-wise capacity FY10 FY11 FY12E FY13E FY14E FY15EPlastic piping 175,000 191,507 207,500 247,500 300,000 360,000Packaging films Performance film 6,500 9,500 9,500 15,500 15,500 21,500Protective packaging 18,000 24,600 27,500 33,000 36,000 40,000XF films 17,500 17,500 22,500 22,500 27,500 27,500Industrial products Moulded products 27,380 34,700 37,500 40,000 46,000 50,000Material handling 21,200 23,030 28,000 33,000 36,000 42,000Consumer products 26,400 29,320 40,000 45,000 48,000 54,000Total 291,980 330,157 372,500 436,500 509,000 595,000Estimated capex (Rs mn) 2,000 1,600 2,000 1,500

This capex will increase capacity from 291,980 tonnes currently to 595,000tonnes in FY15. This will be a combination of greenfield as well as brownfieldprojects. As far as greenfield expansion is concerned, SIL will be adding 12new locations by FY15, which will take its total facilities’ tally to 31 plants fromthe existing 19.

Segments No. of plants Proposed locationsPlastic piping 1 West BengalPackaging films 5 Halol, Hosur, West Bengal,

RajasthanIndustrial products 3 Ahmedabad, Jamshedpur,

PondicherryConsumer products 3 Andhra Pradesh, East and North

zonesTotal 12

Source: Company

Strategy going forward

Source: Company, Dolat Research

DOLAT CAPITAL


India ResearchCapex outlay for FY12: During FY11, SIL incurred a capex of Rs 2.6bn. In linewith its strategy of incurring a capex of Rs 10bn from FY11 to FY15, SIL will beincurring an additional capex of Rs 2bn in FY12, which includes the following:

New facility to manufacture XF films at a capex of around Rs 700mn, whichwill add around 6,000 tonnes of incremental capacity

New facility to make foam products and industrial components

Augmenting existing capacities across product portfolio

Rs 650mn to make a niche LPG composite cylinders facility, with an initialcapacity of 400,000 units

Monetisation of property to fund expansion: The over Rs7bn capex mentionedabove will be funded through internal accruals and by monetising SIL’scommercial property in Mumbai. It may be noted that construction of thecommercial complex is complete and the process of its monetisation is alreadyunderway.

SIL will be retaining two blocks for its own commercial usage. So far, it has soldthree blocks (one in FY10 and two in FY11) and negotiations for a few otherblocks are at an advanced stage. We expect the remaining 17 to get sold onlyby FY13, considering the management’s intent to hold on to the price or mayeven increase it considering the receipt of the “occupation certificate” in Q4FY11.

Particulars FY10 FY11 FY12E FY13E TotalNo. of blocks (units) 1 2 8 9 20Area (sq ft) 13,106 26,409 100,000 110,485 250,000Rate per sq ft (Rs) 15,604 15,052 14,000 14,000 14,195Rs mnSales 204.5 397.5 1,400.0 1,546.8 3,548.8Cost 72.2 164.8 619.6 684.6 1,541.2PBT 132.3 232.7 780.4 862.2 2,007.6Tax 42.5 76.8 257.5 284.5 661.4PAT 89.8 156.0 522.8 577.7 1,346.3Cash flows 162.0 304.8 1,086.5 1,200.4 2,753.7


DOLAT CAPITAL


India ResearchExpect volume growth at 18.4% CAGR: Led by strong demand outlay, alongwith the capex initiatives, SIL is expected to witness a volume CAGR of 18.4%from 224,673 mtpa in FY11 to 315,000 mtpa in FY13 as shown hereunder:

It may be noted that with volumes expected to grow at 18.4% CAGR, capacityutilisation will increase from 68.4% in FY11 to 72.2% in FY13E.

Increasing share of value-added products (VAPs)

VAPs are products incorporating technological innovations and have nichedesigns. Thus they fetch superior margins compared to standard products.These are construed as products with operating margins of over 17% (SIL’sOPM as a whole stand at around 14%).

VAP FY09 FY10 FY11 FY12E FY13EPlastic piping 870 1370.9 2277.0 2960.1 3848.1Packaging films Cross laminated films 1952.4 2290.2 3160.0 3792.9 4550.4 Protective packaging 399.9 486.9 613.5 736.2 883.4Consumer products Moulded furniture 346.6 541.3 790.8 1107.1 1550.0Total 3568.9 4689.3 6841.3 8595.4 10831.9Net revenues - Plastic segment 15606.1 18580.3 23335.2 27579.0 32275.0% of VAP 22.9 25.2 29.3 31.2 33.6


Backed by higher growth in cross-laminated films in the packaging filmsdivision (100% VAPs) and further supported by the plastic piping division, weexpect VAPs’ share in total revenue to rise from 29.3% (FY11) to 33.6% (FY13E).

Diversifying product portfolioApart from investing in its existing business segments, SIL is diversifying itsportfolio by introducing new products that include LPG composite cylinders,micro-irrigation products and moulded fittings for infrastructure and gasdistribution. While the company has already committed capex for a LPGcomposite cylinder-making facility, plans for new products are still nascent.

in T

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DOLAT CAPITAL


India ResearchLPG composite cylindersSIL has earmarked a capex of Rs 650mn to make a niche facility for LPG compositecylinders, with an initial capacity of 0.4mn units. The project, which is comingup in western India, is expected to start operations by Q2FY12. Currently, LPGcylinders are made of steel. A proposal has been made for use of compositecylinders, on which oil companies are working. As per regulatory norms, theChief Controller of Explosives, Nagpur, approves cylinders that can be usedfor LPG.

Composite cylinders will be transparent or translucent and made of plastic.Though the cost of such cylinders would be higher at Rs 3,000 per unit ascompared to Rs 1,200 for metal cylinders, the incremental benefits are expectedto be much higher. Apart from being explosion proof, they will be much lighter(6 kg) than steel (15 kg). Also the level of LPG during delivery would be visible.

India has over 150mn gas cylinders in circulation at present, and this isestimated to be growing by 12mn every year. Oil marketing companies haveannounced an additional 55mn gas connections in the rural sector in the nextfive years, which will generate a huge demand for cylinders.

Value in Supreme Petrochem (SPL)Supreme Petrochem, in which SIL has around 30% stake, is the largest single-site polystyrene (PS) producer with a capacity of 272,000 tonnes per annum,accounting for 2% of the global capacity and 60% of the domestic installedcapacity. The facility is based on technology from the erstwhile HuntsmanChemical Corp (now NOVA Chemicals), US, with basic engineering by ABBLummus Crest, US.

SPL is also the largest exporter of PS from India, exporting to over 80 countriesglobally. The product-range covers the entire spectrum of polystyrenes –general purpose polystyrene (GPPS), high-impact polystyrene (HIPS), specialitypolymers, expanded polystyrene (EPS), extruded polystyrene (XPS) andcompounded polymers.

With PS demand rising, SPL is expanding capacities of EPS (normal grade andcup grade) and speciality polymers and setting up a captive power project aswell:

New facilities (cup grade EPS and standard grade EPS with capacities of20,400 TPA and 24,000 TPA respectively at Nagothane), expected to becommissioned by September this year.

Revamping all existing PS lines to increase production of high-valuepremium grades from 48,000 to 98,000 TPA, within the overall currentcapacity of 272,000 TPA, expected to be completed by FY12

Expansion of SPS capacity in three phases to 43,800 TPA from 25,000 TPA –commissioning of the first two phases (which will take the capacity to 33,500TPA) expected by September this year.

Captive gas power plant of 4,000 KVA at Nagothane, to go on-stream anytime soon.

Of the above-mentioned capex initiatives at Rs 1.8bn, SPL has already spentRs 920mn in FY11 while the balance is expected to be incurred in the currentfiscal. The same is proposed to be funded through debt and internal accruals.With increasing demand for SPL products, coupled with introduction of newVAPs in the PS segment and capex initiatives, we expect volume growth at15% CAGR from 157,450 tonnes in FY10 to 239,462 tonnes in FY13E.

DOLAT CAPITAL


India ResearchSupreme Petrochem: Volume growth (FY10-13E)


Correspondingly, net revenues will grow at 12% CAGR from Rs 19.4bn in FY11to Rs 24.4bn in FY13E. PAT will grow from Rs 877mn in FY11 to Rs 978mn in FY13at 6% CAGR.

Rs.mn Tonnes

DOLAT CAPITAL


India ResearchArguments for Re-rating(1) Healthy topline growth on the back of strong capex initiatives and higherfixed asset turnover; (2) Rising free cash flows resulting from core operationsthrough strict control of working capital, thereby keeping debt-to-equity undercheck; (3) stable margins - enabling SIL to maintain higher RoE at above 30%.

Led by healthy demand across portfolio, SIL’s revenues and PAT are expectedto grow 17.5% and 24.1% CAGR respectively from FY10 to FY13E. At CMP, SIL’score business is attractively valued at 9.4x FY13E earnings. We believe superiorprofitability, improving free cash flows and healthy return ratios, along withthe strong dividend payout ratio, shall drive re-rating for SIL.

Continuously rewarding shareholders: another feather in SIL’s cap

Strong dividend payout ratios Regular bonusesYear PAT Divd. outgo Divd. outgo Year Ratio

(Rs mn) (Rs mn) (%)FY06 469 158 34 FY1978 3:5FY07 515 240 47 FY1981 2:5FY08 538 259 48 FY1986 4:5FY09 909 357 39 FY1988 1:1FY10 1,560 534 34 FY1992 1:1FY11 1,958 635 32 FY2006 1:1FY12E 2,775 832 30 Stock SplitFY13E 3,354 996 30 FY2010 5:1

The above statistics reflect SIL’s strong dividend payout history over the pastfive years. To add to this, it has also been declaring regular bonuses apart fromdeclaring a 5-for-1 stock split in FY10. This represents to us a strongcommitment by SIL towards its shareholders, which augurs well for the stock.Further, SIL has not raised any capital since the current management took overfifteen years ago, despite being in such an asset-heavy business. In fact, thecompany did a buyback of 2.2mn shares in FY09 at a pre-split average price ofRs 111.

Re-rating Candidate


DOLAT CAPITAL


India ResearchCompany BackgroundSIL is an acknowledged leader of India’s plastic industry, processing over200,000 tonnes of polymers annually with over six decades of existence. It hasa diversified business model with a large product portfolio spread across itsfour business divisions.

Over the years, SIL has managed to gain significant market share. It is alsocredited with pioneering several products in India including cross-laminatedfilms, high molecular, high density films, multilayer films, soil, waste and rainwater piping systems, polypropylene mats etc. SIL currently has 19manufacturing plants spread across India with a combined asset base of overRs 12bn.


DOLAT CAPITAL


India ResearchBusiness SegmentsSIL has four main business segments - Plastic piping, packaging films, industrialproducts and consumer products. The plastic piping segment, which providespiping solutions, currently contributes 43% to overall revenues, followed bypackaging films, which contributes 24%. On the other hand, the industrial andconsumer product segments contribute 21% and 11% respectively to overallrevenues, with others contributing the rest (1%).

SIL has a diversified business model with a large product portfolio and alsohas a strong reach with 19 facilities across India. Over the years, it has managedto gain significant market share across its products portfolio by leveraging itsstrong brand image, Supreme. It particularly enjoys strong brand recall in PVCpipes, tarpaulin and furniture segments.


DOLAT CAPITAL


India ResearchPlastic Piping: Key features

Leading player with over 5,000 products for various application systems

Meets various requirements of irrigation, bore wells, potable water supply,plumbing, drainage, sewerage, rainwater harvesting and watermanagement through a high-quality range of piping products

One of the largest players in this segment, along with Finolex Industriesand Jain Irrigation

Introduced various path-breaking technologies in India such as the Soil,Waste & Rain Water (SWR) drainage system, the Indo-Green PP-R hot andcold water system, etc.

Product portfolio includes uPVC pipes, injection-moulded fittings, HDPEpipe systems, CPVC pipe systems, etc.

Commands a market share of 10% in the Rs 100bn domestic plastic pipingmarket

EBITDA margins of 12% in FY11 from this segment

Share of value-added products at 22% in FY11

Contributed 43% to overall revenues and 37% to overall EBITDA in FY11

CAGR growth of around 26% from FY07 to FY11

Expected to grow at 17.2% CAGR from FY11 to FY13 driven by robust demand

Plastic Piping revenues (Rs mn): FY07-13E


Plastic Piping Segment

DOLAT CAPITAL


India ResearchPackaging films: Key features

Key categories include cross-laminated films, specialty films and protectivepackaging products

Cross-laminated films (XF films)

o Acknowledged leader in plastic tarpaulin industry, providing qualitymultilayered cross-laminated films under the brand SIPAULIN forvarious inter alia agricultural and industrial applications

o Exports to Europe, Africa, US and West Asia

Specialty (performance) films

o India’s largest manufacturer of co-extruded multilayer barrier films(up to seven layers) with over 10,000 mtpa capacity

o Supplier to leading food-processing companies in India and abroad

Protective packaging products

o Provides tailor-made packaging solutions for diverse industries

o Introduced various niche products in India such as EPE foam, air bubblefilm & cap cell

o Key divisions in this segment include:

Protective packaging and cushioning (PROTEC): Offerscustomised products like corrosion-resistant, anti-static andmetal-laminated foam and bubble films for industries such assports goods, electronics, white goods, textiles, toys, etc

Packaging services and logistics (PSL): Offers complete end-to-end solutions ranging from recommendation and selection ofright materials, customised design and fabrication, packing anddispatch

Construction accessories (DURA): Offers solutions from flooringunderlay to concrete expansion joints for varied requirementsof both commercial and residential buildings

Insulation (INSU): Offers superior insulation products specificallyfor requirements of various industries with the sole purpose ofimproving energy efficiency

Introduced various path-breaking technologies in India such as instantpolyurethane foams, reticulated foam for air filtration, high temperatureand fire resistant melamine foam

Commands a market share of over 30% in speciality products such as EPEfoam, air bubble film and cap cell

EBITDA margins of 19% in FY11 largely due to higher proportion of value-added products

Share of value-added products (OPM greater than 17%) at 65% in FY11


CAGR growth of around 17.5% from FY07 to FY11

Expected to grow at a CAGR of 21% from FY11 to FY13

Packaging Films Segment

DOLAT CAPITAL


India ResearchPackaging Films revenues (Rs mn): FY07-13E


Industrial Products: Key features

Manufacturer of industrial components and material-handling products

Provides cockpit assemblies for the automobiles segment (four-wheelers)and parts and accessories for the two-wheeler segment

Largest supplier of crates to the soft drink industry

First to launch industrial moulded plastic pallets

Product portfolio includes plastic components for air conditioners,computers, water purifiers, etc; auto plastics, and material-handlingproducts like crates, pallets and dustbins

Commands a market share of 18% in the domestic material-handling productsegment (estimated market size: Rs 5.6bn)

EBITDA margin of 14% in FY11 from this segment

Contributed 21% to overall revenues and around 20% to overall FY11 EBITDA

CAGR growth of 22.7% from FY07 to FY11

Expected to grow at a CAGR of 17.2% from FY11 to FY13

Industrial Products revenues (Rs mn): FY07-13E


Industrial Products Segment

DOLAT CAPITAL


India ResearchConsumer Products: Key features

Second-largest player in plastic moulded furniture, with current processing capacity of 21,700 mtpa

Pioneer in lacquered and upholstered moulded plastic furniture

Over 1mn units of modern plastic furniture manufactured every month

Commands market share of 13% in domestic plastic furniture segment(estimated market size: Rs 11bn)

EBITDA margins of 12% in FY11 from this segment


Share of value-added products at 30% in FY11

CAGR growth of 12.6% from FY07 to FY11

Expected to grow at 11.5% CAGR from FY11 to FY13 on the back of renewedfocus in tier II and III cities

Consumer Products revenues (Rs mn): FY07-13E


Consumer Products Segment

DOLAT CAPITAL


India ResearchNet revenues (Rs mn) to grow at a CAGR of 17.5% from FY11 to FY13

Revenue Mix: Plastic piping and Packaging films to continue todominate

FY11 FY13E


Net Revenue Mix

DOLAT CAPITAL


India ResearchPlastic piping

Spurt in PVC resin prices (by 20%) during Feb-Mar 2011 dampened Q4 FY11growth, restricting overall volume growth to 16% and value growth to 24%

Building industry segment grew 30% while infrastructure grew 10% in value

Under plumbing products, Aquagold System grew nearly 40% while CPVCgrew over 100%

SIL sold 137mn pieces of fittings in FY11 (97.7mn in FY10 -- up 40% YoY

VAPs’ share rose from 17% in FY10 to around 22% in FY11

Overall product portfolio increased from 5,000 in FY10 to 5,311 in FY11

Introduced 450mm dia HDPE pipe in the last year, which has been wellaccepted by the market

To introduce Nu-Drain piping system in the field of sewage & drainagetransportation and is also in the process of developing the cheaper versionof manhole covers in 1 mtr and 1.2 mtr dia

Packaging films

Healthy volume growth of 23% and value growth of 27%

Packaging films segment grew 3% from 5,709 tonnes to 5,893 tonnes, largelyon account of the government’s reluctance on buying 5-layer film fordistribution of edible oil under PDS system

The new 7-layer film line has been installed and is now runningsatisfactorily. SIL expects over 20% volume growth in FY12.

Protective packaging segment grew 13% in volume and 26% in value. Overallcapacity rose from 14,960 tonnes in FY10 to 17,600 tonnes in FY11 and isexpected to increase to 21,070 tonnes by FY12.

XF Films grew 30% in volume from 11554 tonnes to 15,050 tonnes and 38%in value terms. SIL expects to sell the entire installed capacity of 18,000tonnes in the current year

Exports grew 7% from 1,320 tonnes to 1,412 tonnes

SIL is contemplating adding 6,000 tonnes of additional capacity by Q2FY13, considering strong demand outlay for the product.

During the last quarter, SIL entered into an deal with a technicalcollaborator for extension of exclusive rights to manufacture and sellXF products in India and SAARC countries till up to 2025.

Further, the above rights have also been extended to include entireSoutheast Asia and the whole of Africa.

SIL is also exploring the possibility of putting up capacity in one of theAfrican countries.

Industrial products

Healthy volume growth of 17% and value growth of 29%

Industrial components segment grew 30% in value, driven by buoyantdemand in automobiles and consumer durables.

In FY11, SIL has bagged orders for development of cockpit assembly forTata Motors’s new version trucks. The development is at an advance stageand manufacturing is expected to take off in H2 FY12.

It has also bagged orders for development of plastic parts for Piaggio’s twowheelers, to be launched sometime early 2012.

Key Operating Highlights: FY11

DOLAT CAPITAL


India ResearchAnother significant order was bagged for various parts and accessories fromWhirlpool for its ‘all plastic washing machine’.

Material handling segment grew 27% in value and 20% in volume, drivenby strong demand from tailor-made crates to meet specific requirement ofapplications at the customers end.

Consumer products division

Volume growth of 11% and value growth of 24%

Furniture segment grew 13% in volume and 25% in value.

New channel partners to cater to demand of west and south zone markets.

SIL launched, for the first time in India, two models of Mono Block GasMolded Chair, which has been well received by the market.

Share of VAPs in this segment has increased by 3-30% of overall segmentsales and the same is expected to rise by another 3% in the current year.

Mats segment recorded flat growth, driven by input costs and forexvolatility.

FY11 revenues stood at Rs 15 crore (around 6% of overall division revenues).

SIL has therefore decided to close this business by December 2011.

DOLAT CAPITAL


India ResearchWe value SIL on an SoTP basis for: (i) its core operations, and (ii) its stake inSPL.Valuation of SIL’s core operations on PE basis FY13EFY13E PAT (Rs mn) 2,452.4EPS (Rs) 19.3FY13 PE (x) 9.4Target PE multiple (x) 12.0Valuation per share (Rs) 232.0

Valuation of SIL’s 29.9% stake in SPL on PE basis FY13EFY13E PAT of SPL (Rs mn) 977.8SIL’s stake (29.9%) 292.2EPS (Rs) 2.3Target PE multiple (x) 6.0Valuation per share (Rs) 14.0

SoTP Valuation of SIL FY13EValuation per share of SIL’s core operations (Rs) 232.0Valuation per share of SIL’s stake in SPL (Rs) 14.0Target price (Rs) 246.0CMP 182.0Upside potential (%) 35.0Source: Dolat Capital research

SIL’s business is valued at Rs 232 per share based on 12x its core business FY13Eearnings of Rs 19.3. Further, SIL’s 29.88% stake in SPL is valued at Rs 14 pershare. Thus, SIL’s SoTP valuation comes to Rs 246. Further expansion inmultiples, hence an upward revision of target price, is on the cards, consideringhigher profitability, free cash flows and healthy return ratios. Also to beconsidered is SIL’s strong dividend payout ratio that it has maintained overthe years. We initiate coverage on SIL with a BUY rating and TP of Rs 246.

Concerns

Fluctuation in prices of key raw materials: PVC resin is the key raw materialfor SIL, which constitutes 45% of the total raw material cost. While SIL hasthe pricing power to pass on these and sustain margins, however highvolatility and time lag can have an adverse near term impact on earnings.

Delay in sale of commercial property: We believe SIL will complete thesale of its entire commercial property by FY13. Any delay will affect cashflows and financials.

Valuation

DOLAT CAPITAL


India ResearchINCOME STATEMENT Rs.mn

Particulars June10 June11 June12E June13ENet Sales 19,866 23,965 28,329 33,075Other operating income 91 333 382 431Total Income 19,957 24,297 28,711 33,506Total Expenditure 17,103 20,975 24,706 28,720Raw Material 11,865 15,147 17,422 20,341Cost of goods traded 1,325 849 1,133 1,323Decrease / (Increase) in stock (98) (228) 0 0Stores and spare parts consumed 201 233 312 331Employee Expenses 1,114 1,383 1,700 1,985Power, Oil & Fuel 795 1,002 1,275 1,488Packing, freight and transport charges 638 876 907 992Selling & Administrative Expenses 1,187 1,604 1,813 2,084Other Expenses 75 108 145 176EBIDTA (Excl. Other Income) 2,855 3,322 4,005 4,786EBIDTA (Incl. Other Income) 2,896 3,367 4,048 4,851Other Income 42 45 43 65Interest 331 425 486 480PBDT 2,608 2,986 3,605 4,436Depreciation 529 619 755 841Profit Before Tax & EO Items 2,078 2,367 2,849 3,595Extra Ordinary Exps/(Income) - Post tax (89) (177) (523) (578)Profit Before Tax 2,167 2,545 3,372 4,173Tax 706 802 846 1,077Net Profit 1,461 1,742 2,526 3,095Share of Associates 139 261 270 292Net Profit 1,600 2,003 2,796 3,388Adjusted Net Profit (adj. for EO items) 1,470 1,781 2,230 2,745

BALANCE SHEET

Particulars June10 June11 June12E June13ESources of FundsEquity Capital 254 254 254 254Share Premium 475 475 475 475Other Reserves 3,412 4,748 6,669 8,996Net Worth 4,141 5,477 7,398 9,725Secured Loans 2,691 3,532 3,830 4,150Unsecured Loans 1,182 1,580 1,680 1,650Loan Funds 3,874 5,112 5,510 5,800Deferred Tax Liability 698 795 795 795

Total Capital Employed 8,713 11,385 13,704 16,320

Applications of FundsGross Block 9,689 12,021 14,021 16,021Less: Accumulated Depreciation 4,033 4,604 5,359 6,201Net Block 5,655 7,417 8,661 9,820Capital Work in Progress 131 262 200 200Investments 693 916 1,141 1,388Current Assets, Loans & AdvancesInventories 2,906 3,454 4,269 4,984Sundry Debtors 1,310 1,529 2,096 2,628Cash and Bank Balance 187 142 174 147Loans and Advances 978 1,511 2,228 2,869sub total 5,382 6,636 8,766 10,627Less : Current Liabilities & ProvisionsCurrent Liabilities 3,134 3,845 5,045 5,691Provisions 14 1 20 25sub total 3,148 3,845 5,065 5,716Net Current Assets 2,234 2,790 3,701 4,912Misc Expenses 0 0 0 0

Total Assets 8,713 11,385 13,704 16,320E-estimates

IMPORTANT RATIOS

Particulars June10 June11 June12E June13E(A) Measures of Performance (%)Contribution MarginEBIDTA Margin (excl. O.I.) 13.9 12.5 12.8 13.2EBIDTA Margin (incl. O.I.) 14.4 13.9 14.1 14.5Interest / Sales 1.7 1.8 1.7 1.5PBDT Margin 12.9 12.3 12.6 13.2Tax/PBT 33.2 35.1 33.2 33.2Net Profit Margin 7.4 7.4 7.9 8.3

(B) As Percentage of Net SalesRaw Material 58.7 61.3 61.5 61.5Employee Expenses 5.6 5.8 6.0 6.0Power, Oil & Fuel 4.0 4.2 4.5 4.5Selling & Administrative Expenses 6.0 6.7 6.4 6.3Packing, freight and transport charges 3.2 3.7 3.2 3.0

(C) Measures of Financial StatusDebt / Equity (x) 0.9 0.9 0.7 0.6Interest Coverage (x) 7.2 6.5 6.8 8.4Average Cost Of Debt (%) 8.5 8.3 8.8 8.2Debtors Period (days) 24 23 27 29Closing stock (days) 53 53 55 55Inventory Turnover Ratio (x) 6.8 6.9 6.6 6.6Fixed Assets Turnover (x) 3.5 2.0 2.0 2.1Working Capital Turnover (x) 8.9 8.6 7.7 6.7Working Capital Turnover (days) 54.1 48.0 58.0 60.0Non Cash Working Capital (Rs Mn) 2,047 2,648 3,527 4,765

(D) Measures of InvestmentEPS (Rs.) (excl EO) 11.6 14.0 17.6 21.6EPS (Rs.) 12.3 15.4 21.7 26.2CEPS (Rs.) 16.4 18.9 23.5 28.2DPS (Rs.) 3.6 4.3 5.6 6.7Dividend Payout (%) 34.2 32.4 30.2 30.0Profit Ploughback (%) 65.8 67.6 69.8 70.0Book Value (Rs.) 32.5 43.0 58.1 76.4RoANW (%) 40.9 37.0 34.6 32.1RoACE (%) 28.6 27.3 26.2 26.7RoAIC (%) (Excl Cash & Invest.) 29.1 27.8 26.6 27.0

(E) Valuation RatiosCMP (Rs.) 182 182 182 182P/E (x) 15.7 13.0 10.4 8.4Market Cap. (Rs. Mn.) 23,119 23,119 23,119 23,119MCap/ Sales (x) 1.2 1.0 0.8 0.7EV (Rs. Mn.) 26,806 28,089 28,455 28,772EV/Sales (x) 1.3 1.2 1.0 0.9EV/EBDITA (x) 9.4 8.5 7.1 6.0P/BV (x) 5.6 4.2 3.1 2.4Dividend Yield (%) 2.0 2.4 3.1 3.7E-estimates

CASH FLOW

Particulars June10 June11 June12E June13EProfit before tax 2,265 2,761 3,599 4,400Depreciation & w.o. 529 619 755 841Direct taxes paid (706) (802) (846) (1,077)Change in Working Capital (Non Cash) (319) (518) (859) (1,238)Other (14) (22) (19) 0(A) Cash Flow from Operating Activities 1,755 2,038 2,630 2,925Capex {Inc./ (Dec.) in Fixed Assets n WIP} (661) (2,463) (1,938) (2,000)Free Cash Flow 1,094 (425) 692 925Inc./ (Dec.) in Investments (197) (223) (225) (247)(B) Cash Flow from Investing Activities (858) (2,686) (2,163) (2,247)Issue of Equity/ Preference 0 0 0 0Inc./(Dec.) in Debt (283) 1,239 398 290Dividend Paid (Incl. Tax) (534) (635) (832) (996)(C) Cash Flow from Financing (817) 603 (435) (706)Net Change in Cash 79 (45) 32 (28)Opening Cash balances 107 187 142 174Closing Cash balances 187 142 174 147E-estimates

Financials

DOLAT CAPITAL


India Research

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DOLAT CAPITAL

37October 5, 2011 Sintex Industries

India ResearchIn

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Sintex Industries



Scrip Details

Equity Rs.271mnFace Value Rs.1/-Market Cap Rs.30bn

USD 607mn52 week High/Low Rs. 237 / 110Avg. Volume (no) 1,553,413BSE Code 502742NSE Symbol SINTEXBloomberg Code SINT INReuters Code SNTX.BO

Shareholding Pattern as on June’11(%)Promoter 35.0MF/Banks/FIs 5.8FIIs 37.8Public / Others 21.4

Sintex Industries has corrected 54% from its peak owing to concerns on sustainability of growth and overhang ofFCCB redemption. While the near term challenges remain, we do not see any earnings deceleration which warrantssuch correction. Apart from the momentum visible in the building products segment, the custom moulding segmentcontinues to show reasonable growth backed by operational synergies across acquired companies and capexinitiatives at its domestic facilities. We expect Sintex to report a revenue and PAT CAGR of 21.6% and 16.2%respectively from FY11-13E. Considering that Sintex has a diversified presence across sectors, we have valuedthese segments (building product, custom moulding and textiles) on EV/EBIDTA basis and arrived at the valuationof Rs174 per share after considering a 20% conglomerate discount. At the target price, the stock trades at an impliedP/E of 7.6x FY13E EPS and 6x FY13E EV/EBIDTA.

Investment Rationale“Thrust on change” but “Connect within the Disconnect”Since its incorporation, Sintex has forayed into niche businesses like liquidstorage tanks, prefabricated structures and monolithic construction. Further,Sintex made a series of overseas acquisitions which not only marked itsentry into EU and the US markets but also helped it diversify into a host ofplastic composite products with applications in aerospace & defence, masstransit, medical imaging, wind energy and so on. This willingness to changeprompted Sintex to foray into scalable businesses at their nascent stages.Such forays gave it a first-mover advantage, helped identify inflection pointsand then capture the market, leading to attractive value-creation. It may benoted that while a number of its business verticals and products may appearunconnected, there is a common thread binding them -- replacingconventional material with plastic in high-growth sectors.

Monolithic segment to drive building product revenuesThe building product segment comprises of three revenue streams –monolithic construction, pre-fabricated structures and storage tanks. Themonolithic segment particularly has grown rapidly, with revenue and EBIDTACAGR of 85% and 92% respectively from FY08-11. With a strong order book ofRs 30bn and increasing scalability in terms of number of sites per annum andaverage ticket size of orders resulting in economies of scale, we expect thissegment to report revenue and EBIDTA CAGR of 38.5% and 29.4% respectivelyfrom FY11-FY13E. The building products segment in turn is expected to growat 31% and 24% CAGR in revenue and EBIDTA respectively.

Custom moulding segment to supplement growthSintex has over the years developed as a leading plastic processor in theareas of electricals and automobiles, providing plastic components todedicated OEM clientele. After acquiring companies abroad, it has venturedinto composites business in various high-growth verticals such as mass transit,aerospace & defense and medical imaging. After being hit during theslowdown, these are now beginning to deliver due to outsourcing synergiesand following some signs of revival. We expect this segment to deliver arevenue and PAT CAGR of 13.6% and 11.8% respectively for FY11-13E.

FinancialsYear Net Sales % growth EBITDA OPM% Adj. PAT % growth Adj.EPS(Rs.) PER (X) EV/EBIDTA(x) ROANW(%) ROACE(%)FY10 32,816 7.1 5,009 15.3 3,294 1.3 12.1 9.0 9.3 17.8 10.7FY11 44,752 36.4 8,069 18.0 4,600 39.7 16.9 6.5 5.9 21.1 14.0FY12E 54,746 22.3 9,535 17.4 5,061 10.0 18.5 5.9 5.0 19.1 13.9FY13E 66,152 20.8 11,187 16.9 6,217 22.8 22.8 4.8 4.5 19.5 16.4Figure in Rs mn

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DOLAT CAPITAL


India ResearchMantra: “Thrust on change” but “Connect within the Disconnect”

Sintex started off as just a textile company. It then pioneered the concept ofliquid storage plastic tanks, which, in a span of five years, became a greathousehold and industrial brand. However, with unorganised players eatinginto its market share with spurious products, Sintex transformed into a multi-product plastic company, finding applications in building products, electricalsand automobiles.

In 2001, Sintex pioneered the concept of prefabricated structures, which didnot gain sizeable proportions until 2005. By then Sintex had developed strongrelations with the state governments who had approved the company as apre-fab vendor. This was a precursor to Sintex entering into MonolithicConstruction (now its mainstay) in 2005, after considering a number of requestsfrom the state governments to find solutions for mass housing.

Further, after gaining significant presence in the custom moulding segment,Sintex made a series of overseas acquisitions, which not only marked its entryinto EU and USA markets but also helped diversify into a host of plasticcomposite products, finding applications into aerospace & defence, masstransit, medical imaging, wind energy and so on. This transformed Sintex frombeing a domestic company into a global player in plastic composites.

Interestingly, what used to be a flagship product at one point of time (liquidstorage plastic tanks) today accounts for less than 5% of its revenues, with thecompany’s success in other niche areas.

A number of industry observers believe Sintex has been growing into non-synergic businesses that could potentially impede medium-term profitability.However, it may be noted that while a number of its business verticals andproducts may appear unconnected, there is a common thread binding them -- the novel application of plastic to replace conventional material in high-growth sectors with long-term potential.

DOLAT CAPITAL


India ResearchMonolithic segment to drive revenues in the building product segment

The building product segment (49% of revenues) comprises of three sub-segments - Prefabricated structures, Monolithic Construction & Liquid StorageTanks.

Prefabricated Structures set to grow after a lull

Sintex introduced prefabricated structures -- readymade building strutures --in India in 2001. These have been used globally for a large variety ofapplications, including both temporary and permanent residential, industrialand commercial structures. Sintex’s prefabricated structures use concretebetween plastic channels, making it lighter and easy to set up and transportwithout reducing its overall strength. Prefabricated structures can be utilisedto create small structures at multiple locations. These products are made ofplastic, concrete and related material.

These structures are delivered as turnkey projects by Sintex as it offers end-to-end solutions from manufacturing to execution of logistics and installation.These are 25-40% cheaper, time to erect them is just 10-15% of a concretestructure, and they can withstand earthquakes up to seismic level of five andwind speed of up to 150 km per hour.

Some of the most common applications for prefabricated structures in India:

BT shelters that give excellent insulation for housing telecom and electronicequipment

Public healthcare centres and schools (high on government priority) andpublic administration buildings in remote locations (80-85% of Sintex’sprefab revenues is comprised from this segment); and

Portable toilets

Prefabs business - Operating Economics

The prefabricated structures business is very much an execution-led businessthat requires not only a well-trained workforce but also manufacturing facilitiesat strategic locations so as to reduce the lead time and costs associated.

Ideally, any contract under this segment becomes viable if the location wherethe construction occurs is within 1,000km of the manufacturing location.Sintex’s plants are located in five places in India to maximise the addressablearea as under:

Sintex’s manufacturing locations Approved States falling within 1,000km radiusKalol, Gujarat Gujarat & RajasthanNagpur, Maharashtra Maharashtra, Madhya Pradesh & ChattisgarhKolkata, West Bengal West Bengal, Bihar & AssamSalim, Tamil Nadu Karnataka, Tamil Nadu, Kerela & Andhra PradeshBaddi, Himachal Pradesh Himachal Pradesh, Punjab & HaryanaDadri, Uttar Pradesh Uttar Pradesh, Haryana & Delhi

Source: Company

Approvals from State govt a pre-requisite - the largest demand driver so farThe above table indicates that Sintex has already been approved as a prefabvendor for 17 states and it expects to add other states as well over the nextfew years. It may be noted that allocation of funds to social infrastructureflagship schemes in education, health and sanitation have been consistentlyincreased since FY08, thereby driving demand for prefabs required forimplementation.

Building Product Segment

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India ResearchBudget allocation (Rs mn) FY08 FY09 FY10 FY11 FY12 Focus area for

SintexNational Rural Health 99,470 120,500 139,300 156,720 178,400 HealthcareMission centersTotal Sanitation Campaign 9,400 12,000 12,000 15,800 16,500 Sanitation blocksMid-day meal Scheme 73,240 80,000 80,000 94.400 103,800 Kitchen shedsSarva Shiksha Abhiyan 106,710 131,000 131,000 150,000 210,000 Education

centersSource: Dolat Research

Almost 30% of allocation towards these schemes is directed toward setting upof classrooms, mid-day meal kitchens, toilet blocks and healthcare centres,thereby opening up a big opportunity for Sintex, which has been a leader inthis segment.

Capacity ExpansionIn this space, Sintex recently incurred a capex of Rs 700mn for putting up afacility at Dadri in Uttar Pradesh, which got commissioned in August 2011. Thiswill benefit Sintex in terms of saving logistics costs while catering to projectsin the UP state which it was serving through its facility in Baddi, HimachalPradesh. Further it is also proposing to set up another facility in the North Eastregion at a capex of Rs 700 million. This will take Sintex’s total number ofprefab units to seven.

Order bookAt any given point in time, Sintex has an order book of Rs 1-1.5bn. Nearly 80-85% of the book is dominated by orders from state governments for buildingprefabs for public healthcare centres & schools while the balance is fromprivate sector which includes orders for building BT shelters & worker sheds.

New product launches: Cold chain management solutionsIn addition to the government orders, Sintex is scaling up its presence inwarehousing, agriculture sheds and cold chain management. It has recentlycommissioned a new plant imported from Korea capable of manufacturinglarger structures that are typically required for building warehouses. The newplant has the capability to manufacture slabs of 40 feet in length, which allowsthe company to prefabricate larger structures.

India is losing food items worth Rs 500bn annually on account of the poorpost-harvest handling of farm produce. Logistic companies in India have drawnup an investment plan of Rs 50 billion for 2010-12 to expand warehouseoperations nationwide. Sintex is prepared for this opportunity through themanufacture of customised pallets for diverse applications, racking systems,new walling solution (sandwich panel with puff insulation), completewarehousing solutions and cold-chain management solutions.

BT Shelters: Momentum continues to drift downwardsSintex, though its acquisition of Zep Infratech (which had a 25% market sharein BT Shelter segment) in FY07 further consolidated its position in the BT sheltersegment. It offers BT Shelters for the telecommunications industry that arewell insulated, lightweight, compact, watertight, dust proof and durable. Theseshelters have thermally insulated walls made from high-grade sandwich panelswith P U F as core, the technique which is mastered by Sintex.

After initial stages of strong growth momentum, this segment has been alaggard over the last couple of years with telecom industry witnessing a sharp

DOLAT CAPITAL


India Researchdownturn in capex cycle. Though we expect this segment to continue tounderperform in the short to medium term, we believe that the growth inother segments would more than make up for this underperformance.

Prefab segment: cost break-up & EBIDTA (%)

Prefab segment: Revenues (Rs mn), EBIDTA (Rs mn) & EBIDTA (%): FY07-FY13E

Zap Infra: Revenues (Rs mn), EBIDTA (Rs mn) & EBIDTA (%): FY07-FY13E


DOLAT CAPITAL


India ResearchCompetitive strengths put Sintex in the Numero Uno positionIn the prefabs space, Sintex competes largely with L&T on a national level ,besides regional players. We believe Sintex will remain a dominant player inthis segment on account of its following strengths:

Approved by 17 state governments, a pre-requisite before obtaining ordersfrom them

Ability to make a wide-range of products besides regular introduction ofnew products

Scale and efficiency gained over the years: Setting up 1,500 classroomsacross 450 villages in 9-10 months is a huge task. Sintex has mastered thetechnique through better kit designing, speed of execution and logisticsmanagement. Small/regional competitors find it tough to match similarscale and efficiency.

Advantages over conventional brick & mortar construction

cheaper by 25-40%

Time to erect is just 10-15% of a concrete structure

Portable and easy to erect

Strong, durable and safe

Excellent thermal insulation

Prefabricates Structures

Prefab School Prefab Bunk House

Prefab BT Shelter Prefab Toilets

DOLAT CAPITAL


India ResearchMonolithic construction to drive overall revenue growth

What is monolithic constructionIn 2008 Sintex designed and introduced an entirely new housing solutionto address Indian mass and low-cost construction needs, named “monolithicconstruction”. Monolithic concrete construction is a method by which wallsand slabs are constructed together by pouring fluid cement concrete into alight weight formwork system while using nominal quantities of metallicreinforcement bars to strengthen and stabilise. This is now widely usedfor slum rehabilitation, one of the areas of thrust in India.

Addressable marketIndia currently faces shortage of 25mn housing units which is expected toincrease to 38mn units by 2030 (source: Urban Development Ministry). Toaddress this issue, GoI introduced the Basic Services to Urban Power (BSUP)and the Integrated Housing and Slum Development Programme (IHSDP)programs under the JNNURM scheme, which will entail an investment ofRs 395bn over 20 years.

Besides, the Indira Awas Yojana (IAY) aims at helping rural people below thepoverty-line and falling under the SC/ST category, freed bonded labourersand the non-SC/ST categories. It proposes to construct dwelling units andupgrade existing unserviceable “kutcha” houses by providing grants-in-aid. The National Housing Board has estimated that there will be a rural housingshortage of 55mn units by 2012. The government has earmarked Rs 100bn forFY12 for rural housing under IAY.

This opens up a huge addressable market for Sintex, which provides masshousing solutions (since FY08) to these economically weaker sections (EWS),slum dwellers, urban poor, low income groups (LIG) and rural poor by way ofmonolithic construction.

Government spending on affordable housing (Rs in mn)

Budget allocation FY06 FY07 FY08 FY09 FY10 FY11 Focus area forSintex

JNNURM (BSUP) 3,340 10,000 15,010 18,800 22,670 29,050 Affordablehousing forurban poor(EWS)

JNNURM (IHSDP) 5,000 4,900 6,140 11,140 11,620 Slumrehabilitation

Total JNNURM 3,340 15,000 19,910 24,940 33,810 40,670Indira Awas Yojana 28,000 26,000 40,000 54,000 89,000 100,000 Housing needs

of rural poorSource: Ministry of Housing & Urban Poverty Alleviation (MHUPA) & Ministry of Rural Development

Apart from the above demand drivers, the Indian Railways (IR), Indian Armyand the postal department too have been fuelling demand. IR plans to build1mn homes for its 1.4mn employees over seven years. The army needs 25,000houses, of which monolithic would constitute 12-15%.

Further, the company has now started focusing more on housing boards ascompared to central schemes under JNNURM for orders, which might improveworking capital as receivable days from housing boards are lower by around30 days compared to Central Government schemes.

DOLAT CAPITAL


India ResearchAdvantages over brick & mortar constructionSpeed: Construction time for monolithic structures takes less than half (6-8 months) of that for regular construction of similar size (18-24 months).

Cost: Monolithic is 8-12% cheaper than regular construction in terms oflarge projects, with optimum use of formwork (nearly 80-100 retreats performwork) and material, mainly due to limited skilled workforcerequirement.

Working capital: Far lower as it involves faster execution

Stringent benchmarks: It benefits from rigorous seismic and wind speedresistance as compared to regular construction

No plastering: In monolithic construction, four walls and slabs are cast inone shot through the use of plastic formwork which renders a smooth andclean concrete surface, thereby eliminating the need for plastering.

Maintenance: Virtually zero maintenance cost while it remains on the higherside for regular construction.

Strong order bookSintex enjoys a strong order book of Rs 30bn (2.2x FY11 segmental revenues)in the monolithic space. Of this, 70% pertains to government orders (Rs 12bnworth from UP, Rajasthan and Gujarat state housing boards and Rs 9bn fromslum rehabilitation projects), around 10% from IR and the balance from thearmy, police and postal departments.

Current order book distribution & Order book trend (FY07-FY13E) - In Rs mn


DOLAT CAPITAL


India ResearchOrder inflow (Rs mn) trend (FY07-FY13E) Monolithic Construction segment:

Cost break up & EBIDTA (%)


The monolithic segment has grown at a rapid pace with a revenue and EBIDTACAGR of 85% and 92% respectively in FY08-FY11. We expect this segment toreport revenue and EBIDTA CAGR of 38.5% and 29.4% respectively from FY11-FY13E. This will ride on a strong order book of Rs 3bn, increasing scalability interms of number of sites under coverage per annum and average ticket size oforders resulting in economies of scale.

Monolithic Construction segment: Economies of scale catching up

Monolithic Construction segment: Revenues, EBIDTA & EBIDTA (%): FY07-FY13E


DOLAT CAPITAL


India ResearchLong-run competitive pressure on marginsSintex’s monolithic business is not unique from a technology perspective,however it is purely an execution-led business. Over the past couple of years,companies like B E Billimoria, Man Infra and Ahluwalia have entered the space.However, the only comparable company in this space with similar size is L&T,which is the strongest competitor for Sintex while others with relatively smallersize include IVRCL and Shapoorji Pallonji & Co.

Though we expect margins to erode over long term due to adoption of similartechnologies by other players, we believe Sintex’s first mover advantage andRs30bn order book would help maintain its margins over the next couple ofyears.

Advantages over competition:

Backward integration of plastic sheets used to make plastic formwork

Use of Sintex home accessories such as plastic doors, windows, etc

Lean and mean set with lead (faster turnaround time) advantage

Monolithic Construction images

DOLAT CAPITAL


India ResearchPast acquisitions under building product segment

Storage tanks segment to exhibit revenue CAGR of 10%Once a flagship product, the storage tank segment now accounts for just 4.4%of overall revenues (FY06 contribution: 13%). Sintex has been in business forover three decades and remains a dominant player in this segment. Besideswater tanks, Sintex makes underground storage tanks and fibre glass reinforcedplastic tanks used in chemical depots and petrol stations. Over the past fiveyears (FY07-FY11), revenues in this segment have grown at 11% CAGR whileEBIDTA margins have been hovering around 9-12%. We expect this segment toexhibit revenue CAGR of 10% over the next two years with EBIDTA margins tobe maintained at around 10%. Further, we expect overall contribution of thissegment to further go down to 3.6% of overall revenue by FY13E.

Acquired Cos Origin Holding Segment Cost of acq. Date of acq. FY11 RevZep Infratech India 100% Prefab Rs180mn May’06 Rs1.2bnDigvijay Comm. India 100% Prefab Rs540mn Jun’08 Incl in Zep InfraDurha Const India 30% Monolithic Rs420mn Dec’10 Incl in Sintex India

Acquired companies under this segment, their product profile & strategies:

Acquired Cos Portfolio of services & Strategy behind acquisitionZep Infratech Leading telecom shelter manufacturer, now diversified into designing, manufacturing and

installing mobile hospitals, ambulances, cold chain solutions, radar shelters, high altitudedefence shelters etc. Strategy: Consolidate its position in the high-growth BT (basic telecom)shelter space wherein Zep had 25% market share in India

Digvijay Comm. Provider of telecom infra services which includes network infrastructure services,installation and commission, annual maintenance and telecom tower manufacturing.Strategy: To enable Sintex to provide end-to-end solutions in the telecom space frommanufacturing (tower and shelter) to installation and commissioning

Durha Const Mainly engaged into the business of civil construction & mechanical construction work invaried infrastructure sectors including power, petrochemicals, cement from medium tolarge projects in both private and public sectors. Strategy: To strengthen its executioncapabilities in the monolithic construction space (Durha over the years has beenassociated with big contractors like L&T for providing civil & mechanical constructionservices)



Storage tanks segment: Revenues, EBIDTA & EBIDTA margin trend

DOLAT CAPITAL


India ResearchBuilding product segment revenue to grow at 31% CAGR & EBIDTA at 24% CAGR from FY11-13E: Led by 38.5%revenue CAGR & 29.4% EBIDTA CAGR in monolithic segment

Building product segment: Revenues, EBIDTA & EBIDTA margin trend

DOLAT CAPITAL


India ResearchCustom Moulding segment to supplement growth

Sintex’s standalone custom moulding (CM) segment, by virtue of its threefacilities at Bhachau, Kalol and Nalagarh, is largely focused on supply ofelectrical components such as sheet moulding compound (SMC) meter boxes,SMC distribution boards, FRP cross arms, polymeric insulators etc (formingnearly 70% of the standalone CM revenues) to private sector players. The keyplayers include Reliance Energy and Torrent Power and various state electricityboards. The remaining comes from supply of composite tractor fuel tanks todomestic tractor makers and a range of other products, including enclosuresfor gensets, rotors, and fuel tanks for gensets made by Cummins International.

This segment has grown at 12.5% CAGR in FY07-11 while margins have beenvery impressive hovering at 23-26% over the past five years. The increasingT&D spend through government programs such as APDRP and RGGVY, expectedto witness further traction in the 12th five year plan, will remain a strong demanddriver for the electrical components business. We expect this segment togrow at a revenue CAGR of 9% over the next two years while margins areexpected to hover between 24-25%.

Having gained a strong foothold in electrical components, the only way todiversify its product portfolio was through the inorganic route. Sintex, thus,did a series of acquisitions, domestic and overseas, not only to enhance itsproduct portfolio but also to diversify across geographies.

The acquisitions in CM enabled Sintex to not only enter new geographies likeUSA and Europe but also to bring various processes (like injection moulding,blow moulding, rotomoulding, extrusion, pultrusion, etc) under one roof,thereby helping it to diversify from electricals and automobiles to defence &aerospace to wind energy and mass transit.

Spree of acquisitions under the custom moulding segment

Acquired Cos Origin Holding Segment Cost of acq. Date of acq. FY11 RevWasaukee USA 100% Custom Moulding $20.5mn Jun’07 Rs2bnNero Plastics USA 100% Custom Moulding $4.7mn Dec’07 Incl in WasaukeeBright Auto India 100% Custom Moulding Rs1.5bn Sep’07 Rs2.8bnNief Plastics France 100% Custom Moulding •42mn Oct’07 Rs9.9bn

Sintex standalone CM segment: Revenues, EBIDTA & EBIDTA margin trend

Rs.

mn

Rs.

mn


Custom Moulding Segment

DOLAT CAPITAL


India ResearchAcquired cos under this segment, product profile & strategies:

Acquired Cos Portfolio of services & strategy behind acquisition

Wasaukee Makes highly engineered plastic composites in the US with presence in varied sectors likeelectricals, automobiles, wind energy, medical imaging systems, mass transit, etc

Strategy: Access to technology, entry into the US market, ready access to strong clientele, shiftingmanufacturing base to India and widen plastic composites portfolio to include applicationsfor wind energy, mass transit and medical imaging

Nero Plastics Makes low and medium volume plastic composites finding applications in heavyequipments, mining, heavy truck, mass transit, medical and sporting goods industries

Strategy: To enhance Wasaukee’s product mix and moulding processes and further consolidateSintex’s position in the US plastic composite market

Bright Auto Leading manufacturer of a range of exterior and interior automotive plastics, including frontand rear bumper systems, green house systems, seating systems and cockpit systems and has fivefacilities located at all key auto hubs across India

Strategy: To enhance access to major OEMs and to use its low-cost base for Wausaukee and Niefclients

Nief Plastics Leading manufacturer of plastic composites in France with presence in varied sectors likeelectricals, aerospace and defence, automobiles, medical imaging systems, appliances etc

Strategy: Access to technology, entry into higher end plastic composites like aerospace anddefence, entry into EU composite market and ready access to its strong customer base

Bright Autoplast: Entry into auto component segmentIn FY08, Sintex acquired the automotive products division of Bright Brothers(34 years in automotive components) to consolidate its position in thehigh-growth domestic auto components market. The company has sixmanufacturing plants -- Gurgaon, Pune, Pithampur, Nashik and two inChennai.

Bright makes injection moulded plastic components for the auto industrysuch as exterior systems (bumpers and other exterior trims), interiorsystems (dashboards pit, instrumental panels with sub assemblies ofventilation system, side wall, acoustic management, and seating systems)and under hood systems (air ducts, fuel tank parts and radiator fan blades).Its clientele include Maruti, Hyundai, M&M, Tata Motors, GM, Nissan, AshokLeyland, Force Motors, TVS, Honda among others.

Bright’s revenue and EBIDTA have grown at an impressive 90% and 75%CAGR respectively in FY08-FY11. Sintex now is strongly focused onoutsourcing its international business from India as employee expensesare higher by around 30% at Nief and 35% at Wausaukee as against 10% atBright Auto Plast.

Over the past couple of years, Sintex has been successful in persuadingsome of Nief’s clientele to source supplies from India. Notably, Schneiderhas already set up arrangements with the company, whereby Sintex willsupply to its global subsidiaries from Bright’s Chennai facility (speciallydedicated for Schneider). Sintex is also in talks with a number of othercustomers for similar arrangements. We expect Bright to grow at 32.5% and25.4% CAGR in terms of revenues and EBIDTA respectively in FY11-13E,while maintaining margins at round 14-15%.

DOLAT CAPITAL


India Research

Wasaukee Composites (WCI): Entry into US marketSintex acquired WCI in FY08 for $20.5mn. It has excellent technicalcapabilities in highly engineered composites components for both autoand electrical applications. WCI has also developed strong relationshipwith a number of Fortune 500 OEMs. WCI’s revenue comes mainly fromindustrial trucks and tractors (25%), agriculture (15%), medical injecting(30%) and mass transit (30%).

Further, in the same year, WCI acquired Nero Plastics, USA, a custom-molderof low- and medium-volume structural plastic and composite components.Nero’s customer base includes Caterpillar, Motor Coach Industries andKenworth Truck with Caterpillar contributing around 65% to its revenues

WCI’s major clients include Caterpillar, John Deere, Siemens, Alstom,Acciona, Phillips Medical Systems, GE Medical Systems and Rail PlanInternational. Sintex now plans to use its low cost base in India (facilitiesof Bright Autoplast) -- which is expected to be margin accretive -- to servethese clients. We expect WCI to report revenue and EBIDTA CAGR of 7.5%and 18.5% respectively in FY11-13E.

Wausaukee CM segment: Revenues, EBIDTA & EBIDTA margin trend


Rs.

mn

Rs.

mn

Bright Autoplast CM segment: Revenues, EBIDTA & EBIDTA margin trend

Rs.

mn

Rs.

mn


DOLAT CAPITAL


India ResearchNief Plastic: Entry into EU plastic composite marketIn FY08, Sintex entered the EU market through the acquisition of Nief Plastic,a leading plastic composites maker with 12 manufacturing facilities -- eightin France and one each in Hungary,Slovakia and Tunisia and Morocco. Thecompany has developed strong relationship with global majors such asPeugeot, Renault, Schneider, ABB, Alstom and Valeo among others. It has adiversified business model with revenue primarily coming from theautomotive (28%), electrical (35%), aerospace & defence (30%) and medicalimaging (7%) sectors .

Nief Plastic has grown at 41% and 60% CAGR in terms of revenue and PATrespectively in FY08-11. Given the EU slowdown, we expect it to grow at11% and 12% CAGR in revenues and EBIDTA respectively from FY11-FY13E.Nief has now started outsourcing from Bright’s facilities in India to serveits international clientele.

Total CM segment to exhibit revenue & EBIDTA CAGR of 14% & 12% respectively over the next two years

Total CM segment: Revenues, EBIDTA & EBIDTA margin trend


Rs.

mn

Rs.

mn

Nief Plastic CM segment: Revenues, EBIDTA & EBIDTA margin trend

Rs.

mn

Rs.

mn

DOLAT CAPITAL


India ResearchTextiles – Steady cash flow business with strong marginsSince its incorporation in 1931, Sintex has been engaged in textiles, makingyarn dyed structured fabrics and corduroy. The company enjoys a 70% share ofthe structured fabric market within India, addressing the growing needs ofpremium men’s shirt brands.

Sintex is one of India’s largest and Asia’s third largest corduroy makers. Itmakes a range of corduroy fabrics, including yarn dyed corduroy and ultimacotton yarn based corduroy. The company markets its products under the BVMbrand name.

Its clientele includes premier international design houses such as Triber, Gap,DKNY, Ralph Lauren, Marks & Spencer, Diesel and Banana Republic as well asrenowned domestic brands such as Arrow, Zodiac, Van Huesen, Louis Phillipe.Sintex has a technical and market development alliance with various Europeandesign houses. It has the facility to manufacture 29mn metres of structuredfabrics.

Nearly 70% of the revenues from this segment come from supplies toreadymade garment makers while the rest comes from the collection segment,which has much higher realisations and better margins. Sintex expects thecollection segment to contribute over 35% to the textile revenues by FY13Ewith an uptick in demand from international brands.

Textiles segment: Revenues, EBIDTA & EBIDTA margin trend


Rs.

mn

Rs.

mn

Textile Segment

DOLAT CAPITAL


India Research

Sintex Consolidated EBIDTA (Rs mn): FY07-FY13E

Sintex Consolidated Revenue Mix (%): FY07-FY13E

Sintex Consolidated Revenues (Rs mn): FY07-FY13E


Consolidated Revenue & EBIDTA Mix

DOLAT CAPITAL


India ResearchSintex Consolidated EBIDTA Mix: FY07-FY13E

Sintex EBIDTA Margin segment-wise & Overall (%) : FY07-FY13E


DOLAT CAPITAL


India ResearchHigher exposure to monolithic segment to keep working capital highPrior to the company’s evolution as a major force in the monolithic segment,Sintex was operating with a lean working capital cycle of 11-20% of sales (FY07-09). Working capital cycle in the monolithic segment is as high as 5-6 monthswhich has elevated the working capital cycle to 28% in FY11.

FY10 working capital cycle an aberrationSintex saw its working capital cycle shoot up to 42% in FY10. However, this waslargely on account of funds to the tune of Rs 3.5bn being deposited as securityin the escrow account for acquisitions and also due to funds provided forobtaining bank guarantees for the monolithic orders from UP. This increasedSintex’s loans and advances from Rs 3.7bn in FY09 to Rs 8.2bn in FY10.Subsequently these amounts were withdrawn in FY11, which corrected theworking capital cycle to 28%. Going forward, with the contribution from themonolithic segment expected to rise from 30% in FY11 to 39% in FY13E, webelieve working capital is likely to remain at elevated levels.

FCCB redemption likely in March 2013– positive impact on ROCESintex issued USD 225mn worth FCCBs in FY08 with a conversion price of Rs290. This was further reset to Rs 246 in March 2010. This is due for conversionin March 2013. Our calculation below (assuming FY13 forex rate at Rs 46/USD)suggests that the break even price for FCCB holders (considering 5.2% intereston non-conversion of bonds and incremental forex liability on depreciationof rupee) will be Rs 352 per share.

USD mn USD Rate Rs mn Conv. PriceFCCB’s issued in March 2008 225 40.5 9,119 246Interest @5.2% 65 40.5 2,634 71Total liability at fixed forex rate 290 40.5 11,754 317Incremental forex liability assuming rate at 46 1,296 35Net outflow & equivalent break-even price 13,050 352

Since there is a wide gap between CMP and equivalent break even price (belowwhich they would not convert into equity), we assume Sintex will have toredeem FCCBs in FY13. Thus, we have factored the same in the FY13 numbers.

Sintex currently has Rs 9.8bn cash balance (including Rs 5bn of unutilised cashraised through FCCB borrowing, invested in fixed deposits), which is morelikely to be utilised to redeem the same, while the balance (Rs 3.2bn) will bemet through internal free cash flow generation and incremental borrowing offunds. Redemption of bonds through utilisation of available cash would reducethe capital base, thereby resulting in positive impact on ROCE by up to 100bps.


Working Capital / Sales (%)

DOLAT CAPITAL


India ResearchReturn ratios to remain healthy with ROCE gaining traction on probable FCCBredemption


Concerns

Slowdown in govt ordersSintex, which derives nearly 70-80% of its construction orders (both prefabsand monolithic) from state and central governments, will be vulnerable toany slowdown in government spending, which in turn will affect order inflowsand impact our estimates.

Competition in monolithic to impact margins in medium to long runSintex’s monolithic business is not unique from the technology perspectivebut is purely an execution led business. Over the last couple of years,companies like B E Billimoria, Man Infra and Ahluwalia have entered the space.Any aggressive bidding for future contracts will result in margin deterioration.

Raw material cost risksSintex passes on the rise in input prices to end customers for contracts havinglarger execution period (over 4-5 months). However, for prefabs, which havea shorter execution period, the company does get affected. In case of CMproducts, wide fluctuations in input costs being relative to crude prices (whichhave remained volatile) would have an impact on margins.

Overseas subsidiaries susceptible to slowdownSintex derived around 27% of its FY11 revenues from overseas with Europeand US contributing 22% (through Nief Plastic) and 5% (Wausaukee) to therevenues respectively. The ongoing debt crisis in Europe (if its aggravates)may hit them, espceiaclly Nief’s financials.

DOLAT CAPITAL


India ResearchSoTP based Valuation on EV/EBIDTA basis

Considering that Sintex has a diversified presence across sectors, we havevalued these segments (building product, custom moulding and textiles) oncase to case basis and arrived at the valuation on EV/EBIDTA basis. We havevalued:

Building product segment at 6.5x EV/EBIDTA, at a premium over valuationsof small construction companies like Ahluwalia Contractors, B L Kashyap,etc on account of better execution capabilities and much higher margins.

Custom moulding segment at 7x FY13 EV/EBIDTA at a 30% discount tovaluation of Kemrock Industries

Textiles at a EV/EBIDTA of 7x FY13EBIDTA, at a slight premium over playerslike Arvind, Raymond, etc considering its presence in high value structuredfabric resulting in much better margins than these players

We have given it a conglomerate discount of 20% to arrive at the target priceof Rs 174. At the target price, the stock trades at an implied P/E of 7.6x FY13EEPS and 6x FY13E EV/EBIDTA.

Valuation Matrix FY13E EBIDTA Multiple (x) EVBuilding product segment 6,656.3 6.5 43,266Custom Moulding segment 3,489.4 7.0 24,426Textiles 1,156.3 7.0 8,094Total 11,302.0 75,786Add: Cash & liquid investments 4,367Less: Total debt 20,692Enterprise Value 59,461Less: Conglomerate discount (20%) 11,892Net Enterprise Value 47,569Equity 273Target Price 174Implied PE (x) 7.6CMP 109Upside (%) 60

Valuation

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India ResearchCompany BackgroundIncorporated in 1931, Sintex Industries is one of the leading providers of plasticproducts and niche structured yarn dyed textile products in India. Sintex makesa range of plastic products, including industrial custom moulding products,FRP (fibre reinforced plastic) products and water storage tanks. Besides, it hasa proven track record of pioneering innovative concepts like prefabricatedstructures and monolithic construction in the construction space, which nowaccounts for nearly 50% of the company’s revenues.

After having established its presence in India, Sintex diversified its presenceabroad with a series of acquisitions in the custom moulding segments in FY08.With these acquisitions, Sintex now has developed a strong foothold acrosseight countries and four continents. Over the years Sintex has developed thecapability to make plastics using 12 different processes (some developed in-house and others through global acquisitions), which enables Sintex to producethe entire range of its plastic products at one location.

Sintex also has a textile division primarily located at Kalol, Gujarat, whichspecialises in men’s structured shirting for the premium fashion industry. Inaddition to its eight manufacturing facilities across India, Sintex’s subsidiarieshave 26 manufacturing locations spread across USA and Europe, which take itstotal plant tally to 34 locations, thereby enabling a diversified global reach.

The journey so far... Pioneering innovative concepts and building strongcapabilities for scaling up such niche segments


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India ResearchOrganisational structure post acquisitions

Diversified business model

Sintex has a diversified business model spread with products findingapplications across diverse industries. While its building product segment,which currently constitutes 49% of its overall revenues, focuses on the building/construction space, its custom moulding segment (41% of revenues) findsapplications across industries, including automobiles, mass transit, defenceand aerospace, medical, electricals and electronics, etc. The remaining 10% ofthe revenue is contributed by its textile segment (Sintex came into existencewith this business and was earlier known as Bharat Vijay Mills), which is intothe niche segment of making fabrics for international brands/designers.



Business Model

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India Research

Business segments

EBIDTA Mix & Geographical Revenue Mix


Business Segments

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India ResearchKey company segments, related industry drivers, addressable market and Sintex’s strategy


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Particulars Mar10 Mar11 Mar12E Mar13ENet Sales 32,816 44,752 54,746 66,152Total Income 32,816 44,752 54,746 66,152Total Expenditure 27,807 36,683 45,211 54,965Raw Material 17,710 26,269 32,081 38,758Decrease / (Increase) in stock 275 37 0 0Stores and spare parts consumed 1,517 1,574 2,180 2,977Employee Expenses 4,389 4,613 5,748 6,946Power, Oil & Fuel 979 1,125 1,369 1,654Selling & Administrative Expenses 2,937 3,064 3,832 4,631Other Expenses 1 1 0 0EBIDTA (Excl. Other Income) 5,009 8,069 9,535 11,187EBIDTA (Incl. Other Income) 6,263 8,672 9,619 11,511Other Income 1,254 603 83 324Interest 731 1,089 1,238 1,448PBDT 6,786 8,186 8,464 10,387Depreciation 1,445 1,491 1,747 1,910Profit Before Tax & EO Items 5,341 6,695 6,716 8,477Extra Ordinary Exps/(Income) - Post tax 0 0 0 0Profit Before Tax 5,341 6,695 6,716 8,477Tax 772 1,508 1,658 2,038Net Profit 4,569 5,187 5,058 6,439Minority Interest 21 3 0 0Share in Profit / (Loss) of Associates 0 19 86 102Net Profit 4,548 5,203 5,144 6,541Adjusted Net Profit (adj. for EO items) 3,294 4,600 5,061 6,217

BALANCE SHEET

Particulars Mar10 Mar11 Mar12E Mar13ESources of FundsEquity Capital 271 271 271 271Preference Capital 0 0 0 0Share Premium 6,735 6,671 6,671 6,671Other Reserves 12,463 17,073 21,912 27,891Net Worth 19,469 24,016 28,854 34,833Secured Loans 14,453 16,352 16,352 19,352Unsecured Loans 11,851 11,386 11,386 1,339Loan Funds 26,303 27,738 27,738 20,692Minority Interest 190 0 0 0Deferred Tax Liability 1,693 2,057 2,057 2,057


Applications of FundsGross Block 28,246 35,466 38,891 42,391Less: Accumulated Depreciation 7,746 9,156 10,903 12,813Net Block 20,499 26,310 27,987 29,577Capital Work in Progress 1,716 1,363 1,438 1,370Investments 2,470 3,775 3,775 3,775Current Assets, Loans & AdvancesInventories 3,411 3,770 4,500 5,437Sundry Debtors 10,121 14,229 17,399 21,024Cash and Bank Balance 9,295 9,861 9,562 591Loans and Advances 8,157 5,147 6,757 7,960Other Current Assets 0 0 0 0sub total 30,983 33,007 38,217 35,012Less : Current Liabilities & ProvisionsCurrent Liabilities 7,455 10,004 12,048 11,362Provisions 559 640 720 790sub total 8,014 10,644 12,768 12,152Net Current Assets 22,969 22,362 25,449 22,860Misc Expenses 0 0 0 0


IMPORTANT RATIOS

Particulars Mar10 Mar11 Mar12E Mar13E(A) Measures of Performance (%)Contribution MarginEBIDTA Margin (excl. O.I.) 15.3 18.0 17.4 16.9EBIDTA Margin (incl. O.I.) 15.3 18.0 17.4 16.9Interest / Sales 2.2 2.4 2.3 2.2PBDT Margin 16.9 16.9 15.3 15.2Tax/PBT 18.9 24.8 25.0 25.0Net Profit Margin 10.0 10.3 9.2 9.4





CASH FLOW

Particulars Mar10 Mar11 Mar12E Mar13EProfit before tax 4,066 6,108 6,719 8,255Depreciation & w.o. 1,445 1,491 1,747 1,910Direct taxes paid (772) (1,508) (1,658) (2,038)Change in Working Capital (Non Cash) (7,207) 1,536 (3,385) (6,382)Other (747) 135 0 0(A) CF from Operating Activities (3,215) 7,762 3,423 1,745Capex {Inc./ (Dec.) in FA n WIP} (1,599) (6,867) (3,500) (3,432)Free Cash Flow (4,813) 895 (77) (1,687)Inc./ (Dec.) in Investments (651) (1,305) 0 0(B) Cash Flow from Investing Activities (2,250) (8,172) (3,500) (3,432)Issue of Equity/ Preference 0 (64) 0 0Inc./(Dec.) in Debt 3,339 1,435 0 (7,046)Dividend Paid (Incl. Tax) (191) (206) (222) (238)Other (74) (190) 0 0(C) Cash Flow from Financing 3,075 976 (222) (7,284)Net Change in Cash (2,390) 566 (299) (8,971)Opening Cash balances 11,685 9,295 9,861 9,562Closing Cash balances 9,295 9,861 9,562 591E-estimates

Financials

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DOLAT CAPITAL

65October 5, 2011 Time Technoplast

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CMP: Rs 64 Target Price: Rs 76 Accumulate


Scrip Details

Equity Rs.209mnFace Value Rs.1/-

Market Cap Rs.13bnUSD 273mn

52 week High/Low Rs. 72 / 42Avg. Volume (no) 552,520BSE Code 532856NSE Symbol TIMETECHNOBloomberg Code TIME INReuters Code TIME.BO

Shareholding Pattern as on June’11(%)

Promoter 62.1MF/Banks/FIs 10.1FIIs 9.5Public / Others 17.5

Time Technoplast (TTL) is expected to benefit from its ongoing expansion plans and recent acquisitions in theindustrial packaging space. Apart from the traction seen in its mainstay ‘drums segment’, other segments too are ona firm footing and are expected to deliver healthy growth. Volume growth, driven by expanded capacities inexisting and new product categories, is likely to translate into healthy CAGR of 23% and 21% in revenue and PATrespectively over FY11-13E. We value TTL at 10x FY13E earnings of Rs 7.6 and arrive at a TP of Rs 76 (18% upside),implying 6.4x FY13E EV/EBIDTA.


Industrial packaging, key growth driver: Time Technoplast (TTL) is the largestdomestic player in the polymer-based industrial packaging segment. Itmanufactures range of polymer drums and containers and has a strong marketshare of 75%. Besides being a market leader in India, through its overseasacquisitions and by replicating its Indian business model, it has gained marketleadership in UAE, Thailand and Taiwan.

With major user industries such as specialty chemicals, FMCG and paintsexpected to grow at 12-15% CAGR over the next few years, we believe theindustrial packaging industry is likely to grow at around 15% CAGR over thenext few years. Also, replacement of metal drums with polymer drums willact as an additional trigger. We expect this segment to grow at 24.7% CAGRover FY11-FY13E, aided by organic growth (domestic & global) and overseasacquisitions.

Other business lines on strong footing: In the quest to diversify, TTL hassuccessfully established a meaningful presence in some other segmentslike (A) technical products (lifestyle, auto components and healthcare) and(B) infrastructure products (industrial batteries, HDPE pipes and prefabs).Revenues of both these segments are expected to grow at of 13% and 17%CAGR respectively over the next two years. This will be led by 19.5% revenueCAGR of lifestyle segment in technical products and 37% revenue CAGR ofHDPE/FRP pipes segment in infrastructure products.

New product launches hold great potential: TTL is introducing two newproducts viz composite cylinders and material handling systems. Compositecylinders can be a potential substitute to metal gas cylinders. Further,through its JV with Schoellar Acra, it has introduced foldable crates for thefirst time in India, which reduces the return freight cost for end users.

Capex cycle over by FY12, return ratios to improve from FY13: TTL has spentover Rs 4.5bn to increase its capacities by approximately 2.4 times over thepast three years. The management has guided for a capex of Rs 1.2bn, ofwhich Rs 550mn will be used for composite LPG cylinders and the rest to setup facilities for industrial packaging. The capex cycle is expected to end byFY12 and, going forward, we believe this shall drive operating earnings,translating into better return ratios.

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FinancialsYear Net Sales % growth EBITDA OPM% Adj. PAT % growth Adj.EPS(Rs.) PER (X) EV/EBIDTA(x) ROANW(%) ROACE(%)FY10 10,114 28.1 1,950 19.3 909 31.7 4.3 14.7 8.9 16.2 16.8FY11 12,753 26.1 2,360 18.5 1,110 18.5 5.1 12.4 7.9 16.4 16.3FY12E 15,868 24.4 2,833 17.9 1,260 17.0 6.0 10.6 6.8 16.4 16.6FY13E 19,280 21.5 3,375 17.5 1,586 25.9 7.6 8.4 5.6 17.8 18.2Figure in Rs mn

DOLAT CAPITAL


India ResearchIndustrial packaging: Key driver to overall growth

TTL is the largest domestic player in the polymer-based industrial packagingsegment, making a range of polymer drums and containers, intermediate bulkcontainers (IBCs), conipack pails and PET sheets typically for end-user industriessuch as chemicals, specialty chemicals, FMCG, construction chemicals, paints,pharmaceuticals and others.

Over the years TTL has launched a wide array of niche products, aided by itstechnical tie up with Germany’s Mauser, a leading industrial packaging playerin the US and Europe. TTL, which has 58% of its revenue coming from thissegment, now commands a 75% market share attained through organic growthover the years and by virtue of acquisition of the second largest player, TPLPlastech, from the Tainwalla Group in 2006, which further strengthened itsmarket position.

Overview of Industrial Packaging Products

Plastic DrumsHM-HDPE Drums & Containers in 20 – 250 litre capacity

Narrow Mouth drums for liquid products

Open Top drums for powder and semi-solid products

Half Open Top/Wide Mouth drums for viscous products

Intermediate Bulk Containers

Intermediate Bulk Containers (IBCs) of 1000 litre capacitywith:

Wooden Pallet

Composite Steel Pallet

Plastic pallet

Others Plastic Conipack Pails in 5 – 25 litre capacity PET Sheets 0.15 mm to 2 mm thickness and up to 1.6 mtr

width

Key Highlights

Tie up with Mauser, one of the largest producer of polymerdrums worldwide

Dominant market share of 75% in India

14 production facilities in India to go with 9 globalfacilities across Asia & Europe·

Building Strong Asian footprints with 6 existing facilitiesand 6 proposed facilities

Captive machine Building Capabilities

Key Highlights

One of the world’s largest producers of polymer drums: The global industrialpolymer drums industry is dominated by three key players—Mauser(Germany), Schultz (Germany) and Greif (USA). While Greif is already presentin India through its tie up with Balmer Lawrie, Mauser is present through atechnical tie up with TTL and also through a JV with TTL to manufacture IBCs.Further, the market opportunity (Rs 15bn in India) is not that big enough toentice a global player like Schultz to set up facilities, thereby limitingcompetition to only a few players.

Dominant market share of 75%: TTL currently enjoys a market share of 75% inthe Indian polymer drums market. It largely competes with Balmer Lawrie inIndia, which is the second largest manufacturer with a market share of 18%.With the company continuously rolling out niche products under this segment,we expect it to retain such a healthy market share in the near future.


Industrial Packaging

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India ResearchPan India presence with strong footprints in AsiaTTL has maintained strong relations with its domestic clients by setting upproduction facilities closer to clients, enabling faster delivery and reductionin freight & inventory cost for its client. Thus it has created strong entry barriersand gained strong market share. Besides, through its overseas acquisitionsand by replicating its Indian business model, TTL has gained market leadershipin the UAE (Elan Inc FZE), Thailand (Pak Delta, YPA) and Taiwan (Yung Hsin).

In FY11, TTL acquired the largest industrial packaging company, Yung Hsin, inTaiwan and commissioned its greenfield project in Tianjin, north China.Currently its set up comprises 14 manufacturing locations across India andeight worldwide (six across Asia and two in Europe).

Over the next 12-18 months it is further expanding its footprint in Asia bysetting up manufacturing at five more locations in Asia and one in Africa. It isalso adding another facility in India at Bhuj, Gujarat, which will take the totaltally to 29 locations. (It may be noted that the Czech Republic facility is formanufacturing composite cylinders and the Romania facility for lifestyleproducts). Going forward, TTL’s strategy is to expand operations in Asian/African countries where there is strong demand and low penetration of plasticdrums.

TTL - Expanding global footprints

Source : Company

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India ResearchExisting industrial packaging projects overseas:Country Subsidiary Product Key Highlights

UAE Elan Incorporated FZE Upto 220 ltrs drum Largest Industrial Packaging (plastics) company inUAE

10 – 80 ltrs jerry cans Only producer of 200 Ltrs drum in Middle East(excluding Saudi Arabia)

4/5 Ltrs polycans Over 80 customers 10 - 20 Ltrs conical pails

Thailand Pack Delta 1000 Ltrs IBCs 12 year old; Largest Industrial Packaging companyin Thailand

Upto 250 Ltrs drum Over 100 customers 20 – 80 Ltrs jerry cans YPA Upto 250 Ltrs drum 20 year old; 3rd largest Industrial Packaging

company in Thailand 20 – 80 Ltrs jerry cans Undergoing expansion to include Turf and Auto

components Drum accessories

Taiwan Yung Hsin 1000 Ltrs IBC Largest Industrial Packaging (plastics) company inTaiwan

Upto 220 Ltrs drum Ready facility to produce 1,000 liter IBCs 10 – 80 Ltrs jerry cans Over 200 customers 4/5 Ltrs polycans

North China Tianjin Elan Upto 250 Ltrs Drum Drum production already commenced 1000 Ltrs IBC IBC production to commence from June Plastics pallet IBC components Drum accessories

Upcoming Greenfield Projects in FY12City Country Subsidiary Product TTL % ShareJakarta Indonesia PT. Novo Complast 1000 Ltrs IBC 100% Upto 250 Ltrs drum 20 – 80 Ltrs jerry cans

Guangzhou South China Guangzhou Elan 1000 Ltrs IBC JV Upto 250 Ltrs drum 20 – 80 Ltrs jerry cans

Manama Bahrain Gulf Power Beat 1000 Ltrs IBC Upto 250 Ltrs drum 20 – 80 Ltrs jerry cans

Attaqa Egypt Nile Egypt Plastech Upto 250 Ltrs drum JV 20 – 80 Ltrs jerry cans

Busan South Korea Tech Complast Korea Inc 1000 Ltrs IBC 100% Upto 250 Ltrs drum 20 – 80 Ltrs jerry cans

Ho Chi Minh City Vietnam Exel Plastech Company Ltd Upto 250 Ltrs drum 100% 20 – 80 Ltrs jerry cans

Turkey IBCs 99% 220 Ltr & 120 Ltr open head drums 60 Ltr drums open head Source: Company, Dolat Research

Expanding Asian Footprint

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India ResearchGrowth in user industries provides healthy opportunities for TTL

TTL’s products are used by diverse industries in specialty chemicals, FMCG,inks, paints, pharmaceuticals, etc. Industrial packaging’s growth is dependenton its major end user industries like specialty chemicals, FMCG, paints andconstruction chemicals, which contribute 85% of the demand for drums andcontainers. With major user industries such as specialty chemicals, FMCG andpaints expected to grow at 12-15% CAGR over the next few years, we believethe industrial packaging industry is also likely to grow at around 15% CAGRover the next few years.

Replacement demand to spur incremental demandThe Indian drum market is Rs 16bn, of which the polymer drum market size isRs 8bn (TTL’s market share is Rs 6.5bn). While India has a 50% polymer drumspenetration, for the rest of Asia it is only 6-7%, which gives a huge opportunityfor TTL to explore.

Packaging Products Asia Global

(Nos In Mn And % Penetration) India Rest of Asia Total Asia Rest of World Total

Steel Drums 7.5 (50%) 90.5 (94%) 98 (88%) 98 (88%) 100 (86%) 198 (87%)

Polymer Drums 7.5 (50%) 5.5 (6%) 13 (12%) 13 (12%) 16 (14%) 29 (13%)

Total 15 (100%) 96 (100%) 111 (100%) 111 (100%) 116 (100%) 227 (100%)

IBCs 0.06 (6%) 0.94 (94%) 1 (100%) 1 (10%) 8 (90%) 9 (100%)

Source: Company


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India ResearchBenefits of polymers over metal drumsPolymer packaging offers various benefits over metal that include:

Lower weight;Higher resale value; andBetter quality, since the containers/barrels produced are seamlessand, hence, better equipped for transportation and difficult materialhandling conditions.

Further, many products (specialty chemicals) are sensitive or hazardous innature and, hence, safety of the materials in transit is of prime importance toend-users.

Case study for 200 litre drumsParameters Polymer drums Metal drumsWeight 8.5 kg 20 kgRaw material (RM) HDPE SteelRM cost per kg Rs 75 Rs 35Yield / Mt 117 drums 51 drumsRaw Material cost per drum Rs 640 Rs 700Salvage value Rs 550-600 Rs 250-300Source: company

Strong list of diversified clienteleTTL has close to 500 clients in the industrial packaging space and is notdependent on any single customer (the top 10 customers constitute 25% of itsindustrial packaging revenues). While 90% of the revenues from this segmentcome from repeat business (existing customers), the balance is through newclients. Some of its clients include BASF, Jubliant, Clariant Chemicals, DowChemicals, Pidilite, Godrej, HUL and Nestle.

JV with Mauser: Key to innovationsTTL has also entered into a 49-51 JV (Time Mauser Industries) with Mauser tomanufacture and market IBCs in India. IBCs are large containers of around1,000 litres used to package chemicals and specialty chemicals, and are usedfor long-distance transportation of hazardous chemicals.

In house captive machine building unitIn recent years, TTL has built up a strong captive machine building capability;thereby not only reducing dependence on vendors but also resulting in lowercapex vis a vis competitors. According to the management, it has to shell outEuro 1.2mn to set up machine while its competitor has to incur around Euro2mn for a similar one.

Industrial packaging revenues to grow at a CAGR of 24.7% over FY11-FY13Eaided by organic growth (domestic & global) and overseas acquisitions (FY09-11 CAGR at 22.5%)


Industrial packaging revenues (Rs.mn)

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India ResearchOther business segments on strong footingIn the quest to diversify, TTL has also successfully established a meaningfulpresence in other segments like (A) Technical products (lifestyle, autocomponents and healthcare) and (B) infrastructure products (industrialbatteries, HDPE pipes and prefabs).

(A) Technical products: This segment includes lifestyle products, autocomponents and healthcare products and constituted 16% of TTL’s overallFY11 revenue.

1. Lifestyle productsThe lifestyle products segment, which contributes around 9% to overallrevenues, manufactures artificial entrance mattings, car mattings and turfsunder the brand names Duro Turf, Duro Soft, Duro Wipe and Astroturf. Italso makes moulded furniture under the brand name Regal Furniture.Through its network of 400 dealers, TTL caters to institutions, healthcare,retail outlets and the hotels & hospitality industry.

Growth prospects

Through its recent acquisition of the plastic division of Solutia in Belgium(Europe), it has got ready access to proprietary technology & knowledge,apart from acquiring well-established brands. This shall facilitate its entryinto making products such as entrance mattings, artificial turf for indoorand outdoor application under the brand name Astroturf, opening hugegrowth opportunities in Europe and Asia.

Lifestyle segment to grow at 19.5% CAGR over the next two years (FY09-11CAGR at 18.9%)

Lifestyle products revenues (Rs mn)


2. Auto componentsUnder this segment, TTL’s product portfolio consists of anti spray 3S rainflaps (spray suppression system), radiator tanks, fuel tanks and air ducts,which contribute around 6% to total revenue. TTL makes value-addedplastic auto components, conforming to international standards mainlypertaining to the CV segment. Its clientele base compromises of TataMotors, Ashok Leyland, Eicher Motors etc.

Technical Products Segment

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India ResearchGrowth prospects

Plastic radiators and fuel tanks are preferred over metal ones as they arelight weight, corrosion resistant and sturdier. The Indian CV sector isexpected to grow 12-15% over the next few years, which shall drivevolumes.

The trend towards plastic fuel tanks has just begun in India. The potentialis huge, considering that 85% of the newly-registered vehicles in Europeand 70% in the US are built with plastic fuel tanks. TTL has built up theproduction scale and technical knowhow and, therefore, shall be in anadvantageous position to reap the benefits.

It has entered the European market by acquiring Clearpass, which makesrain flaps through its acquisition of the plastics division of Solutia. Throughthis deal it can leverage on the strong brand and global distribution networkof Clearpass.

Automobile components segment to grow at 5% CAGR over next two years(FY09-11 CAGR at 3.5%)

Automotive Component Revenues (Rs.mn)


3. Healthcare productsThis segment contributes 2% to overall revenues, offering products suchas auto break disposable syringe, auto collect blood samplers and OT safedisposable masks under the brand name Genex. Key users for this segmentinclude hospitals, nursing homes, pathology labs, etc.

Growth prospects

The government has issued directives to public hospitals to use autodisposable syringes and this shall now move to cover all private hospitalsas well, which augurs well for TTL

DOLAT CAPITAL


India ResearchHealthcare product segment to grow at 2% CAGR over next two years (FY09-11CAGR at 2.2%)

Healthcare product revenues (Rs mn)


Technical products segment to grow at 12.7% CAGR over next two years (FY09-11 CAGR at 10.8%)

Technical products revenues (Rs mn)


(A) Infrastructure products: TTL’s infrastructure product range (23% of totalrevenues) includes pipes (HDPE/FRP), energy storage devices (batteries),prefabs and shelters, catering to a mixed bag of industries.

i) HDPE/FRP pipes (7% of total revenue)TTL manufactures HDPE pipes (20-1,400mm) for water supply, irrigation,sewage & drainage, electrical ducting, natural gas distribution, wastedisposal, industrial application and offshore pipeline installation. Its majorclients include L&T, Reliance Infrastructure, Hydroair Technotics, IVRCLInfrastructure, Nagarjuna Constructions, Karnataka Water Supply andSewage Board. FRP pipes (250-2,100mm) are high pressure compositepipes, which find application in power plants for desalination. TTL expectsto roll out this product in this financial year.

Infrastructure Products Segment

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India ResearchGrowth prospects

HDPE pipes’ domestic consumption is growing at around 21%. They arepreferred over metal pipes as they are leak proof, corrosion resistant andlight weight. With the market potential for HDPE pipe at around Rs 110bnand the government of India is expected to spend Rs 4.6tn on waterdistribution and sanitation & irrigation in the five year plan ending 2012,TTL stands to gain. It is also envisaging capacity expansion plans in thissegment by putting up greenfield projects in north and east India.

HDPE / FRP pipes segment to grow at 37% CAGR over next two years (FY09-11CAGR at 221%)

HDPE/FRP pipes revenues (Rs mn)


i) Energy storage devices (15% of total revenue)With its NED Energy (Hyderabad) acquisition in 2007, TTL began producingVRLA batteries for the telecom sector under the brand name Maxlife.Further, with acquired Gulf Powerbeat WLL (Bahrain) and PowerbuildBatteries (India) to diversify into manufacturing of automotive, power plantand locomotive batteries. Key user industries here are telecom, railways,defence, power sectors and UPS systems.

Growth prospects

VRLA batteries are preferred over conventional flooded acid batteries dueto their longer life and leak-proof and spill-proof properties. Owing togrowing awareness of energy conservation, TTL makes eco-friendlybatteries. Its unique positive grid-and-paste combination enhances thebattery’s life and that of the installed control system to check air pollutionto maintain environmental standards.

NED’s market share in the telecom battery sector is greater than 15% andwith the slowing down of the sector, its entry into other areas such asautomotive, power plant and locomotive batteries will result in offsettingthe lower demand for telecom batteries.

DOLAT CAPITAL


India ResearchEnergy storage devices segment to grow at 3.6% CAGR over next two years(FY09-11 CAGR at 12.8%)

Energy Storage Devices Revenues (Rs.mn)


i) Prefabs & Shelters (<1% of total revenue)TTL manufactures prefabs & shelters which is a fast growing segment inrural & urban markets due to its low cost, zero maintenance and ease ofinstallation. Its major clients include BEST, MSDRC, MGM hospital etc. Thecompany is at a nascent stage, having one state-of-the-art factory at Silvassaand has been approved by four states.

Prefabs segment to grow at 67% CAGR over next two years

Prefabs revenues (Rs mn)


Infrastructure products segment to grow at 17% CAGR over next two years(FY09-11 CAGR at 35%)

Infrastructure products revenues (Rs mn)

DOLAT CAPITAL


India ResearchNew product launches hold great potential

Composite cylindersThrough the acquisition of Kompozit - Praha, Czech Republic, TTL hasacquired the production facility (capacity now ramped up to 600,000cylinders per annum) for composite cylinders, which will be a first of itskind product in India. TTL shall be one among the two companies’ worldwidemaking composite cylinders – the other company being Ragasco (Norway).The company has already received orders for 40,000 cylinders from a clientin Latin America, which will account for 80% of its capacity from its plant atCzech Republic. The cylinders are expected to roll out starting October2011.

TTL has also started a pilot project at Daman for LPG composite cylinderswith a capacity of 1mn cylinders per annum, for which it has already receivedTUV certification. This facility will, however, require the approval of theChief Controller of Explosives, Nagpur, before it starts rolling out thecylinders. It may be noted that Supreme Industries too has entered thissegment and is in the midst of setting up the facility.

Material handling productsTTL has entered into a JV with Schoeller Arca Systems, Netherlands, tolaunch new concepts of returnable material handling systems in India. Theproduct range include stackable crates/containers, foldable small cratecontainers, stack-nest crates/container pallets and dollies (Trolleys),catering to segments like FMCG, consumer durables, retail, logistics,automotive etc.

The uniqueness of the product is that it can be folded after it is emptied,thereby reducing handling and transport cost for its end users. The companyhas set up facilities at Silvassa and Pantnagar to make 3,000 tonnes of MHPproducts and is expected to set up new facilities at Chennai and Kolkata.

New Products Segment

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India ResearchSegmental break up: FY09-FY13E

TTL’s gross revenues to grow 23% CAGR over FY11-13E (FY09-11 CAGR at 24%)

TTL’s gross revenues mix (%) – FY09-13E

TTL domestic and overseas revenue break up (FY09-13E)


Rs.mn

Gross Revenue Mix

DOLAT CAPITAL


India ResearchImproving Financials

EBIDTA growth (FY07-13E)


Net Revenue growth (FY07-13E)


Revenues & EBIDTA margins (FY07-13E)


DOLAT CAPITAL


India ResearchPAT growth (FY07-13E)


Debt to Equity: to remain under control


Return Ratios to improve


DOLAT CAPITAL


India ResearchTTL to turn free cash flow positive in FY13E: Capex cycle to end in FY12


Concerns

Volatility in prices of key raw materialsHDPE is a key raw material required to make drums and cylinders. Raw materialcosts account for 64% of revenues and a significant rise here may cause short-term volatility in margins. However, the management is of the opinion that itshall be able to pass on the impact of increase in input costs, though with atime lag of 2-3 months. This has in fact resulted in TTL maintaining its marginsover the past five years.

Approval pending for composite cylindersTTL has started a pilot project at Daman for LPG composite cylinders, with acapacity at 1mn cylinders, per annum, for which it has already received TUVcertification. This facility will, however, require the approval of the ChiefController of Explosives, Nagpur, before it starts rolling out cylinders in India.Since regulatory approvals are time consuming, we have not factored in thepotential revenues from this facility in our FY13 estimates.

Valuation

TTL is expected to benefit from its ongoing expansion plans and recentacquisitions in the industrial packaging space. Apart from the traction seen inits mainstay ‘drums segment’, other segments too are on a firm footing andare expected to deliver healthy growth.

Volume growth, driven by expanded capacities in the existing and new productcategories, is likely to translate into healthy CAGR of 23% and 21% in revenuesand PAT respectively over FY11-13E. We value TTL at 10x FY13E earnings of Rs7.6 and arrive at a TP of Rs 76 (6.4x FY13E EV/EBIDTA), implying an upside of18% from the current levels.

Parameters FY13EFY13E PAT 1,665FY13E EPS (Rs) 7.6FY13E PE 8.4Target PE multiple (x) 10Valuation per share (Rs) 76CMP (Rs) 64Upside 18

Valuation

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India ResearchCompany BackgroundTTL is a technology-based polymer product company, which started as a SSIunit. It has today diversified into five strategic business units — lifestyleproducts, industrial packaging, healthcare products, auto components andinfrastructure related products — there by catering to the growing sectors ofIndian economy. The growth momentum since inception can be attributed toits drive for innovation, focus on R&D, futuristic product design, superiorcustomer service and pan-India presence, supported by its qualified andexperienced team of research scientists and engineers.

Source : Company

Acquisition Highlights

Year Company Acquired Country % holding Company Profile

2006-07 TPL Plastech India 75 Industrial PackagingPack Delta Thailand 99.7 Industrial Packaging

2007-08 Ned Energy Ltd India 71 Batteries for telecom sector

2008-09 Gulf Power Bahrain 100 Battery for automotivebeat WLL Sector

2009-10 YPA Thailand 100 Industrial Packaging

Kompozit Praha Czech Republic 99 Composite Cylinders2010-11 Grasstech Ltd Romania 100 Lifestyle (Astroturf) and Rain

flaps (Clearpass)Yung Hsin Taiwan 90 Industrial Packaging


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India Research


Key Milestones

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India Research

Industrial Packaging

Lifestyle products

Automotive products

Healthcare products

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India Research

HDPE pipes

Batteries

Prefabs & shelters

Other Infra products

Composite cylinders

Material handling

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Particulars Mar10 Mar11 Mar12E Mar13ENet Sales 10,114 12,753 15,868 19,280Total Income 10,114 12,753 15,868 19,280Total Expenditure 8,164 10,393 13,035 15,904Raw Material 6,707 8,593 10,235 12,435Decrease / (Increase) in stock (217) (348) 0 0Stores and spare parts consumed 64 77 83 93Employee Expenses 375 491 698 906Power, Oil & Fuel 382 457 555 674Packing, freight and transport charges 355 439 539 636Selling & Administrative Expenses 496 680 920 1,157EBIDTA (Excl. Other Income) 1,950 2,360 2,833 3,375EBIDTA (Incl. Other Income) 1,966 2,383 2,871 3,421Other Income 16 23 38 46Interest 333 451 576 604PBDT 1,650 1,954 2,334 2,864Depreciation 355 440 531 614Profit Before Tax & EO Items 1,295 1,514 1,802 2,250Extra Ordinary Exps/(Income) - Post tax 0 (33) 0 0Profit Before Tax 1,295 1,547 1,802 2,250Tax 296 356 432 539Net Profit 999 1,192 1,370 1,711Minority Interest 74 59 72 79Net Profit 925 1,133 1,370 1,711Adjusted Net Profit (adj. for EO items) 909 1,077 1,260 1,586

BALANCE SHEET

Particulars Mar10 Mar11E Mar12E Mar13ESources of FundsEquity Capital 209 209 209 209Preference Capital 0 0 0Share Premium 1,469 1,470 1,470 1,470Other Reserves 4,044 4,998 6,087 7,254Net Worth 5,722 6,677 7,765 8,932Secured Loans 3,977 5,491 5,991 5,641Unsecured Loans 421 399 399 399Loan Funds 4,398 5,891 6,391 6,041Minority Interest 312 414 520 640Deferred Tax Liability 211 287 287 287


Applications of FundsGross Block 8,325 10,083 12,534 13,034Less: Accumulated Depreciation 2,059 2,645 3,177 3,790Net Block 6,266 7,438 9,358 9,244Capital Work in Progress 609 1,191 0 0Investments 0 0 0 0Current Assets, Loans & AdvancesInventories 2,045 2,589 3,260 3,962Sundry Debtors 2,075 2,503 3,000 3,539Cash and Bank Balance 432 537 440 420Loans and Advances 847 1,335 1,962 2,695Other Current Assets 0 0 0 0sub total 5,399 6,964 8,663 10,616Less : Current Liabilities & ProvisionsCurrent Liabilities 1,623 2,314 3,043 3,941Provisions 8 11 15 19sub total 1,631 2,325 3,057 3,960Net Current Assets 3,769 4,639 5,605 6,656Misc Expenses 30 21 21 21


IMPORTANT RATIOS

Particulars Mar10 Mar11 Mar12E Mar13E(A) Measures of Performance (%)Contribution MarginEBIDTA Margin (excl. O.I.) 19.3 18.5 17.9 17.5EBIDTA Margin (incl. O.I.) 19.3 18.5 17.9 17.5Interest / Sales 3.3 3.5 3.6 3.1PBDT Margin 16.2 15.1 14.5 14.6Tax/PBT 23.1 23.3 24.5 24.5Net Profit Margin 9.0 8.4 7.9 8.2





CASH FLOW

Particulars Mar10 Mar11 Mar12E Mar13EProfit before tax 1,205 1,466 1,692 2,125Depreciation & w.o. 355 440 531 614Direct taxes paid (296) (356) (432) (539)Change in Working Capital (Non Cash) (588) (686) (1,060) (1,071)Other 164 124 (4) (223)(A) Cash Flow from Operating Activities 840 988 728 906Capex {Inc./ (Dec.) in Fixed Assets n WIP} (2,073) (2,341) (1,260) (500)Free Cash Flow (1,233) (1,353) (532) 406Inc./ (Dec.) in Investments 3 0 0 0(B) Cash Flow from Investing Activities (2,070) (2,341) (1,260) (500)Inc./(Dec.) in Debt 1,202 1,493 500 (350)Dividend Paid (Incl. Tax) (124) (136) (171) (196)Other 88 102 106 120(C) Cash Flow from Financing 1,166 1,458 435 (426)Net Change in Cash (65) 105 (97) (20)Opening Cash balances 497 432 537 440Closing Cash balances 432 537 440 420E-estimates

Financials

October 5, 2011 Astral Poly

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Astral Poly Technik


FinancialsYear Net Sales % growth EBITDA OPM% PAT NPM(%) EPS(Rs.) % growth PER(x) ROANW(%) ROACE(%)FY10 2,902 50.2 419 14.5 280 9.5 12.5 97.5 15.2 26.9 26.3FY11 4,108 41.6 539 13.1 334 8.0 14.9 19.1 12.8 25.2 26.5FY12E 5,925 44.2 811 13.7 463 7.8 20.6 38.6 9.2 27.3 30.3FY13E 7,925 33.7 1,098 13.9 639 8.0 28.4 38.1 6.7 28.8 29.8Figure in Rs mn


Scrip Details

Equity Rs.112mnFace Value Rs.5/-

Market Cap Rs.4.3bnUSD 88.5mn

52 week High / Low Rs.223 / 116Avg. Volume (no) 34,050BSE Code 532830NSE Symbol ASTRALBloomberg Code ASTRA INReuters Code ASPT.BO

Shareholding Pattern as on June’11 (%)

Promoter 63.8MF/Banks/FIs -FIIs 1.7Public / Others 34.4

Analyst: Priyank ChandraTel : +9122 4096 9737Email: [email protected]

Astral Poly Technik (APTL), a maker of pipes and fittings, is the pioneer of the CPVC segment in India. The companyexpanded its product portfolio to PVC segment to become a one-stop solution provider for plumbing needs.Considering the growing need for buildings with sanitation (residential & commercial — offices, malls, hospitals) inIndia, sustainability is assured. Moreover, replacement of existing pipes (mostly GI/PVC) too is potentially a hugemarket. The ongoing capacity addition would enable APTL to play the opportunity. We reiterate Buy recommendationwith a price target of Rs 226 to trade at 8x FY13E earnings.


Robust growth: The APTL product range is witnessing strong growth due toproduct characteristics, which makes the product superior. The current trendin construction and real estate will bolster demand. APTL has licences for fourproducts from Lubrizol, which gives it a competitive advantage. Competitorshave only one such licence – for Flowguard Pipes.

APTL has invested to create visibility for these products, which we believe willgive it a competitive edge in the medium term. The license for the upcomingproduct Blaze Master has been given exclusively to APTL for five years —extendable up to 10 years on fulfilling certain sales covenants.

Network expansion & brand enhancement: APTL is aggressively expanding itsdealer network (300 distributors and 5,000 dealers currently) to increase itscountrywide presence. The brand enhancement program will improve productperception and ISI certification will further strengthen it.

New product launches: APTL has been continuously developing a product rangein both CPVC and PVC segments. The upcoming product Blaze Master (firesprinkler) could be a game changer for APTL. It is awaiting approval from localauthorities. The increased product range enables APTL to act as a one-stopsolution provider for plumbing requirements.

Capacity addition: The continuous capacity addition would enable APTL to caterthe strong growth rate and remain ahead of competition. APTL has increasedthe capacity by 57% to 48,432mn tonnes at the end of FY11 from 30,867mntones in FY10. Considering the demand potential, APTL is expected to addcapacity on a continuous basis.

ValuationAt CMP of Rs 190, the stock trades at 9.2x FY12E and 6.7x FY13E earnings.Considering the growth potential, new product launches and capacity additionswill keep APTL on a growth trajectory. We reiterate a Buy recommendationwith a price target of Rs 226 to trade at 8x FY13E earnings.

APTL relative to Sensex

8090

100110120130140150160170

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INCOME STATEMENT Rs.mn

Particulars Mar10 Mar11 Mar12E Mar13ENet Sales 2,902 4,108 5,925 7,925Other income 52 42 40 40Total Income 2,954 4,150 5,965 7,965Total Expenditure 2,482 3,577 5,114 6,827Raw Material 1,998 2,943 3,981 5,448Employee Expenses 88 105 126 150Selling & Administrative Expenses 246 313 711 872Other Expenses 151 214 296 357EBIDTA (Excl. Other Income) 419 539 811 1,098EBIDTA (Incl. Other Income) 472 573 851 1,138Interest 48 46 91 122Gross Profit 423 527 761 1,016Depreciation 86 107 144 165Profit Before Tax & EO Items 337 420 617 852Extra Ordinary Exps/(Income)Profit Before Tax 337 420 617 852Tax 57 86 154 213Net Profit 280 334 463 639Minority InterestNet Profit 280 334 463 639

BALANCE SHEET

Particulars Mar10 Mar11 Mar12E Mar13ESources of FundsEquity Capital 112 112 112 112Preference CapitalShare Premium 389 389 389 389Other Reserves 668 974 1,411 2,023Net Worth 1,169 1,476 1,912 2,525Revaluation reserve 12 12 12 12Secured Loans 404 407 824 1,222Unsecured Loans 0 0 0 0Loan Funds 404 407 824 1,222Deferred Tax Liability 17 17 17 17


Applications of FundsGross Block 1,112 1,380 1,797 2,195Less: Accumulated Depreciation 234 340 484 648Net Block 878 1,040 1,314 1,547Capital Work in Progress 62 127 135 143Investments 1 1 1 1Current Assets, Loans & AdvancesInventories 697 862 1,218 1,628Sundry Debtors 674 863 1,218 1,628Cash and Bank Balance 38 102 185 268Loans and Advances 259 347 365 384Other Current Assetssub total 1,668 2,173 2,985 3,909Less : Current Liabilities & ProvisionsCurrent Liabilities 983 1,404 1,636 1,791Provisions 23 25 32 32sub total 1,006 1,429 1,668 1,823Net Current Assets 662 744 1,316 2,085Misc Expenses 0 0


IMPORTANT RATIOS

Particulars Mar10 Mar11 Mar12E Mar13E(A) Measures of Performance (%)Contribution MarginEBIDTA Margin (excl. O.I.) 14.5 13.1 13.7 13.9Interest / Sales 1.7 1.1 1.5 1.5Gross Profit Margin 14.3 12.7 12.8 12.8Tax/PBT 16.9 20.5 25.0 25.0Net Profit Margin 9.5 8.0 7.8 8.0

(B) As Percentage of Net SalesRaw Material 68.9 71.6 67.2 68.7Employee Expenses 3.0 2.6 2.1 1.9Selling & Administrative Exp. 8.5 7.6 12.0 11.0Other Expenses 5.2 5.2 5.0 4.5

(C) Measures of Financial StatusDebt / Equity (x) 0.3 0.3 0.4 0.5Interest Coverage (x) 9.7 12.5 9.4 9.3Average Cost Of Debt (%) 12.2 11.3 14.7 11.9Debtors Period (days) 85 77 75 75Closing stock (days) 88 77 75 75Inventory Turnover Ratio (x) 4.2 4.8 4.9 4.9Fixed Assets Turnover (x) 2.6 3.0 3.3 3.6Working Capital Turnover (x) 4.4 5.5 4.5 3.8Non Cash Working Capital (RsMn) 624 642 1,132 1,818

(D) Measures of InvestmentEPS (Rs.) 12.5 14.9 20.6 28.4CEPS (Rs.) 16.3 19.6 27.0 35.7DPS (Rs.) 1.0 1.1 1.0 1.0Dividend Payout (%) 8.0 7.6 4.9 3.5Profit Ploughback (%) 92.0 92.4 95.1 96.5Book Value (Rs.) 52.0 65.7 85.1 112.3RoANW (%) 26.9 25.2 27.3 28.8RoACE (%) 26.3 26.5 30.3 29.8


CASH FLOW

Particulars Mar10 Mar11 Mar12E Mar13EProfit before tax 337 420 617 852Depreciation & w.o. 86 107 144 165Net Interest Exp 48 46 91 122Direct taxes paid (57) (86) (154) (213)Chg. in Working Capital (Non Cash) (161) (18) (489) (686)Other(A) CF from Opt. Activities 253 469 208 239Capex {Inc./ (Dec.) in FA n WIP} (176) (333) (425) (406)Free Cash Flow 77 135 (217) (166)Inc./ (Dec.) in Investments 0 (0) 0 0(B) CF from Investing Activities (177) (334) (425) (406)Issue of Equity/ Preference 0 0 0 0Inc./(Dec.) in Debt 14 3 417 398Interest exp net (48) (46) (91) (122)Dividend Paid (Incl. Tax) (26) (30) (26) (26)(C) Cash Flow from Financing (61) (72) 300 249Net Change in Cash 16 63 83 83Opening Cash balances 22 38 102 185Closing Cash balances 38 102 185 268E-estimates


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This report contains a compilation of publicly available information, internally developed data and other sources believed to be reliable. While all reasonable care has been taken to ensurethat the facts stated are accurate and the opinion given are fair and reasonable, we do not take any responsibility for inaccuracy or omission of any information and will not be liable forany loss or damage of any kind suffered by use of or reliance placed upon this information. For Pvt. Circulation & Research Purpose only.

DolaDolaDolaDolaDolattttt Capital Market Pvt. Ltd. 20, Rajabahadur Mansion, 1st Floor, Ambalal Doshi Marg, Fort, Mumbai - 400 001

DOLADOLADOLADOLADOLAT T T T T TEAM

BUY Upside above 20%

ACCUMULATE Upside above 5% and up to 20%

REDUCE Upside up to 5%

SELL Negative Returns

Principal Sector / Tel. No.Purvag [email protected] +9122 4096 9747

[email protected]

Amit Khurana, CFA Head of [email protected] +9122 4096 9745

Senior AnalystsAmit Purohit FMCG & [email protected] +9122 4096 9724

Bhavin Shah Pharma & Agro [email protected] +9122 4096 9731Priyank Chandra Oil & [email protected] +9122 4096 9737

Rahul Jain [email protected] +9122 4096 9754Rakesh Kumar [email protected] +9122 4096 9750Ram Modi Metals & [email protected] +9122 4096 9756Sameer Panke Construction & [email protected] +9122 4096 9757

AnalystsNehal Shah [email protected] +9122 4096 9753

AssociatesDhaval Shah Engineering & Capital [email protected] +9122 4096 9726Hetal Shah [email protected] +9122 4096 9725Mahvash Ariyanfar Economy, [email protected] +9122 4096 9736Pranav P. Joshi [email protected] +9122 4096 9706Praveen Kumar [email protected] +9122 4096 9723Rohit Natarajan Construction & [email protected] +9122 4096 9751

Sales Tel. No.

[email protected]

Janakiram Karra +9122 4096 [email protected]

Vikram Babulkar +9122 4096 [email protected]

Kapil Yadav +9122 4096 [email protected]

Head Dealing - Equities

P. Sridhar +9122 4096 [email protected]

Equity Sales Traders

[email protected] +9122 4096 9797

Jignesh Shahukar +9122 4096 9727

[email protected] Dalal +9122 4096 [email protected]

Derivatives Team

Head of Derivatives

Aadil R. Sethna +9122 4096 [email protected]

Derivatives Sales Traders

Chirag Makati +9122 4096 [email protected]

Mihir Thakar +9122 4096 [email protected]

Quantitative [email protected]

Prachi Save Derivatives [email protected] +9122 4096 9733

Bloomberg [email protected]

Board Lines +9122 4096 9700Fax Lines +9122 2265 0410

+9122 2265 1278Production StaffHarish C Menon Editor - [email protected] +9122 4096 9749

Paresh Girkar +9122 4096 [email protected] Shinde +9122 4096 [email protected]

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