Alagappan Arunachalam

Driving growth by labelling brands.

INVESTORS can subscribe to the public offer by Jindal Poly Films at the lower end of the Rs 360-400 band. Jindal Poly Films proposes to primarily use the proceeds of this offer primarily to enhance capacities in the flexible packaging business. At Rs 360, the stock is being offered at 10 times the earnings for FY-05. On an expanded equity base at the lower end of the price band, the price-earnings multiple is 14. The offer is stiffly priced compared to the earnings multiple of its closest competitor, even at Rs 360. There is, thus, less justification to invest at Rs 400.

The company's performance also depends on volatile international demand and raw material costs. At the same time, the company needs to generate reasonable returns on its net worth to deliver value to shareholders. These factors enhance the risk involved though the global demand environment is favourable to the company. Besides, the stock had flared up by about 33 per cent ever since the proposal to come out with an offer. There is, thus, the risk that the stock price will settle at a lower level after the offer is through.

As a standalone entity, Jindal Poly Films derives about 60 per cent of its revenues from the flexible packaging business and the balance from its polyester yarn business. It also makes polyester chips, which are consumed by its PET films and polyester yarn divisions. The yarn business was a drag on its earnings in FY-05 with flexible packaging business contributing more than 90 per cent of its profits. Growth in profits also depends on the flexible packaging business.

Jindal Poly Films is among the larger players in the flexible packaging segment. It manufactures PET, BOPP and metallised films. Its products are used in labels, adhesive tapes, food packaging and wrapping for tobacco, consumer and textile products. Raw materials, most of which are derived from crude oil, constitute 58 per cent of its revenues. Further rise in crude prices could impact the margins. Unlike its domestic competitors in the flexible packaging business, which face a stiff anti-dumping duty imposition by the EU, its products do no attract such a duty.

A future imposition of such a duty could hamper export prospects. Jindal Poly Films derived 22 per cent of its total revenues from exports in FY-04. This jumped to 34.5 per cent in the nine months ended December 2004, indicating significant increase in exports.

Jindal Poly reported a 25 per cent growth in revenues and earnings in FY-2005. This came on the back of higher volumes in the packaging business. In the domestic market, the company faces competition from Flex Industries, another major player in the flexible packaging business. The capacity utilisation at Jindal Poly Films has been low.

The capacities of its flexible packaging business had been ramped up from 12,000 tonnes in 1999 to 74,000 tonnes in 2004. Jindal Poly, in FY-04, produced 38,000 tonnes of flexible packaging material.

A number of production facilities has either come onstream only recently or are set to start production in 2005. The project too envisages adding to the existing capacity as well as installing new lines that expand its product mix.

Jindal Poly Films, however, expects capacity utilisation to rise and stay above 75 per cent in the flexible packaging business over the next three years, based on their assessment of demand for their products. If this happens, it could significantly boost the profit growth rates, especially if margins do not decline sharply.

The managers to the offer are ICICI Securities and JM Morgan Stanley. The offer, which opened on June 9 and closes on June 15.

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