Polyplex Corporation - Unwrapping a Packaging Giant

Summary

A reasonably valued packaging company that has displayed resilient growth across cycles and has rewarded shareholders through consistent dividend payouts and buybacks.

Polyplex Corporation is a manufacturer of plastic films across various substrates like PET (thin & thick), BOPP, CPP and Blown PP/PE which are used in flexible packaging besides a variety of industrial applications like release liners, tapes, labels, thermal lamination, imaging and graphics, photovoltaic and optical applications. It has a global presence with manufacturing facilities present in India, Thailand, Turkey, US and Indonesia.

Products:

PET films: These are flexible, clear or translucent material produced from PET polymer having high tensile strength, durability, high heat resistance, excellent gas-barrier properties, dimensional stability, chemical inertness, clarity and recyclability. They are divided into thick and thin films based on thickness. Thick films generally refer to films with a thickness range of 50-350 micron whereas films below 50 microns are characterized as thin film.

BOPP and Blown PE/PP Films: These are transparent cast polypropylene films designed to offer high performance and easy converting for flexible packaging and other applications.

Product Application:

As of FY21, Packaging constitutes 72% of Polyplex’s product.

Industrial application constitutes 28% of Polyplex’s products.

Positives:

Globally Diversified Operations – With manufacturing facilities in India, Thailand, Turkey, USA and Indonesia along with additional warehouses in Poland, Germany & Mexico and Liaison offices in South Korea & Japan, Polyplex is a global player in the PET film industry. The company has a stable market share of about 25% in Thailand and Turkey, and around 10% in India, the US and Indonesia. This diversification in terms of markets served helps the company in navigating through challenges faced in a single region. Asian countries have come to dominate both the supply side as well as the demand side of the packaging industry. Asia accounts for 3/4th of total PET film consumption and demand in Asia is growing faster than rest of the world. On the supply side, most of the new capacities being installed are in low-cost Asian countries.

The company’s value proposition of distributed manufacturing base has an advantage as compared to concentrated capacities and has helped it achieve status as a strategic supplier to several large customers.

Backward Integration – PET film is made from Polyester resin (chips), which in turn is produced from Purified Terephthalic Acid (PTA) & Mono-Ethylene Glycol (MEG). PET Resin is key raw material for production of PET films. PCL is a backward integrated player as company produces its own PET resin which is further utilized for manufacturing of Base films comprising PET thin, PET thick, BOPP, CPP, and Blown PP. PET resin capacity is present at each manufacturing facility of the company. Total capacity of PET resin stands at 4.18 lakh MT.

Increasing Share of Value Added Products – Packaging industry is a commoditized one and the ability to pass on the effect of raw material price fluctuation depends on the ability of the company to differentiate itself. Value added films are higher margin sales arising from differentiated product characteristics or application and/or a differentiated customer. This allows better control over pricing and margins. Over the past five years, the share of value-added films in the total films sales turnover has increased from 24% in FY17 to 34% in FY21.

The Company has accelerated investments in niche downstream products to exploit synergies, broad-base the portfolio and provide a scalable platform for further growth. The setting up of Extrusion Coating lines in Thailand, Silicone Coating lines in India and Thailand, Offline Coaters in India, Turkey & Thailand comprise such downstream investments. The investments in Holography machines in India, Thailand & Turkey besides paper metallizing business in India will further provide opportunities for enhancing the range of value-added products.

Production Capacity – While industry wide capacity utilization for PET films has ranged between 71%-82% over the past 5 years, Polyplex has displayed an industry leading capacity utilization of >95%. This is when Polyplex has added capacities at a CAGR of 10% in last 10 years. The total capacities for different production lines stands at –

PET Resin: 4.18 lakh MT with maximum ~1 lakh MT in Thailand.

PET Thin Film: 2.84 lakh MT with maximum 81K MT in US.

BOPP, PET Thick and Coated PP: Combined total capacity of 1.5 lakh MT.

Value Added Films: Total capacity of 1.1 lakh MT.

Further, the company is undertaking expansion of various production lines. These are –

Greenfield expansion across Thailand and Turkey for Post-Consumer Plastic Waste Recycling and Blown Film line adding 29,000 TPA capacity, expected to go live in Q3/Q4 FY22.

Brownfield expansion for BOPP line, BOPET and Resin plant debottlenecking to add 140,000 TPA capacity expected to go live in H2FY23.

Forward integration for Metallizer and Offline Coater across Indonesia, India and Turkey, adding a total of 18,000 TPA capacity.

Payout History – Polyplex’s dividend payout ratio in FY18, FY19, FY20 and FY21 has been 82%, 50%, 20% and 102%. Total dividend payout during FY21 was 164/share. It also bought back 5.9 lakh shares at 475/share during FY21. For FY22, it has already paid out 48/share in dividends.

Negatives:

Commoditized Industry – The PET film industry has suffered from over capacity in the past. Supply has increased steadily as newer capacities have been added in China and other Asian countries. This has impacted the industry wide capacity utilisation. It is expected that approx. 1.79 million tons of new capacity (approx. 61% in China and 27% in India) will be added over the next few years. Demand in developed countries is expected to grow at a stable 4-5% rate while in developing countries at 7-9%.

Government Regulation – Given the environment hazards of plastics, it remains sensitive to the government regulations. In March 2011, the environment ministry imposed ban on the plastic packing of tobacco products (Gutka and other smokeless tobacco products) which accounted for approximately 25-30% of the end-user industry for flexible packaging in India. Thus, there is an inherent risk of government regulation in the industry.

Raw Material Price Risk – PET resin is the key raw material for Polyplex which it manufactures in-house. Purified Terephthalic Acid (PTA) and Monoethylene Glycol (MEG) are the major raw materials used for manufacturing of PET resin which are crude oil derivatives and thus are highly volatile.

Financials:

Sales have grown at a CAGR of 7% over the last 10 years and 9% CAGR over last 5 years. EBITDA has grown at a CAGR of 28% and PAT has grown at a CAGR of 78% over the last 5 years.

Polyplex is debt free on a net debt basis (Cash balance is greater than debt), the Gross debt to equity ratio stands at 0.3x.

Fixed asset turnover has been rangebound between 1.5x to 2.0x and stood at 1.8x as of Mar 21.

Valuation:

This a simple 10-year DCF with conservative estimates. 

For the first 3 years, revenue growth has been assumed at 9%, for the next 3 years at 7% and for the last 4 years at 5%.

Operating margins (EBIT) is assumed at 14%, which improves to 15% by the end of the forecast period.

The amount to be reinvested is determined by the sales to capital ratio, which is 1.5x in this case, has been taken from Prof. Aswath Damodaran’s website.

Discount rate is 12% for the first 3 years which settles at 11% by the end of forecast period. Terminal growth rate is 4%.