This article provides in-depth fundamental analysis of Polyplex Corporation Ltd, manufacturer of polyester films (PET films).
Polyplex Corporation Ltd Research Report by Reader
Q: Dear Sir, please let us know your comments on Polyplex Corporation Ltd. I have tried to analyse the company based on the guidance provided by you in your blog:
- The company is amongst top 5 players in polyester film globally, and is well diversified with operations across the globe.
- It also has a listed subsidiary in Thailand, Polyplex Thailand, which has a market cap over that enjoyed by the holding company (~INR 1500 crore).
- Despite strong revenue growth, the profitability of the company is not encouraging with operating margins deteriorating over the last five years.
- However, the most interesting aspect about the company is that it has INR 932.7 crore cash on its books (as on Mar-14) against a market cap of INR 631 crore. Although the company has debt on its books, the gearing ratio is comfortable at 0.9 times during FY14
Dr Vijay Malik’s Response
Thanks for writing to me!
Financial Analysis of Polyplex Corporation Ltd:
Polyplex Corporation Ltd has been growing its sales at a descent pace of 20-25% year on year since last 10 years (FY2005-14). However, this growth has come at the cost of profitability. Operating profit margins (OPM) have reduced from 18-20% in past to 3% in FY2014. Net profit margins (NPM) have reduced from 8-10% in past to losses in FY2014. An investor should analyse the reasons for this drastic reduction in profitability of Polyplex Corporation Ltd.
Operating Efficiency Analysis of Polyplex Corporation Ltd:
Analysis of operating efficiency parameters of Polyplex Corporation Ltd indicates deteriorating operating performance on each of the parameters.
Inventory turnover ratio though improving in last 3 years, has witnessed overall decline from 7.5 in FY2011 to 6.7 in FY2014. Receivables days though improving from last 3 years, have increased from 38 days in FY2011 to 43 days in FY2014.
Net fixed assets turnover of Polyplex Corporation Ltd has declined from 1.8 in FY2011 to 1.3 in FY2014. Net fixed asset turnover of 1.3 is very low. It indicates that Polyplex Corporation Ltd has to put in a lot of capital in its operations to grow its sales. If companies with low fixed asset turnover were not able to generate sufficient cash from operations, then they would have to rely on alternate sources of cash like equity and debt to meet their cash requirements.
You should read the analysis of two other companies: Ahmednagar Forgings Ltd and Amtek India Ltd, to understand the impact low fixed asset turnover can have on the debt levels of companies. You may read their analysis here:
Polyplex Corporation Ltd has been primarily relying on debt to fund its cash requirements. Total debt of Polyplex Corporation Ltd has increased from INR 100 cr. in FY2005 to INR 1,821 cr. in FY2014 (18.21 times increase). During the same time, Polyplex Corporation Ltd has increased its sales from INR 570 cr. in FY2005 to INR 3,172 cr. in FY2014 (about 5.6 times increase). It indicates that business operations of Polyplex Corporation Ltd are highly cash consuming. This is not a good sign for a good investment opportunity.
If we analyse the debt situation of Polyplex Corporation Ltd in further detail, then we see that the debt of INR 1,821 cr. at a reasonable interest rate of 12%, would require INR 218 cr. of interest payments. The profit & loss statement data shows interest expense of INR 54 cr. only as the rest of the interest amount is being capitalized and is added to capital work in progress as part of cost of expansion projects.
However, this interest payment still needs to be made to lenders on time and the operating profit of Polyplex Corporation Ltd is only INR 92 cr. against expected interest costs of INR 218 cr. Therefore, it seems that Polyplex Corporation Ltd is not able to make sufficient profits to meet even the interest cost of its debt. The actual interest coverage ratio of Polyplex Corporation Ltd is less than 1. This is a dangerous situation to be in, as it leads the company to rely on refinancing to meet the interest & principal payments and is an indication of imminent debt trap.
Investors should be very cautious of investing in companies, which have continuously increasing debt levels, as high debt has the potential of increasing the risk of bankruptcy and reduced profitability under tough business conditions.
Cumulative PAT vs. cumulative CFO analysis for Polyplex Corporation Ltd has been carried out for 9 years (FY2005-11 and FY2013-14) as the consolidated financial data from “screener” does not contain cash flow data for FY2012. It seems that Polyplex Corporation Ltd has not been able to convert its profits in to cash flow from operations. PAT for the 9 years analysed, is INR 1,496 cr. whereas the CFO over the similar period is INR 1,433 cr. Deteriorating inventory turnover and receivables days indicate that profits are being stuck in the working capital.
You have mentioned that Polyplex Corporation Ltd has subsidiaries, which have higher market capitalization than the parent. Similarly, you have pointed out that Polyplex Corporation Ltd has cash of INR 933 cr. at March 31, 2014, which is higher than current market capitalization of INR 639 cr. Such situations are “asset plays” in which the investor expects that the stock market will realize the value of subsidiaries or cash and increase the market capitalization of parent to fully reflect the value of these hidden assets.
However, exactly when the stock markets would realize these hidden values always remains uncertain. It might take years. Moreover, during this time, the value of these subsidiaries might erode leaving the investor’s expectations perpetually unfulfilled.
Moreover, the corporate history has many examples where the managements have squandered cash on useless decision and destroyed shareholders’ wealth. What would happen in case of Polyplex Corporation Ltd, is something which only future would unfold. An investor should keep a close watch on it.
On the contrary, it can be said that management of Polyplex Corporation Ltd has already destroyed shareholders’ wealth, as the increase in market capitalization since FY2005 is only INR 372 cr. against retained earnings of INR 1.473 cr. Effectively, more than INR 1,100 cr. of shareholders’ wealth has been eroded by Polyplex Corporation Ltd.
Margin of Safety in the market price of Polyplex Corporation Ltd:
Polyplex Corporation Ltd is currently available at a P/E ratio of about 12.6, which does not offer margin of safety as described by Benjamin Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Overall, Polyplex Corporation Ltd seems to be a company growing at a moderate pace but sacrificing its profitability and operating efficiency. It seems to have fallen in a debt trap, as its operating profits do not seem sufficient to meet even the interest costs of the debt. An investor should keep a close watch on its profitability and debt levels; else, the outcome might not be very pleasant for her.
These are my views about Polyplex Corporation Ltd. However, you should do your own analysis before taking any investment related decision about Polyplex Corporation Ltd.
You may use the following steps to analyse the company: “How to do Detailed Analysis of aCompany“
Hope it helps!
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- The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
- I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
- Currently, I do not own stocks of the companies mentioned above in my portfolio.