Analysis: Shri Jagdamba Polymers Ltd

The current section of “Analysis” series covers Shri Jagdamba Polymers Ltd, an Indian company producing technical textiles, polypropylene/polyethylene woven sacks & fabric and geo-textile products etc.

“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.

In order to benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

Shri Jagdamba Polymers Ltd Research Report by Reader

Dear Dr Vijay,

I recently subscribed to your Stock Analysis Excel Template (Screener.in) and e-books and this is my first analysis.

I have attached my analysis and I request your comments on my analysis so that I can consider opening my first position in Indian stocks.

I would love to hear your usual in-depth analysis and spot anything if I have missed out.

Thanks

Sriram

1. Introduction of Shri Jagdamba Polymers Ltd:

• Company Name: Shri Jagdamba Polymers Ltd
• Stock Code: BSE 512453
• Sector: Consumer Cyclical
• Industry: Packaging & Containers
• Website: http://www.shrijagdamba.com/

2. Industry Overview:

Shri Jagdamba Polymers Ltd is engaged in the business of technical textiles, woven fabrics, and windmill power generation. Its products comprise PP Woven bags, fabric, box bag, ground cover, and lumber cover. Mainly in woven polypropylene market.

• Technical Textiles – 91%
• Woven Fabrics – 6%
• Wind Mill Power Generation – 3%

Technical textiles in India continues to grow along with the growth of end-user industries. Technical textiles currently contribute around 0.75% of India’s GDP and account for around 12% of the Indian textile market. India’s technical textiles market size accounts for around 4% share in the world’s market. The technical textile market size is expected to reach ₹175,000 crore until 2019-20, at a growing rate of almost CAGR of 15%.

3. Products Overview:

Technical Textiles:

Unlike conventional textiles, which are manufactured for aesthetics and appearance, technical textiles are manufactured mainly for its performance and functional aspects.

4. Financial Analysis of Shri Jagdamba Polymers Ltd:

The sales growth trend over the past 10 years is at 27% whereas for the last year FY18-2019, the growth has dropped to 6%.

The company has an Operating Profit Margin of 12% over 10 years and it has achieved an OPM of 18% in the last twelve months. A deeper look into the YOY operating profit margin indicates the highest at 16% and lowest at 8%. The fluctuation of nearly 50% from the highest indicates that the company does not have any pricing power or is not able to pass on the cost of the raw materials to its customers. The Net Profit Margin resembles close to operating profit margin, with NPM highest at 9% and the lowest at 3%.

The OPM & NPM for the last twelve months is standing highest over the last 10 years is at 18% and 12% respectively.

Though the OPM & NPM 10-year trend appears decent, Investors should note that the company is unable to pass the increase in raw material costs to its customers or has no pricing power or too many players offering similar products.

Operating Efficiency Analysis of Shri Jagdamba Polymers Ltd:

a) Inventory Turnover Ratio:

The company has a stable & increasing inventory turnover from March 2011 to March 2018 indicating that the company is not suffering from cash being trapped in the inventory.

b) Receivable Days:

The company has been able to collect payment from its customers and the receivable days has been dropping from 57 to 36 days. There have been some years where the company has increased receivable days in March 2011, 2013, and 2014. Overall, the company has been able to collect its payment from its customers in a timely manner.

c) Net Fixed Asset Turnover:

The company has been increasing efficient Y-O-Y in asset utilization to produce goods. There has been a stable and steady increase in NFAT over the past 10 years from 2.24 to 10.55, which is very good.

Converting Profits into Free Cash:

Comparison of cumulative PAT (₹42 cr) and Cash flow from Operations (₹73 cr) indicates that the profits are not being stuck as working capital. This also indicates that the company can convert profits into free cash.

Debt:

The company had increasing debt from March 2011 to March 2014 (40 crores) and in March 2018 the company reduced its debt to 14 crores. As of March 2018, the debt to equity ratio stands at 0.3, which is good. In addition, over a period of 10 years, the debt has increased by 4%.

With the debt at 14 crores by March 2018, if we assume an interest rate of 12%, then ₹1.68 cr is interest expense and remaining 12 crores are being used for Capital work in progress for expansion work.

A further deep look – the interest expense of 1.68 crores (₹2 cr) is well covered by the operating profit itself which is at 29 crores as of March-2018. The interest coverage ratio is at 11 as of March 2018.

Self-Sustained Growth Rate (SSGR) of Shri Jagdamba Polymers Ltd:

SSGR is at an average of 3% until March 2017, where debt was high until then. The company has reduced its debt in March 2018 / 2019 and SSGR is at 14% in March 2018. This is also indicated by Capex as of March 2018 is zero, and all the cash from operations are available as free cash, which could have boosted the NPM and thus the SSGR at 14%.

A 10-year average-sales-growth-rate of 27% is high when compared to SSGR of 14%, which is why probably the company had high debt to meet the sales growth. With the debt at current levels, investors shall continue to watch and compare the same with sales growth. The company has achieved a sales growth of CAGR 25% by using debt and then closed most of its debt in March 2018. The company has been paying a consistent dividend with a low payout ratio of 5% (which is good). Considering the past debt levels, the dividends to shareholders were not significant, however, the intention of the company to share its profits are well noted.

This company is a classic case where the SSGR is lower than the sales growth, and excess sales growth have been funded by debt. Further, the company has managed to reduce its debt by increased operating efficiency which is evident from cCFO > cPAT and supported by higher inventory turnover and lower receivable days.

Investors shall be careful to keep track of operating efficiency as well as rising debt levels. Investors shall also note that the FCF/CFO is at 48%, which is a good sign.

FCFE is at ₹11 cr, which is higher than the total dividend paid (₹2 cr) in 10 years, and this indicates that the dividends are paid from the free cash and not from debts.

5. Valuation Analysis of Shri Jagdamba Polymers Ltd:

Margin of Safety:

The current PE is 8.7, offering an earnings yield (EY) of 11.5%, which offers a reasonable margin of safety.

On looking at PEG, which is currently at 0.6, implying that based on the growth rate, the stock price is under-valued, however, as we have evaluated SSGR and sales growth, investors shall know the sales growth has been fueled mainly by debt and thus PEG may not be a correct way to evaluate the margin of safety.

• Price to Sales is at 0.98, which offers a good margin of safety.
• Stock Price: ₹209
• EPS: 24.08
• PE = 8.7
• PB = 3.18

As per Benjamin Graham PE X PB should be less than 22 and in this case, 8.7 x 3.18 = 27

PE and EY offer a good Margin of safety, as well as Price to sales is at 0.89, which is a good valuation.

6. Business & Industry Analysis of Shri Jagdamba Polymers Ltd:

Peers:

There are many players in the packaging industry market; however, very few companies are with technical textiles pure play. Some of the peers (not necessarily pure play in technical textiles) and picked on a random basis are, as below:

• Shri Jagdamba Polymers
• Essel Propack
• Uflex
• Polyplex

Sales Growth Comparison of Shri Jagdamba Polymers Ltd with Peers:

Sales growth comparison between all the above 4 companies indicates that the growth for Shri Jagdamba Polymers is highest for trailing 10-years to trailing 3-years except that for the last 12 months, POLYPLEX performed the best. Investors shall observe that Shri Jagdamba Polymers sales growth is declining considering its past performance. On the other end, all other companies have clocked an increase in Sales growth in the last year 2018.

Comparison of SSGR:

SSGR comparison amongst the peers reveals that only Shri Jagdamba Polymers have a good/positive range whereas POLYPLEX does have a huge negative SSGR.

Combining both Sales growth & SSGR, it is evident that Shri Jagdamba Polymers has a better growth prospects than its peers.

Comparison of Operating Profit Margin:

OPM comparison reveals that Essel Propack leads peers; however, Shri Jagdamba Polymers is having a consistent growth in OPM. Overall, almost all companies have a similar OPM in the range of around 13% to 18% and Shri Jagdamba Polymers is well in line with its peers.

Comparison of Net Profit Margin:

Polyplex and Uflex had a one-time spike in NPM in the year 2011. All the companies fall within the NPM range of 1% to 10%, where POLYPLEX has fluctuating NPM, and Shri Jagdamba Polymers has a steady and increasing NPM. In March 2018 and after, the NPM of Shri Jagdamba Polymers has exceeded 10%.

Creation of Value for Shareholders from the profits retained:

The total increase in market cap in the last 10 years is ₹173 crores and retained earnings are at ₹40 crores. Thus, Shri Jagdamba Polymers stands at 4 times for every INR 1 of retained earnings.

7. Management Analysis of Shri Jagdamba Polymers Ltd:

Mr Ramakant Bhojnagarwala is the MD of Shri Jagdamba Polymers, who draws almost 5% if PAT as his salary. While this 5% shall be within industry norms, what caught my attention is the % increase in salary from the previous years. There is a 40% jump hike in salary and the same trend is for Directors and WTD (Whole Time Director). Mr Hanskumar Ramakant is likely to the son of Mr Ramakant Bhojnagarwala – there is no succession plan announced and/or Mr Hanskumar is not actively part of Shri Jagdamba Polymers. It looks like Mr Hanskumar heads Shri Shakti Polyweave, which is more likely to have a close link with Shri Jagdamba Polymers.

Shareholders & Promoters:

All the above four key shareholders, Shradha Hanskumar Agarwal, Hanskumar Ramakant Agarwal, Ramakant Jhabarmal Bhojnagarwala and Radhadevi R. Agarwal looks like a family. Based on further research, found that there are two other companies, a private and partnership firm:

1. Shakti Polyweave
2. Shri Techtex

It is not clear why these two companies are spun off with similar product range and there are no succession plans under Shri Jagdamba Poly. If Mr Hanskumar is likely to take over both the companies, then why operate two different companies at all?

• Are there any plans to merge these entities – not sure!
• Are they competing against themselves – not sure!
• Is this a strategy for increasing market share – not sure!

Close to 94% of the total shareholders are promoters and the public, which is a good sign and there are not many FII & other institutions who hold a stake in this company.

EPS:

In 2017, the company has undergone a stock split 10:1 ratio

DIVIDEND – 2019:

The Board recommended a Dividend of ₹0.20 per share of ₹1/- each (i.e. @ 20%) for the Financial Year 2018-19, subject to the approval by the shareholders in the ensuing Annual General Meeting of the company.

NO R&D SPEND:

Some of the peer companies are spending for R&D in technical textiles, it is surprising to see that Shri Jagdamba Polymers has no spend or no intentions towards R&D

8. CONCLUSION:

Overall, the company Shri Jagdamba Polymers has a good sales growth of 25% over 10 years with an unstable profit and operating margins, indicating lack of pricing power and/or due to fluctuations in raw material pricing. The company has utilized debt to achieve above-mentioned sales growth, however, by improved operating efficiency, and deployment of capital, the company has reduced its debt in recent years.

The company has grown its business by utilizing its production capacity at an optimal level with efficient management of inventory and receivables. As a result, the company has managed to grow using its business profits and reduce its debt over the years without witnessing a lot of money being stuck in working capital.

When compared to some of its peers, Shri Jagdamba polymers has witnessed better profitability, and operating efficiency – however, investors should be aware of lack of pricing power and it appears to be common for all companies operating in this industry of technical textiles.

Investors shall also note that the company can optimize its operating efficiency until a certain point after which Shri Jagdamba Polymers shall rely on external capital or debt to sustain sales growth at 25%. Investors should also note that there is no evident succession plan and the promoter having stakes in another company with a similar product range, which is a private company.

Given the current stock price, valuations, a good record of accomplishment of management, and financial analysis, I believe Shri Jagdamba Polymers can be considered a good candidate for investing.

I will be pleased to hear your thoughts on my analysis and your expert opinion on this company.

Dr Vijay Malik’s Response

Hi Sriram,

Thanks for sharing the analysis of Shri Jagdamba Polymers Ltd (SJPL) with us! We appreciate the time & effort put in by you in the analysis.

Let us analyse the financial and business performance of the company over the last 10 years.

Financial and business analysis of Shri Jagdamba Polymers Ltd:

While analyzing the financials of Shri Jagdamba Polymers Ltd, an investor would note that in the past, the company has been able to grow its sales at a rate of 20-25% year on year. Sales of the company increased from ₹20 cr. in FY2009 to ₹179 cr in FY2018. Further, the sales of the company have increased to ₹190 cr in FY2019.

While analysing the performance of the company in the past, an investor would notice that over the last 10 years, the operating profit margin (OPM) of the company has shown two distinct patterns.

During the initial period, FY2009-15, the OPM of the company declined from 16% in FY2009 to 8% in FY2015. Whereas since FY2016 onwards, the OPM of the company has witnessed improvement. The OPM has increased from 8% in FY2015 to 18% in FY2019.

While analysing the reasons for such fluctuations in the profit margins of the company, an investor gets to know that almost 99% of the raw material of the company is dependent on prices of crude oil.

FY2018 annual report, page 66:

While reading the annual reports of the company, an investor notices that most of the raw material used by the company like PP (polypropylene), HDPE (high-density polyethylene), LDPE (low-density polyethylene) etc. are produced from crude oil. Therefore, an investor would appreciate that the prices of these raw materials are highly dependent on crude oil prices.

The company has highlighted this aspect of its business in its annual reports. FY2018 annual report, page 19:

Threats: International fluctuation in petroleum products may affects prices of raw materials

Moreover, while reading other public documents like the credit rating reports of the company, an investor gets to know that the key suppliers of these raw materials are large petrochemical companies like Reliance Limited.

Credit rating report for Shri Jagdamba Polymers Ltd prepared by ICRA in September 2010:

The basic raw materials used for production of technical textiles are Polypropylene (PP) or High Density polyethylene (HDPE) , which are procured from Reliance Industries Ltd and limited quantity is imported from abroad.

An investor would appreciate that small players like Shri Jagdamba Polymers Ltd do not have any negotiating power in front of large petrochemical companies like Reliance Limited. It is difficult for small players to negotiate lower prices from Reliance Limited. On the contrary, small players find it hard to get even any credit period from Reliance Limited. Most of the time, small players like Shri Jagdamba Polymers Ltd have to make advance payments to purchase raw material from large petrochemical companies.

Credit rating report for Shri Jagdamba Polymers Ltd prepared by ICRA in September 2010:

The operations are also working capital intensive because of high debtor/inventory days and low supplier’s credit as significant value of raw materials are purchased against advance payment.

Shri Jagdamba Polymers Ltd used to have lower negotiating power with its supplier in the past as highlighted by ICRA in 2011 credit rating report.

The ratings also take into account the susceptibility of profitability to foreign exchange rate fluctuations, since a large part of revenue of the company is being contributed by export sales, and to volatility in major raw material (PP) price, given the absence of bargaining power for raw material procurement following nearly monopoly position of suppliers.

The negotiating position of Shri Jagdamba Polymers Ltd has not changed even after eight years as the 2019 credit rating rationale of CARE Ltd has highlighted similar concerns.

Moreover, there are limited suppliers of its key raw material (plastic granules) in the domestic market due to the oligopolistic nature of the supply market, which results in a limited bargaining power of SJPL.

Therefore, an investor would acknowledge that on the front of sourcing of raw material, Shri Jagdamba Polymers Ltd (SJPL) could do little to negotiate lower prices as the suppliers of petrochemical products are very large companies when compared to SJPL. Therefore, whenever the crude oil prices go up, the raw material costs of Shri Jagdamba Polymers Ltd go up.

Further advised reading: How to do Business Analysis of a Company?

Further, to understand the profitability of the company, an investor needs to understand the nature of competitive intensity in the customer market/industry of Shri Jagdamba Polymers Ltd.

While reading more about the customer market of the company, an investor realizes that Shri Jagdamba Polymers Ltd operates in a commodity market where there are very low barriers to entry. The capital required to start production is low and the technology to produce the final product is easily available.

February 2019 credit rating report of CARE for Shri Jagdamba Polymers Ltd:

The industry is fragmented in nature due to the low entry barrier on account of low initial capital investment and ease of accessibility to technology. This results in increase in the competition especially in the domestic market.

Further advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

The low barriers to entry in the industry along with the commoditized nature of the product of Shri Jagdamba Polymers Ltd lead to severe competition, which is primarily depends on price.

September 2010 credit rating report of Shri Jagdamba Polymers Ltd by ICRA:

The ratings also factor in the highly competitive business environment on account of a fragmented industry structure and the commoditized nature of SJPL’s product, which result in price-based competition.

By combining the learning from the business situation faced by Shri Jagdamba Polymers Ltd from both the fronts i.e. while sourcing raw material and while selling its products in the market, an investor would notice that the company faces immense challenges. Whenever the crude oil prices go up, then its raw material prices go up as well. However, the company faces difficulty to pass on the increased cost of raw material prices to its customers because the industry has intense competition from multiple players.

February 2019 credit rating report of CARE for Shri Jagdamba Polymers Ltd:

The ratings, however, continue to be constrained by its modest scale of operations, susceptibility of its profitability to volatile raw material prices and foreign exchange rates, customer concentration risk and presence in the fragmented and competitive woven fabric industry which restricts its profitability margin.

In addition, Shri Jagdamba Polymers Ltd does not have any long-term contracts with its customers.

February 2019 credit rating report of CARE for Shri Jagdamba Polymers Ltd:

SJPL’s majority of the production is exported to countries such as United Kingdom (UK), United States of America (USA), China and other European countries. SJPL has been successful in establishing a stable customer base in these countries. Although, it does not have any long-term agreements in place with its customers, SJPL has been able to secure repeat orders from its customers due to conformity to quality standards and specifications which mitigate the risk to a certain extent.

In the absence of long-term contracts, the customers can easily switch to other suppliers.

As a result, an investor would appreciate that Shri Jagdamba Polymers Ltd finds it very difficult to pass on the increasing cost of raw material to its customers to maintain its profitability.

In light of the above learning, when an investor analyses the trend of crude oil prices over the last 10 years, then she notices that the crude oil prices have witnessed two major trends.

1. Phase 1 (FY2009-FY2015) Increasing Crude Oil Prices: Crude oil prices increased steadily from about $55 per barrel in 2009 to about $110 per barrel during FY2015
2. Phase 2 (FY2015-FY2019) Declining Crude Oil Prices: Crude oil prices declined from $110 per barrel during FY2015 and are currently back in the range of about $55 per barrel.

When an investor analyses the movement of operating profit margin (OPM) of Shri Jagdamba Polymers Ltd over last 10 years in association with the crude oil prices, then she notices that during phase 1 of increasing crude oil prices (FY2009-FY2015), the company witnessed a decline in its OPM from 16% in FY2009 to 8% in FY2015. Whereas in phase 2 of declining crude oil prices, the company witnessed its OPM to increase from 8% in FY2015 to 18% in FY2019.

During FY2010, the company highlighted that the key reason for the decline in margins (the increase in raw material prices) was an increase in crude oil prices. FY2010 annual report, page 20:

Risks and Concerns: While the demand for the polymers continues to be strong however the polymers are petrochemical products. The rise in crude prices has increased the cost of polymer production.

In FY2017, the credit rating agency CARE highlighted that the improvement in profit margins was due to a decline in raw material costs/fall in crude oil prices.

December 2017 credit rating report of CARE for Shri Jagdamba Polymers Ltd:

The total operating income which grew at compounded annual growth rate of over 18% during FY15-FY17; grew nearly 20% during FY17 over FY16 on the back of growth in production and sales volume. The PBILDT margin too improved during FY17 over FY16 due to saving in raw material cost.

In light of the dependence of the profit margins of Shri Jagdamba Polymers Ltd on crude oil prices, it is advised that investors should be cautious while extrapolating the current trend of improving profit margins in the future. The current improvement in the profit margins may be an effect of low crude oil prices and the crackdown by China on the polluting industries in its geography. Both these factors may change in the future. The crude oil prices may increase and the competition from China may come up again.

As a result, an investor should be cautious while assessing the improvement in the profit margins of Shri Jagdamba Polymers Ltd in recent years.

The net profit margin (NPM) of Shri Jagdamba Polymers Ltd has followed the trend of OPM over the years.

Over the years, Shri Jagdamba Polymers Ltd had a tax payout ratio in line with the standard corporate tax rate prevalent in India.

Further advised reading: How to do Financial Analysis of Companies

Operating Efficiency Analysis of Shri Jagdamba Polymers Ltd:

a) Net fixed asset turnover (NFAT) of Shri Jagdamba Polymers Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Shri Jagdamba Polymers Ltd in the past years (FY2010-18), then she notices that the NFAT of the company has consistently increased from 2.4 in FY2010 to 5.55 in FY2018.

While reading the annual reports, an investor gets to know that the manufacturing capacity of the company is stagnant since FY2010. In FY2010, Shri Jagdamba Polymers Ltd increased its production capacity to 12,000 MTPA from 4,600 MTPA in FY2009.

FY2010 annual report, page 47:

As per the credit rating rationale prepared by CARE Ltd in February 2019, the manufacturing capacity of Shri Jagdamba Polymers Ltd is still 12,000 MTPA.

February 2019 credit rating report of CARE for Shri Jagdamba Polymers Ltd:

SJPL has its plant situated at Dholka, Ahmedabad having an installed capacity for woven fabrics and bags of 12,000 Metric Tons per annum (MTPA) as on March 31, 2018.

Therefore, an investor realizes that the growth in sales volume in the revenue growth of the company from ₹32 cr in FY2010 to ₹179 cr in FY2018 has been contributed by the higher capacity utilization of the existing plant of Shri Jagdamba Polymers Ltd. As a result, the better utilization of the manufacturing plant has led to a consistent improvement in the NFAT of the company.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio of Shri Jagdamba Polymers Ltd:

An investor would note that over the years, the inventory turnover ratios (ITR) of the Shri Jagdamba Polymers Ltd has witnessed improvement. The ITR has increased from 8.3 in FY2011 to 19.9 in FY2018.

An increasing ITR indicates that Shri Jagdamba Polymers Ltd has been able to manage its inventory efficiently over the years. As a result, the company has been able to grow its sales without significant investments in inventory.

Advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of Shri Jagdamba Polymers Ltd:

An investor would notice that over the years, Shri Jagdamba Polymers Ltd has kept its receivables days under control. Receivables days have improved from 57 days in FY2010 to 36 days in FY2018, which is a good improvement despite increasing business.

Further Advised Reading: Receivable Days: A Complete Guide

When an investor looks at the inventory and receivables level of Shri Jagdamba Polymers Ltd, then she realizes that the company managed its inventory and receivables efficiently. As a result, the working capital of the company has not consumed a lot of cash.

This aspect of the business of Shri Jagdamba Polymers Ltd gets established when an investor compares the cumulative net profit after tax (cPAT) of the company with the cumulative cash flow from operations (cCFO) for FY2009-18. She notices that the company has been able to convert its profits into cash flow from operations.

Over FY2009-18, Shri Jagdamba Polymers Ltd has reported a total cumulative net profit after tax (cPAT) of ₹42 cr. whereas during the same period, it reported cumulative cash flow from operations (cCFO) of ₹73 cr.

It is advised that investors should read the article on CFO calculation mentioned below, which would help them understand the situations in which companies tend to have the CFO lower than their PAT and the situations when the companies tend to have CFO higher than their PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Margin of Safety in the Business of Shri Jagdamba Polymers Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Further advised reading: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it is able to convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

While analysing the SSGR of Shri Jagdamba Polymers Ltd, an investor would notice that the company has consistently had a low SSGR (0% to 4%) over the years. Only in the latest year (FY2018), the SSGR has improved to 14%, which is primarily due to a recent increase in profitability of the company due to decline in crude oil prices in recent years.

While studying the formula for calculation of SSGR, an investor would understand that the SSGR directly depends on the net profit margin (NPM) of a company.

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

• SSGR = Self Sustainable Growth Rate in %
• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

An investor would notice that the NPM of Shri Jagdamba Polymers Ltd has been consistently very low in the range of 3% to 4%. Therefore, the company consistently has a low SSGR over the years. In FY2018, the NPM has increased to 9% and as a result, the SSGR has increased to 14%.

An investor would appreciate that the company has been growing at a rate of 20-25% over the years. However, the low SSGR indicates that the company does not seem to have the inherent ability to grow at the rate of 25% from its business profits. As a result, investors would appreciate that Shri Jagdamba Polymers Ltd would have to raise money from additional sources like debt or equity to meet its investment requirements.

However, while analysing the growth history of the company, an investor notices that despite growing at 20-25%, the company has kept its debt levels under control. Over the last 10 years, the debt levels of the company have increased minimally from ₹11 cr in FY2009 to ₹14 cr in FY2018.

There are two reasons leading to the controlled debt levels of the company over the years. Firstly, as per the above discussion, the company has kept its manufacturing capacity at the same level since FY2010. The lack of significant capital expenditure to increase manufacturing capacity and the use of operating leverage (using previously unutilized capacity) has kept the funds requirement of the company under check.

Secondly, while reading the SSGR article shared above, the investor would notice that we have highlighted a situation (Case C), where companies that have SSGR less than the current growth rate but still manage to reduce debt over the years. In such cases, efficient working capital management ensures that the company has a significant amount of CFO, which is not stuck in the working capital needs of the company. As a result, the cash is available from the internal sources for the capital expenditure needed for growth and reduce debt.

An investor is able to observe this aspect of the company’s business when she analyses the cumulative cash flow position including free cash flow for the company over the last 10 years (FY2009-18).

b) Free Cash Flow Analysis of Shri Jagdamba Polymers Ltd:

While looking at the cash flow performance of Shri Jagdamba Polymers Ltd, an investor notices that during FY2009-18, the company had a cumulative cash flow from operations of ₹73 cr. However, during this period it did a capital expenditure (capex) of ₹38 cr. As a result, it had a free cash flow of ₹35 cr. (73 – 38).

Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

The presence of free cash flow indicates that the Shri Jagdamba Polymers Ltd has been able to meet all its capital expenditure requirements from its cash flow from operations. As a result, the company could expand its production capacity and kept its debt level under over the last 10 years.

Free cash flow (FCF) is one of the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Additional aspects of Shri Jagdamba Polymers Ltd:

On analysing Shri Jagdamba Polymers Ltd, an investor comes across certain other aspects of the company:

1) Curious case of a large competing company, Shakti Polyweave Private Ltd, owned by promoters of Shri Jagdamba Polymers Ltd:

While reading about the company, an investor gets to know that the promoters of Shri Jagdamba Polymers Ltd (SJPL) have another company, Shakti Polyweave Private Ltd (SPPL), which is in the same business line. The promoters of SJPL run the entire business operations of SPPL.

February 2019 credit rating report of CARE for Shri Jagdamba Polymers Ltd:

The promoters have also promoted the other company; Shakti Polyweave Private Limited (SPPL; rated CARE BBB+; Positive/ CARE A2) which is also engaged in similar line of operations. Both these companies operate under the common management and have business linkages.

While reading about Shakti Polyweave (Website), an investor gets to know that it produces the same products as Shri Jagdamba Polymers Ltd and is a much larger player in terms of manufacturing capacity.

With the growing demand and “constant self evolving” attitude of directors,three divisions were formed within the marketing group relatively termed as AGRO-TECH FABRIC, SPL CONSTRU-TECH FABRIC, SPL PACK-TECH PRODUCTS With the help of this focused marketing approach, company has reached a production level of 30000 tonnes annually and targeting another 20,000 tonnes in next 2 years.

An investor would notice that Shakti Polyweave has a current production capacity of 30,000 MTPA in comparison to the production capacity of 12,000 MTPA of Shri Jagdamba Polymers Ltd. Moreover, as per the above screenshot, the promoters are increasing the production capacity of Shakti Polyweave by another 20,000 MTPA.

As per the credit rating rationale of Shakti Polyweave prepared by CARE Ltd in February 2019, the additional capacity is primarily debt funded.

February 2019 credit rating report of CARE for Shakti Polyweave Private Ltd:

SPPL is implementing a large size expansion project with a total cost of Rs.72 crore (approximately 1.14 times of tangible net-worth as on March 31, 2018) which is being funded through the term debt of Rs.50 crore, and balance through the internal accruals

In light of the above information, an investor should be aware of the conflict of interest that may arise when the same promoters/management take decisions about Shakti Polyweave Pvt. Ltd and Shri Jagdamba Polymers Ltd.

a) Promoters may prefer Shakti Polyweave Pvt. Ltd to Shri Jagdamba Polymers Ltd:

While analysing the past business history of Shri Jagdamba Polymers Ltd, an investor gets to know that previously, the key role of the company was to act as a contract manufacturer for Shakti Polyweave Pvt. Ltd.

September 2010 credit rating rationale of Shri Jagdamba Polymers Ltd by ICRA Ltd:

The company manufactures woven sacks, tarpaulin and geo-textile products on job work basis and large part of the job work is for Shakti Polyweave Private Limited, a group company, which exports most of its production to USA and European countries.

Thus, an investor would note that the key role of Shri Jagdamba Polymers Ltd in the promoter group was to do contract manufacturing for Shakti Polyweave Pvt. Ltd. Shakti Polyweave would, in turn, sell the goods produced by the company to export markets. Such an arrangement raises the possibility that for any export order, the promoters may split the profit between Shri Jagdamba Polymers Ltd and Shakti Polyweave Pvt. Ltd as per their preferences.

If the promoters decide, then they may easily keep a larger share of profit in Shakti Polyweave and pass on a lower share of profit to Shri Jagdamba Polymers Ltd in the form of contract manufacturing/job work charges.

Possibility of such a situation is removed if the promoters only have one company for the business activity. In such a case, all the profits are availed by one company and the possibility of promoters preferring their private company to the public limited company is mitigated.

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

b) Expansion of production capacity in Shakti Polyweave Pvt. Ltd instead of Shri Jagdamba Polymers Ltd:

In the discussion above, an investor would remember that the production capacity of Shri Jagdamba Polymers Ltd is unchanged at 12,000 MTPA since FY2010. On the other hand, Shakti Polyweave Pvt. Ltd, which is already a larger player with a current production capacity of 30,000 MTPA, is undergoing a further capacity expansion of 20,000 MTPA. An investor would also remember that both Shri Jagdamba Polymers Ltd and Shakti Polyweave operate in the same business segment and produce similar products.

An investor may think that the promoters have decided to expand the production capacity of Shakti Polyweave instead of Shri Jagdamba Polymers because Shakti Polyweave may have reached a higher capacity utilization and in turn, it might need additional capacity.

However, while reading the credit rating reports of both the companies, an investor gets to know that in FY2018, Shri Jagdamba Polymers had achieved 88% capacity utilization versus 87% capacity utilization achieved by Shakti Polyweave.

February 2019 credit rating report of CARE for Shri Jagdamba Polymers Ltd:

The growth in total operating income of the company was largely driven by improving capacity utilisation and increasing average sales realization of its products. The capacity utilisation of SJPL’s products improved to 88% during FY18 from 59% during FY16.

February 2019 credit rating report of CARE for Shakti Polyweave Private Ltd:

The growth in total operating income of the company was largely driven by improving capacity utilisation and increasing average sales realization of its products. The capacity utilisation of SJPL’s products improved to 87% during FY18 from 61% during FY16.

(*please note: we believe that the mention of SJPL in the credit rating report of Shakti Polyweave Private Ltd while describing the capacity utilization is a typographical error by CARE Ltd.)

Looking at the above data, an investor would appreciate that in FY2018, both the companies have achieved a similar level of capacity utilization (88% vs 87%). However, still, the decision of promoters to increase production capacity of already larger company Shakti Polyweave instead of Shri Jagdamba Polymers Ltd may indicate that the promoters have decided to grow the already larger company to an even larger level.

Investors would note that since FY2010, the manufacturing capacity of Shri Jagdamba Polymers Ltd is constant at 12,000 MTPA. The major capital expenditure is done by the company during the last 10 years towards the creation of wind-power generation capacity in FY2014 and FY2016. Moreover, as per the credit rating rationale of the company by CARE in December 2017, the promoters plan to create a solar power plant in Shri Jagdamba Polymers Ltd:

Moreover, As on March 31, 2017, SJPL has windmill capacity of 3.6 Mega Watt (MW). SJPL is also planning to install solar power plant with capacity of 3 MW at the total cost of Rs.13.50 crore, which is expected to be funded through the term loan of Rs.10.12 crore and rest through internal accruals. The installation is expected to be completed by March 2018.

Advised reading: How to do Business Analysis of Wind Power Plants

Moreover, investors would notice that the larger of the two companies, Shakti Polyweave Private Ltd was established by the promoters in 1997 whereas Shri Jagdamba Polymers Ltd was established in 1985.

February 2019 credit rating report of CARE for Shakti Polyweave Private Ltd:

Incorporated in December 1997, SPPL is promoted by Mr. Hanskumar R. Agarwal and his family members. SPPL is engaged in manufacturing of polypropylene (PP)/ Polyethylene (PE) woven sacks & fabric, geo-textile products and various technical textile products which find its application in agriculture, infrastructure and packing industry.

Therefore, investors would note that the Shakti Polyweave, which was established by promoters much later than Shri Jagdamba Polymers Ltd has grown to a much larger level and is still being expanded to an even larger level with currently ongoing large capital expenditure.

It might be that Shri Jagdamba Polymers Ltd no longer fits into the future expansion plans of the promoter group. Alternatively, it might be that the promoters prefer to generate more business growth in their privately held company instead of the public listed company.

Investors may note that such a situation of differential treatment would not arise if the promoters hold only one company for doing business in a segment.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

c) Investors of Shri Jagdamba Polymers Ltd at the mercy of promoters to give any business to the company:

After looking at the promoter group structure, an investor would appreciate that the promoters have two companies in the group to manufacture technical textiles: Shri Jagdamba Polymers Ltd and Shakti Polyweave Pvt. Ltd. Both of these companies are run by the same promoter group/management. As a result, whenever, the promoter group/management gets any new order/business opportunity, then it has the discretion whether to give this order to Shri Jagdamba Polymers Ltd and Shakti Polyweave Pvt. Ltd.

As a result, the shareholders of Shri Jagdamba Polymers Ltd are always at the mercy of the promoters to give it any business by not giving the business to Shakti Polyweave. All the distribution of business between Shri Jagdamba Polymers Ltd and Shakti Polyweave Pvt. Ltd is purely based on the goodwill of promoters. The promoters may decide to give all the business to Shakti Polyweave and only give that amount of manufacturing job to Shri Jagdamba Polymers Ltd, which cannot be manufactured by Shakti Polyweave, as used to happen in the past. This raises possibilities of conflict of interest.

Moreover, from the above discussion, an investor would note that Shakti Polyweave is currently undergoing a debt-funded large capital expenditure. An investor would appreciate that the natural intention of the promoter group may be to utilize the newly created capacity of Shakti Polyweave as early as possible and in turn, pay off the debt raised by them in Shakti Polyweave so that the upcoming interest burden can be reduced.

In light of the same, an investor should be cautious while analysing the future possible situations where the conflict of interest of the promoters of the company by way of their privately held company may interfere with the future prospects of Shri Jagdamba Polymers Ltd.

Investors may note that such a situation of conflict of interest can be avoided if the promoters of public listed companies have only one company for running a business segment.

Further advised reading: How Promoters benefit themselves using Related Party Transactions

2) Management succession planning:

An investor would note that Shri Jagdamba Polymers Ltd was established by Mr. Ramakant Bhojnagarwala in 1985. Currently, he is assisted by his son Mr. Hanskumar R. Agarwal in running the technical textile business of the group.

February 2019 credit rating report of CARE for Shri Jagdamba Polymers Ltd:

SJPL is promoted by Mr. Ramakant Bhojnagarwala, a first generation entrepreneur and has nearly five decades of experience in the textile and polymer industry. He monitors the overall operations of SJPL and plays an active role in growth of the company. He is assisted by his son Mr. Hanskumar R. Agarwal, who is a graduate and has nearly two decades of experience in the woven fabrics, bags and geo-textile business.

Therefore, it seems that the promoter group has already taken steps for the continuity of the leadership for the group. The next generation has already started playing an active role in the business while the founding promoters are still around to guide them.

3) No increase in manufacturing capacity of Shri Jagdamba Polymers Ltd despite capital expenditure in FY2012:

While analysing the financial data of Shri Jagdamba Polymers Ltd, an investor notices that over the last 10 years, the company has done significant capital expenditure during three years:

1. FY2012: a capital expenditure of about ₹7 cr
2. FY2014: a capital expenditure of about ₹12 cr and
3. FY2016: a capital expenditure of about ₹13 cr.

In FY2014 and FY2016, the capital expenditure done by the company was utilized towards the creation of wind-power generation capacity.

FY2014 annual report, page 20:

During the year under the review the Company has installed Windmill Turbine of 2.00 MW under captive mode.

FY2016 annual report, page 63:

When an investor reads the annual report for FY2012, then she notices that the company had spent ₹7 cr on building, plant and equipment. FY2012 annual report, page 27:

Further advised reading: Understanding the Annual Report of a Company

However, while analysing the annual reports of the company, an investor is not able to find any information about any increase in production capacity or any other key asset (like new wind power plant etc.). An investor would note from the discussion above in the article that the production capacity of Shri Jagdamba Polymers Ltd is constant at 12,000 MTPA since FY2010.

Therefore, investors may seek clarifications from the company about the assets that were created by it by the capital expenditure of ₹7 cr in FY2012.

4) Strange case of forfeiture of ₹10 cr by an investor:

While reading about the promoter group, an investor get to know that in FY2019, one of the partners of the group had to forfeit about ₹10 cr of money in the group company Shakti Polyweave Pvt. Ltd.

February 2019 credit rating report of CARE for Shakti Polyweave Private Ltd:

Extinguishment of long term liability: SPPL was envisaging a capex and had entered into a memorandum of under-standing with one partner from whom SPPL had received capital advances of Rs.9.98 crore. During 9MFY19, that partner withdrew from project and as per the terms of the agreement, SPPL has forfeited the capital advance. SPPL has adjusted Rs.9.98 crore against gross block of assets during 9MFY19. With reduction in long term liability, TOL/ TNW ratio has improved significantly from 1.33 times as on March 31, 2018 to 0.92 times as on December 31, 2018.

The explanation provided in the credit rating rationale is that the partner withdrew from the project after providing an advance ₹10 cr. Investors would remember that the size of the current capital expenditure of Shakti Polyweave is ₹72 cr out of which ₹50 cr is to be funded by debt.

February 2019 credit rating report of CARE for Shakti Polyweave Private Ltd:

Large size debt funded capex: Considering the already optimum utilization of existing manufacturing capacities and growing demand of its products, SPPL is implementing a large size expansion project with a total cost of Rs.72 crore (approximately 1.14 times of tangible net-worth as on March 31, 2018) which is being funded through the term debt of Rs.50 crore, and balance through the internal accruals.

Further advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

Therefore, the equity contribution for the project is ₹22 cr out of which almost 50% was already provided by the said partner. If the balance equity contribution could have been contributed by the Shri Jagdamba group promoters, then the project could be completed without any funding constraints.

In light of this information, it seems strange that the said partner had to withdraw from the project despite giving away almost 50% of the equity contribution. Moreover, when the partner knew that he/she might have to lose the entire ₹10 cr of money invested.

Therefore, investors may analyse this event further to understand more about it. Investors may take a hard look at whether the said capital expansion project and in turn, the future of the technical textile business of Shri Jagdamba group is financially attractive. Investors may need to convince themselves about the forfeited investment, as the amount of funds is significant when compared to the size of the company and the project.

5) Transactions of loans from promoters not disclosed under related party transactions for Shri Jagdamba Polymers Ltd:

While assessing the credit rating reports for the company, an investor gets to know that the promoters of the company have frequently provided loans to the company. CARE in its credit rating report for February 2019 has taken comfort because of such loans.

The liquidity profile of the company is comfortable with current ratio of 1.86 times as on March 31, 2018 and average fund based working capital utilizations at 38% for past trailing 12 months ended October 2018. Moreover, liquidity is supported by healthy cash accruals and need based support from promoters.

In the December 2017 credit rating report, CARE has identified the amount of loans provided by promoters to the company in FY2016 and FY2017.

Moreover, there were unsecured loans from promoters of Rs.11.90 crore of which Rs.8 crore were subordinated to bank loans and hence considered as quasi capital till FY16. However, the promoters have withdrawn the unsecured loans of Rs.6.25 crore during FY17.

From the above disclosure in the credit rating report, an investor can ascertain that at the end of FY2016, the promoters had provided loans of ₹11.90 cr to Shri Jagdamba Polymers Ltd. In FY2017, out of these loans, the promoters withdrew ₹6.25 cr. Therefore, in FY2017, loans of ₹5.65 cr (11.90 – 6.25 = 5.65) remained outstanding.

This data matches with the data present under the section “Loans from Directors and Body Corporates” in the FY2017 annual report, page 66:

Further advised reading: Understanding the Annual Report of a Company

In light of the presence of loans from promoters, an investor would expect that the detailed data related to these loans would be present in the related party transactions section of the annual report like:

• What is the applicable interest rate on these loans, how much interest is paid by the company to the promoters for these loans during the year and how much is payable at the end of the year?
• How much money was taken and repaid during the year etc?

However, when an investor analyses the related party transactions section of the annual report, then she notices that there are no such details of these loans and interest payments in this section.

FY2017 annual report, page 75:

An investor would notice that in the detailed table, under different heads, there are no rows for details of loan taken/repaid and interest paid. In the last two rows, under outstanding balances at the end of the year, it seems that the company tried to provide some information like amount due from key management personnel of ₹83.42 lac, which matches with the amount disclosed under “Loan from Directors & Shareholders”. However, an investor is not able to gain meaningful information about the rest of the loans and their counterparties.

It seems that the disclosures by Shri Jagdamba Polymers Ltd under related party transactions have a room for improvement.

Further advised reading: How Promoters benefit themselves using Related Party Transactions

Margin of Safety in the market price of Shri Jagdamba Polymers Ltd:

Currently (June 25, 2019), Shri Jagdamba Polymers Ltd is available at a price to earnings (PE) ratio of about 8 based on earnings of FY2019.

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, even 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.

• Further advised reading: 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• Read: How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Further advised reading: Hidden Risk of Investing in High P/E Stocks

Analysis Summary

Overall, Shri Jagdamba Polymers Ltd seems like a company, which has been able to grow its sales at a growth rate of 20-25% year on year in the past. The company witnessed its operating profit margin (OPM) decline from 16% to 8% during FY2009 to FY2015 and then witnessed its OPM improve to 18% in FY2019. While an investor analysed the business dynamics of the company, then she notices that the profit margins of the company are linked to crude oil prices.

When crude prices increased during FY2009-FY2015, the OPM of the company declined as it could not pass on the increase in raw material costs to its customers. This is because the technical textiles industry has a lot of competition. It is a fragmented industry with low initial capital requirement and easy access to manufacturing technology. The products of the company are commoditized and as a result, the industry has a price-based competition where usually the buyer has a choice of many organized and unorganized suppliers. As a result, the companies find it difficult to increase prices when their costs increase leading to a decline in profit margins when crude oil prices increase. The absence of long-term agreements with the customers allows the customers the freedom to change suppliers at short notice.

In recent years, crude oil prices have declined and are currently staying at lower levels. Therefore, the raw material costs for Shri Jagdamba Polymers Ltd has declined and it is able to show improved profit margins. It is advised that investor may keep the impact of changing crude oil prices in the profit margins of the company while they make any future prediction about the sustainability of its profit margins.

Investors notice that the manufacturing capacity of Shri Jagdamba Polymers Ltd has stayed the same at 12,000 MTPA since FY2010, as the promoters seem to have decided against increasing its manufacturing capacity. Instead, the company has invested money in wind power projects in FY2014 and FY2016 and has plans to invest money in solar power plants.

On the other hand, the promoters have increased manufacturing capacity in one of their privately held company, Shakti Polyweave Pvt. Ltd, which was established in 1997 much later than Shri Jagdamba Polymers Ltd (1985). Shakti Polyweave operates in the same business segment as Shri Jagdamba Polymers Ltd and currently has a manufacturing capacity of about 30,000 MTPA. Moreover, the promoters are expanding the manufacturing capacity of Shakti Polyweave further by 20,000 MTPA in a primarily debt-funded expansion.

It seems that the promoters have preferred to make Shakti Polyweave a larger player in the technical textiles segment in their group as they have decided to expand further capacity in Shakti Polyweave while Shri Jagdamba Polymers Ltd also had 88% capacity utilization level.

In such a case, an investor should be aware of the conflict of interests of promoters and minority shareholders where promoters may prefer to give a higher amount of business to Shakti Polyweave to utilize the new capacity addition and repay the debt taken for the same. Investors may note that the probability of such conflict of interest is mitigated if the promoters of the group keep only one company for one business segment instead of having a public listed company and a privately held company competing for the same business. Under such group structures, there is a possibility of minority shareholders of the public listed company being ignored if the promoters decide to prioritize their privately held company over the public listed company.

While analysing the related party transactions of the company with promoters, an investor gets to know that the promoters have given loans to the company. However, an investor is not able to gain further insights into these transactions to find out the cost of these loans (rate of interest etc.). Investors may seek clarification from the company about these loans.

Investors may also seek clarifications from the company about the capital expenditure done by the company in FY2012 on building and plant & equipment of ₹7 cr that did not lead to any capacity expansion. Investors may also analyse the forfeiture of ₹10 cr by one of the partners of the promoter for the capacity expansion project of Shakti Polyweave.

Going ahead, investors may keep a close watch on the profit margins of the company, lending transactions between promoters and Shri Jagdamba Polymers Ltd, and any signs where promoters may prefer their privately held company Shakti Polyweave to the public listed company Shri Jagdamba Polymers Ltd. If an investor notices that the promoters have preferred their privately held company, then she may take a decision accordingly.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Shri Jagdamba Polymers Ltd. However, investors should do their own analysis before taking any investment related decision about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”

Hope it helps!

Regards,

Dr Vijay Malik

P.S.

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Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.