Costly fabric

Although Emmbi Polyarns has grown rapidly in the past, its unimpressive return ratios coupled with stiff IPO pricing render the offer unattractive

With India witnessing better growth thanks to robust consumption and capex, its flexible packaging sector appears to have a bright future. Estimates suggest that the plastic-based packaging products would grow at 5-20 per cent annually, wherein woven-cloth products will grow faster. Emmbi Polyarns, which manufactures woven fabric and bags among other products, is coming out with a public issue with an aim to raise funds of around Rs 38-43 crore with a majority of it allocated for its proposed expansion.

Expansion plans
Emmbi proposes to expand its existing capacities by 3.5 times from the present 5,000 MTPA. The expansion is to be executed in two phases with phase 1 expected to be operational by May 2010 at its existing Silvassa premises. Phase 1 would take its capacities to 8,600 MTPA and in phase 2, Emmbi wants to augment its capacities to 17,800 MTPA. Phase 2 is expected to be operational by December 2010. These additional capacities, besides manufacturing conventional packaging items like PP and HDPE woven sacks and box bags which contribute three-fifth of turnover, would also be used to increase the production of speciality packaging products.

These value-add products like geo-textiles, pond liners, canal liners, flexi-tanks typically fetch better margins of as high as 20 per cent in comparison to 8 per cent for conventional packaging products. The company would focus on canal liners and geo-textiles; it is estimated that these two products would contribute around 35 per cent of total sales in the next couple of years. With the additional capacities coming on stream, Emmbi is likely to look towards increasing exports, which contributed 42 per cent to total sales in the first half of 2009-10 and are much more rewarding than domestic markets. To give thrust to exports, the company has undertaken exclusive marketing tie-ups in the Benelux region and East European countries.
 

YET TO SHINE
in Rs crore	FY08	FY09	H1 FY10
Net sales	29.6	38.3	23.2
EBITDA	3.5	4.8	3.3
Net profit	0.6	1.3	1.2
EPS (Rs) *	2.0	4.0	1.4
RoCE (%)	12.0	14.9	-
P/E (x) @ Rs  40	-	9.9	28.8
@ Rs  45	-	11.2	32.4
*FY10 based on annualised net profit of H1 and post-IPO equity Source: Company

Conclusion
Emmbi’s net sales and net profits grew annually at 29 per cent and 57 per cent, respectively during FY07-FY09. The company’s bigger clientele includes FMCG companies like HUL, Godrej industries, Tata Chemicals and ITC, which provide stable revenue streams.

Although its operating margins have been improving in the last two years on account of higher contribution from value-add products and export markets, and are above industry average, they are still not exciting at 14.1 per cent in the first half of 2009-10.

Also, its return ratios namely, return on capital employed is unimpressive at below 15 per cent. Part of this is also due to the long average working capital cycle of 123 days (or 4 months). Clearly, these indicate the company’s relatively weaker bargaining power with its customers, thanks to the highly fragmented nature of the industry and stiff competition in the domestic market from peers such as Neo Corporation, and Jumbo bags in the export markets.

Nevertheless, execution risk is attached to proposed expansion (substantially large, both in terms of capacity addition and financial outlay), as any delay in terms of acquiring additional land (for the bigger phase 2 project) and project implementation would lead to significant cost overruns.

The stock trades at around 32 times its 2009-10 annualised earnings at the higher end of price band and post-IPO equity, which is costlier than its bigger peers like Neo which enjoy better return ratios. Even on the pre-IPO equity, the PE works out to 15 times its 2009-10 annualised earnings, which is not cheap.