Last week, Flex Industries and Polyplex Corporation merged their polyester film capacity to form the largest domestic polyester film manufacturing company. The proposal, likely to be effective from January 1, 1999, has been cleared by the board of both companies and awaits the nod of the financial institutions. This merger would have significant implications for the beleaguered polyester film industry on the whole and Flex Industries in particular.
Flex is one of the leading flexible packaging and polyester film manufacturing companies in the country, with a turnover of over Rs 400 crore (annualised from 18 month results). About 40 per cent of this turnover comes from the polyester film division which has a capacity of 24,000 tonne per annum (tpa).
Costly backward integration
For the twelve month period ended June 1994, Flex had notched a PAT of Rs 13.13 crore on a turnover of Rs 171 crore. Buoyed by success, in 1994, Flex decided go for backward integration by putting up a 6,000 tpa manufacturing capacity for polyester film, the raw material needed for the packaging industry.
Initial success and attractive price situation in the country for polyester films tempted Flex to increase capacity to 24,000 tpa to take advantage of the domestic market. Within a short span of two years, for the year ended June 1996, the company recorded a net profit of Rs 44.9 crore on a turnover of Rs 465 crore. Thereafter, things began to go wrong as large capacities of polyester films were commissioned leading to a crash in domestic prices of polyester films by 40 per cent.
This had a two fold impact on the company. First, it landed in red immediately with a loss of Rs 121.7 crore on a turnover of Rs 615.3 crore for the 18-month period which ended December 1998. Second, the company was pre-occupied with making the polyester division profitable which resulted in loss of focus and ground in the packaging business. Its share in the flexible packaging segment slip-ped from 33 per cent to about 23 per cent. The company was not able to meet its obligations to financial institutions, following which a financial restructuring scheme involving res-cheduling of loans, funding of interest, waiving of compound interest and liquidity damages and conversion of short term loans into term loans was approved by the institutions.
Financials
Setting up the polyester films division put pressure on Flex's resources. Total borrowings jumped from Rs 66.22 crore for the year ended June 1993 to Rs 622.56 crore by June 1997 and crossed Rs 700 crore by December 1998. As a result, the debt-equity ratio stands at a precarious 2.3:1 on December 31, 1998. Leveraged expansion resulted in interest costs ballooning to Rs 140.32 crore for the 18-month period ended December 1998 against Rs 14.2 crore in June 1994. Following the financial restructuring, the interest cost is expected to drop. For quarter June 1999, Flex has provided for only Rs 9.89 crore towards interest payments.
But despite taking a beating, Flex has been showing a positive operating profit. For quarter ended June 1999, the company showed a modest gross profit of Rs 5.28 crore against a negative Rs 20.97 crore for corresponding previous quarter.
Future
With the polyester capacity being hived off, Flex would be in a position to put all its troubles behind and focus on its core business of packaging. "We went for backward integration which proved to be disastrous but now we are going back to our core competency," says Ashok Chaturvedi, chairman and managing director.
The flexible packaging industry is expected to grow at about 20 per cent per annum for the next couple of years. Flex would now concentrate on its core business and try to regain lost ground. Flex had been focused in the middle and upper segment, but is now also considering tapping the lower end also in a gradual manner. At the same time, it would also develop the high-margin, value-added segment. It has already launched a holographic laminate to enable products to be distinguished from counterfeits. It is also targeting products that are currently polythene-packed by pointing out benefits of polyester packaging. S
