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IPO WATCH

Jindal Poly Films looks attractive compared to its listed peers.

At first glance, the public issue from Jindal Poly Films (JPFL), which is closing on June 15, 2005, seems to be attractive. However, there are enough negatives in the offer which counterbalance the positives. The issue aggregates up to Rs 300 crore.

On a face value of Rs 10, it will open on a price band of Rs 360-400, which is at a 23 per cent discount to its current price levels of Rs 490. The stock has appreciated by more than 50 per cent in the past 12 months.

JPFL, the flagship company of the Rs 1,500 crore BC Jindal group, is the largest manufacturer of flexible packaging films. Its products include BOPET (biaxially oriented poly ethylene terephthalate), BOPP (biauxially oriented poly propylene) and metallised films, and POY (partially oriented yarn) and polyester chips for captive consumption.

These varieties of plastic films are used in the packaged foods industry and in print labels for soft drink bottles, toiletries, creams, etc.

JPFL will use the proceeds from the issue to fund its Rs 650 crore expansion plan which mainly involves increasing its BOPET film segment (capacity stands at 86,000 tonnes per annum).

The plan will also be funded by debt (Rs 239 crore is already arranged) and internal accruals. After the installation of the new BOPET film line in March 2005, JPFL has the fifth-largest BOPET film manufacturing capacity in the world.

JPFL is the largest Indian exporter of BOPET films. In November 2003, the Jindal group acquired Rexor SAS, a French company. This gave it access to a broad range of advanced metallised and coated film production technologies. The acquisition also strengthened its distribution initiatives in Europe.

JPFL, which was a relatively late entrant into the BOPP film market, has a capacity of 45,000 tpa. Its main competitor Cosmo Films has a capacity of 60,000 tpa.

However, there are some risks on the raw material front - that is, rising crude oil prices. JPFL uses dimethyl terephthalate, monoethylene glycol and purified terephthalic acid, etc. as raw materials which are impacted by the changes in international crude oil prices. 
 

Financials
(In Rs Cr)	FY05	FY04	% change
Net sales	702.99	542.39	29.61
Other income	12.25	6.15	6.15
Operating profit	149.17	121.63	22.64
OPM (%)	21.22	22.43	-
Net profit	75.82	55.85	35.76
NPM (%)	10.79	10.3	-
EPS (Rs)	56.54	42.52	-
Trailing 12-month P/E			8.4

Raw material costs as a percentage of revenues in FY05 stands at 58 per cent and has showed a slight increase. Therefore, a further rise in crude prices is likely to escalate raw material costs.

"We have been able to pass on the rise in raw material costs to consumers. Also, we are focusing on more value-added products, which will improve our margins on this front," says Puneet Gupta, director (films division).

Another risk is that the imposition of any anti-dumping or anti-subsidy duties on the company will adversely affect its exports to US and EU. Currently, the company is exempted from any anti-dumping duty on the BOPET films it exports to the EU.

The company recorded a 43.93 per cent rise in net profit for FY05 to Rs 75.82 crore, while sales rose nearly 30 per cent to Rs 703 crore. Currently about 35 per cent of revenues are from exports. During Q4FY05, export revenues more than doubled to Rs 67.82 crore (out of total revenues of Rs 192.97 crore).

The percentage of revenues from the polyester yarn/chips segment, which contributed nearly 48 per cent to the total revenues in Q4FY04, declined to 21 per cent in Q4FY05. On the other hand, contribution of the PET/OPP segment increased to nearly 80 per cent from 53 per cent previously.

At the current price levels of Rs 490, the stock is trading at a trailing 12-month P/E of 8x, which is attractive compared with its competitors like Cosmo Films (15x) and Flex Industries (8x) and Polyplex Corporation (14x).

Also the industry is highly competitive with any number of large and small companies. Apart from domestic competition, the company faces international competition too, with the threat mainly arising from low cost producers in China apart from companies in South Korea, Japan and Taiwan.

Analysts note that in a market where there is no shortage of quality offers it is at best an arbitrage opportunity. However, considering the better valuations and the discount at which it is offered, the offer may be worth a look.

RESEARCH CALLS

GRASIM (neutral, target price: Rs 1,084)
Motilal Oswal maintains a 'neutral' on Grasim and has downgraded earnings to factor in the higher natural gas prices. Grasim's gas-based sponge-iron business would be impacted by the recent hike in the price of natural gas from Rs 2850/tcm to Rs 6740/tcm.

While the sponge-iron business' margins could fall by 500 basis points in FY06E and 660 bps in FY07E, impact on overall business would be negligible.

After factoring in a price hike, the revised consolidated EPS is 2.9 per cent lower at Rs 112 for FY06E and 3.4 per cent lower at Rs 125 for FY07E.

SESA GOA (outperformer, target price: Rs 1,500)
Enam has reiterated an 'outperformer' on Sesa Goa as the stock is highly undervalued.

The medium-term outlook for iron ore remains favorable given the tight supply situation. Annual contract prices of iron ore for FY06 are up 71 per cent compared with FY05 prices. The met coke business is expected to report a fall in profit on account of increasing coal prices and decreasing realisations.

However, higher iron ore realisations will more than offset the drop in profits from the met coke business. It maintained their earlier forecast for FY06 EPS at Rs 171.2.

DEWAN HOUSING FINANCE (buy, target price: Rs 80)
Kotak has put a 'buy' on DHFL, citing the growth in housing finance segment.

DHFL is a private sector mortgage lending institution with an asset base of around Rs 1,500 crore. The aggression DHFL has shown in the past is bearing fruit and in the next three years it is expected to post a 30 per cent growth in terms of assets and a 25 per cent rise in terms of profitability.

It has raised its capital from Rs 360 million to Rs 510 million. The company with its RoE of 21.3 per cent (by FY07E) and low cost of equity should trade at a fair value of 2.3x its adjusted book value.

THERMAX (outperformer, target price: Rs 631)
SSKI has initiated coverage on Thermax with an 'outperformer' rating. Thermax is riding on waves of capital expenditure flowing across manufacturing and power sectors.

The diverse underlying forces, ranging from expansion of capacity in core sectors and captive power additions to environmental compliance, lend constancy to Thermax's order- book.

Though pricing flexibility vis-à-vis input costs remains a concern, stable input costs will ensure earnings CAGR of 36.8 per cent over FY05-07E, driven by a 20.5 per cent CAGR in revenues.