By Ekansh Mittal
The rupee is trading around the 70 mark to the dollar and crude oil has crashed from its recent high of $80 per barrel to below $55 a barrel. I personally believe the rupee may continue to trade above 70 and it seems unlikely that oil will again rise very sharply.
Over the next few years companies that might do well will be the ones that are majorly into exports and are dependent on crude or its derivative as raw material source.
In line with the above strategy, I would like to bring to your notice a smallcap company, called Kanpur Plastipack (KPL). It is engaged in manufacturing of flexible intermediate bulk containers (FIBCs), HDPE/PP woven sacks, PP box bags, fabrics and high tenacity PP. FIBCs are industrial bulk packaging products finding applications in the packaging of food stuffs, chemicals, minerals and agricultural products.
FIBC as a packaging medium is widely used in developed countries like the US and Europe. Exports account for around 75-80 per cent of the companys sales and key raw materials used by the company are PP and LDPE granules, whose prices are dependent on crude oil prices.
The company is in the process of expanding its manufacturing capacities and has raised capital through a rights issue last year.
As on date, we like several points about this company:
FIBC industry growing well: – India is now gaining the centrestage in the global packaging industry and has about 42 per cent of the global market share of FIBCs. There are only 25-30 players in the Indian FIBC industry and only 10 have large capacities. Globally, theres competition from China, Turkey and some South American nations. However, increasingly they seem to be losing market shares (Turkey is losing market share because of political reasons) to their Indian counterparts. That should help an industrywide growth of 10-15 per cent in India.
Capacity expansion on the verge of completion: – The company has been facing capacity constraints since last three years and to overcome the same, a major project is under way. It will help substantial expansion of the existing capacities and consolidation of operations. The greenfield expansion will result in 60% increase in FIBC capacity and 100% increase in the capacity of multi-filament yarn (MFY).
The company has already commercialised some of the capacities. However, the entire project (including shifting from existing locations) is expected to go on-stream in FY 20. On the back of the greenfield expansions and consolidation of existing operations at the new site, the company is hopeful of recording a turnover of Rs 450 crore in next two years against Rs 280 crore recorded in FY18.
Capacity expansions without much strain on balance sheet: – In last two-and-a-half years, the company has expanded its net block by more than 100 per cent. The company has spent around Rs 80 crore on capacity expansions. However, the absolute debt has increased by only Rs 50 crore, while the debt-equity ratio has deteriorated marginally from 0.98 to 1.10 (as of Sept18)
Reasonable valuation:– Last but not the least, the stock is currently trading around 9 times trailing 12-months earnings while during the last 3-4 years it traded in the range of 5-20 times earnings. Taking into account the capacity expansion and expected improvement in earnings, we believe the downside is limited while the upside could be much more over the next 2-3 years.
( Ekansh Mittal is founder of Kanpur-based Katalyst Wealth. He was named a Wealth Wizard by Forbes India in 2015. Mittal has personal holding in the stock mentioned in this article and has recommended it to his clients.)
Here's what 2019 may look like
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