Emmbi Polyarns IPO Analysis

The IPO of Emmbi Polyarns appears unsuitable for conservative investors. Despite the company's relatively healthy margins and reasonable potential for growth in the flexible packaging business, the asking price for the offer appears high. The company's relatively small size and the scale of the proposed capacity expansion also peg up execution risks.

At the offer price of Rs 40-45 per share, the price would discount its annualised six-month 2009-10 earnings by 12-14 times on the pre-offer equity and by 29-32 times, on post-offer equity base.The expansion project would, thus, be crucial to justify the offer price. The stock's status as a small-cap and its limited scale of operations may make premium valuations difficult to attain.

Volume-driven business

Emmbi Polyarns' business revolves around the plastic packaging solutions. The company makes flexible intermediate bulk containers or jumbo bags, technical textiles, flexible tanks, woven sacks, container liner, anti-corrosive packaging and car covers. The user industries include chemicals, agri-processors and consumer products.

Barring a few products, the business of Emmbi Polyarns is mainly volume-driven. The company is in the process of entering new technical textile applications, which hold potential for higher margins, based on demand potential in the overseas markets.

The company has been supplying to established consumer and industrial companies such as Tata Chemicals, Godrej Industries and ITC. It has historically enjoyed operating margins in the 12-14 per cent range, while margins earned by competitors are around 8-10 per cent, claiming that it is able to price in raw material cost increases to its clients. However, whether it will be able to maintain margins with an over four-fold expansion in capacity planned now, is open to question.

Niche products such as flexible tanks, woven sacks and liners compensate for the wafer-thin margins earned by the jumbo bag business. The wide range of applications for flexible packaging make for reasonable growth potential. However, the sector is quite fragmented and features considerable competition. Plans to foray overseas would expose the company to global competition.

Expansion plans

Emmbi Polyarns is raising money to expand its facilities for flexible packaging from 5,000 tonnes per annum to 17,800 mtpa. The first phase, of expanding to 8,600 mtpa is due for completion in May 2010, while second phase (the bulk of expansion) due by December 2010 is in the initial stages of implementation. The project is to be fully funded by equity.

Financials

The company has managed sales growth CAGR of 38 per cent in the last three years. From no exposure to the overseas markets in 2006, the share of exports to total revenues now stands at 58 per cent. However, despite the growth rates, the company's revenue base remains relatively small, even in the context of the fragmented packaging industry. For the six months ended September 2009, the company clocked net profits of Rs.1.21 crore on net sales of Rs. 23.2 crore.

As the company attempts to drive larger volumes, margins may be sensitive to sharp swings in raw material prices .

Prices of inputs closely follow crude oil and appear to be upward bound currently. The spot prices of LDPE and HDPE, for instance, have appreciated by over 50 per cent from their November 2009 lows, though prices are still below the 2007-08 levels.

via BL