We have been studying this company for a while now. Their JV @ Cameroon is doing very well and hence financials of Prima look attractive. Below are some of the points we could gather on Prima -
Promoter - Dilip Parekh is nephew of Nilkamal's promoters
JV in Cameroon (Prima Dee-Lite Plastics Pvt) - JV partner was erstwhile dealer of company in South Africa. That dealer convinced Dilip to set up a local unit as market was attractive and there were some benefits of tax savings, which continue to happen till today.
- Prima sells moulded furniture and woven sacks through this JV in Cameroon
- Investment in JV - 1cr equity and 11cr in debt with recourse to Prima (debt is fully repaid now)
- JV has been able to maintain EBITDA margins of ~33%, five years back they were ~37%
- Management says there is not much competition in Cameroon so far
below is an yearly snapshot of financials of JV -
For 9 months FY15, JV has done sales of 60Cr. On an annualized basis it converts into growth of 70% over FY14.
India business – current op margins of 6-7%
o Margins are expected to increase up to ~12% after hiving off its ACP division and also to benefit from low crude prices flowing into COGS
- Good presence into Kerala, Daman, Puunjab, Hyderabad
Revenue mix for last 9 years -
Impact of falling crude prices -
there might be some inventory write off in Q4'15
Tax rates - Prima will have to pay MAT in India and will keep on getting 50% concession in Cameroon (for next 4 years perhaps)
Future plans/outlook -
- Prima intends to enter Latin America on similar lines as Cameroon
- Focus is on exports and foreign operations. Domestic sales will keep on growing ~10%
Growth triggers -
- High growth JV operations in Cameroon
- Entry into newer geographies such as Latin America
Below is what I like and what I do not like about the company -
- Closing down of ACP division speaks good of management. This should lead to better profitability and return metrics
- Improving profile of business on the back of better revenue mix in favour of JV and export sales sounds good.
- Strong balance sheet -net D/E at ~0.2x
- JV operations are earning super normal profits in such a commodity business. Their sustainability will be threatened once new competitors come
- Net working capital is very high at 5 months, over last 9 years company has been able to convert only ~80% of its profits into cash. Receivables are poor in domestic markets, while in foreign markets company operates on average receivables of ~15 days. On suppliers side, company does not have any bargaining power to get good credit days. Its suppliers include Reliance, Indian Oil besides some local ones.
- related party transactions with promoters' entity is discomforting
- No hedging strategy in place, all forex exposure is left open
Few open questions -
- What is leading to high growth and high profits for Prima in Cameroon. Why is new competition not coming up
- Need to understand its LatAm plans in detail
Look forward to your views.