Good fundamentals & extremely high valuations.
FCF is low- continuous investment, but thats how it is & will be.
Overall safe stock for long term but no great returns starting at this level
Good fundamentals & extremely high valuations.
The TCPL website mentions a diversification into flexible packaging:
“Starting July 2016, TCPL will begin an exciting new venture in the flexible packaging industry. We are installing the best equipment in the world in order to supply cork tipping paper, laminates, sleeves and wrap-around labels. Located near our existing facility in Silvassa, we are confident of producing the best quality at great value.”
Any idea how this is expected to impact financials / growth?
Currently at a TTM PE of approximately 13 times, and approx TTM EV/EBITDA of 7 times; doesnt look that expensive if they can maintain earnings growth of 22% and RoE of over 25%. Low liquidity makes this difficult to buy though. Lets see how the Q4 results are…
excellent points to be remembered
But the question is what is a capex for this new venture and how they are going to fund it?
If the new facility is going to be operational in June 2016, presumably the capex has been funded already, probably by more debt. The LT debt increased from Rs97 cr to Rs 119 cr from Mar 31, 2015 to Sep 30, 2015. Possibly part of this debt was for this project, but frankly I dont know the answer. The H2FY16 results spoke of expansion at Haridwar which is for a different line of business
Seeking higher degrees of automation, packaging converters adopt Rapida 106
11 May 2016 | Rushikesh Aravkar | Comment now
With packaging players in India realising the need for higher levels of automation on their offset presses, KBA has ramped up Rapida 106 installations in India, said Aditya Surana of Indo Polygraph Machinery, in conversation with PrintWeek India.
He confirmed that there are 11 highly automated Rapida 106 machines running in India and three more are en route. These include one order booked by ITC for its third KBA Rapida 106 machine. The star: the KBA Rapida 106 eight colour press at Parksons’ Pantnagar plant with cold foil technology. Today, Parksons Packaging has seven KBA presses of which three are Rapida 106 while TCPL has four Rapida 106 machines.
After signing the contract at the KBA customer centre for two long Rapidas with a total of 17 printing and finishing units in 2014 l-r: Adiya Surana, managing director of KBA sales partner IPM; Ramesh Kejriwal, CEO of Parksons Packaging; sales director Dietmar Heyduck, sales manager Bhupinder Sethi and key account manager Jürgen Veil (all three from KBA)
“None of these presses are of less than six-colour plus coater configuration. And all but one are combi presses suitable for both UV and conventional inks,” added Surana.
Automation adds value
Surana pointed out, a print company in India needs a higher amount of sheets on pallets in a day with faster makereadies and UV curing at a higher speed.
Designed to enable time-saving job changeovers, KBA’s automation modules include its DriveTronic concept, which includes DriveTronic SIS, the sidelay-free infeed; DriveTronic SPC, for simultaneous plate changing; and DriveTronic Plate Ident, for register pre-setting and plate identification.
The kit USP is its DriveTronic SIS (Sensoric Infeed System), which comes standard on the press. Surana said, “There is no sidelay in the press. The patented KBA sheet infeed system controls lateral sheet alignment electronically.”
Saket Kanoria, CEO of TCPL, KBA sales director Dietmar Heyduck and KBA sales engineer Bhupinder Sethi (r-l) after signing the contract for an eight-colour Rapida 106 in 2014
Using what KBA calls integration into automatic format setting, it eliminates the need for operator intervention, and it has electronic drive elements for precise positioning of the sheet, even at maximum speed and pile side edge alignment via the SIS sensor.
“With the fully automatic plate changing system, all plates are changed in just less than three minutes – including register zeroing – irrespective of the length of the press. This press is configured in such a way that the users are running it at full speeds. Even the UV jobs are run at 16,000 sph.”
The Rapida 106 handles substrates from lightweight paper to a heavy board, and from plastic films to corrugated packaging. It also offers to finish in gloss or matt effects; all-over or spot finishes; single and multiple coating applications with dispersion; and/or UV varnishes. KBA now offers Rapida 106 at raised speeds of 20,000 sph for straight printing.
TCPL’s Q4 result headlines for those who haven’t had a chance to download (from BSE website; as with most small caps it not yet uploaded on the company website):
- Negligible q-o-q revenue growth of 3% in Q4; y-o-y growth in Q4 of 22%. For the full year, revenue growth is 19%
- Q-o-q PAT down 10%; y-o-y Q4 PAT growth of 9%. For the full year, PAT growth is also 19% coincidentally
- Mcap is Rs 500 cr and debt is Rs 200 cr. With Rs 101 cr EBITDA in FY16, this is trading at 7x FY16 EV/EBITDA and 13x FY16 PE.
- FY16 RoNW = 26.2% (PAT/closing net worth)
- Dividend is Rs 7.35/share (payout ratio of 16%) and current dividend yield of 1.3%. Given that Debt equity ratio is 1.4:1, i think a higher dividend than this would be imprudent
- Net block up Rs 60 cr to rs 290 cr (maybe for the new facility?)
- Promoter’s son fresh out of college to join the board at age 24
Decent results - for this sort of growth and RoE profile I would think this is still slightly undervalued. Thoughts welcome.
Disclosure: Hold a small position
Excellent numbers from TCPL Packaging.
YoY profit growth looks lower due to higher tax outgo. However, PBT Grew at a stellar rate of 22%.
TCPL is very efficient player with WC days of only around a month. ROC & ROE of more than 20% & 25% respectively.
View on FY17:
It should be able to maintain its topline growth of ~20% and assuming EBITDA Margin of 17% (Same as FY16). It should do EBITDA of 120 cr.
As company has already completed its expansion, it should be able to repay 50-80 cr of loan, which can reduce the interest outgo for FY17 and boost profitability.
On a conservative basis, it should do an EPS of 58 in FY17 with ROE of ~25%. Debt/equity may reduce to 0.8x (vs 1.4 current). Stock is trading at ~10x FY17E EPS.
No doubt profit and topline growth is good. but what i have noticed is all these growth since last 10 yrs is funding by debt only and not from internal accruals. As you can see company has done net profit of Rs.38 crs but it has spent 62 crs on fixed assets and Rs.30 crs increased in working capital. so net cash generation from operation is negative and if you notice same trend is persist since last 10 yrs. so their debt has increased from Rs.156 crs to Rs.200 crs. so my question is how they are going to pay their debt as they continuously need to increase their fixed asset to grow and this even you can find from last 10 yrs results and balance sheet.
Now the other question is when they need lots of fund to grow why they are increasing their dividend instead of paying debt, though this dividend will come out of debt only?
Correct me if i am wrong.
You are exactly right hazariwalapu. This is the only reason that makes me avoid TCPL. Heavy CAPEX spends every year (almost twice the profits). CAPEX spends is one of the way where promoters could easily siphon the money out of the company. They haven’t produce single rupee as a free cash flow for any given year.
I think funding growth by debt is not a bad idea in the expansion stage of the business. Until they are earning decent returns on their investments (ROCE ~20%) then taking leverage to spur growth is not a bad idea. But I do agree that high debt can be a double edge sword in a downturn. But as the company is more exposed to FMCG play, it gives it a bit of stability vs. other cyclical players (where high debt is much more a risk factor).
That is a good point @fundoo. Does anybody have a sense of what their capacity utilisation is for different lines of business. That would give us a sense of whether debt-lead expansion makes sense or not.
According to a report by Systematix Shares, the packaging industry in India stands at US$32bn and is expected to grow at 18% CAGR to reach US$73bn by 2020.
Disc: Invested. 8% of my portfolio
(Extract from my note on TCPL earlier this year, you may need to adjust some numbers for FY16 results)
What I like about the story -
Higher grade paperboard production growing at 10%+, triangulated this from various sources like ITC investor presentation etc. TCPL has grown sales at 21% over the last 5 years (14% vol growth with the rest coming in from price increases in paperboard). 15%+ growth looks doable in the medium term
Few large players addressing the segment (Parksons packaging, Borkar packaging, ITC packaging, Ruby Macons, Manipal group) other than TCPL. Larger players have access to high end printing technology and are integrated with customer teams at 3 levels (Pre press design & artwork, procurement teams & automated packaging plant ops) which brings in some switching cost to keep competition at bay - these insights from a discussion with one of their large competitors recently
Immune to fluctuations in raw material, EBITDA margin has been steady at 14-16% and is growing due to changes in product mix. Paperboard pricing in the domestic market seems to be having the same issues as the steel industry (domestic price > imports landed cost), unless pricing collapses further from here there shouldn’t be too many issues in sustaining value growth. Inventory holding period of 40 days also offers a cushion against large inventory losses if such a situation were to materialize
FY16 is an inflection point for the business since the company can fund a large chunk of capex from internal accruals. In FY16 the cash profit was in excess of 60 Cr, during the 12 months net block went up by 60 Cr where as long term debt went up by 25 Cr. Terms of trade cannot change much for a business like this since inventory, receivable and payable policies are already in place with large companies. The only thing that can tweak this is bigger scale and the ability to increase capacity at an investment lower than what is has in the past. Better margins can do the job as well albeit much more slowly
On an OCF yield, P/E and DCF basis the stock looks cheap to me. The biggest comfort is that the underlying customer segments are secular businesses and that the CMP is hardly discounting a 10% growth even with all other parameters held at conservative levels. The range of outcomes in my opinion is limited for a business like this, meets my criteria of an asymmetric payoff structure
Low levels of institutional holding (DII & FII) with the exception of 2-3 well known individual investors
If point (4) above plays out this will do very well from here, I see some early indications but not willing to stick my neck out on this specific point yet.
This is my second big bet on a converter business after APL Apollo, business quality wise TCPL rates way higher though APL Apollo is better placed on the competitive landscape parameter.
If the relative debt level thesis does not play out as expected this will be an above average return stock but probably not a multibagger
Low liquidity counter, exiting a large position will not be easy
Promoter family connect to the Godfrey Philips, Jindal families. Not a negative in my view but maybe for some people
I don’t expect to see institutional interest here till PAT crosses 75-80 Cr per year. Converter businesses haven’t traded at high multiples all these years, I believe the market will eventually come around to my view but that may not happen soon. So if someone wants to front run large institutional investors this may not be the best place.
Disclosure - Almost my largest holding till date at cost, the final 15-20% allocation will go in if I see a confirmation of my thesis that relative debt levels will come down over the next 2-3 years.
Why did the last two quarters showed such weak growth.
H1 growth in sales for FY17 was just 2% ??
any idea why is it so ?
In my opinion, unorganized players eats up that market. It might have changed in last 1year. I will have to check.