Innovative Tech Pack

Stock Opportunities
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Innovative Tech Pack Ltd (ITPL)

I see huge potential in this company. The quarterly results are enclosed

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Reasons for investment

  1. Drop in crude price to have spiral effect on Raw material viz. PET / PP and HDPE.
  2. They sell finished products like Bottles / Jars / Caps to FMCG and Pharma companies.
  3. OPM as high as 20% for last 6 months.
    See the important Nos. Debt Equity , NPM Promoter Holding etc.

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  1. State of art Machinery (Check Website Very detailed explanatory website)
  2. 3 Manufacturing plants all tax free zone. They are not paying any tax. I take it as negative for future.
  3. Great Client names as per website Cadburys Cadila Pepsi.
  4. 25 Year old company. Promoter holding displays promoters confidence in business.

Discl : Very Small holding and plan to increase the share.

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Key negatives/risk? Please put up a balanced view point.

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@av_30 Few questions for you, please note all my observations are based on Screener data.

  1. Drop in crude oil prices will bring down raw material costs, but wouldn’t that also bring down the sales price of its product? Unless there are very few competitors.
  2. Why is the company not paying any taxes? For cumulative profits 8 Cr since FY 2012 the company has paid only 0.01 Cr tax. This coupled with the fact that the company has not paid dividend ever, just doesn’t give me any sort of comfort in the management.
  3. Borrowings of the company have become more than 5x since 2012 (from 3.65 Cr to 20.42 Cr) whereas the revenue has only grown 1.6x (from 47.7 Cr to 76 Cr). Any idea where the additional capital is being deployed?
  4. Cash flow statement indicates consistently high entries under “Investing Activity”. Where are these investments made? -7.1 Cr (Mar 14), -12.1 Cr(Mar 13), -2.6 Cr (Mar 12)
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Got a chance to look at the company and financials. Peeked into the Annual Report too. I liked the AR, as management comments are very precise and addressed on right spots. Thumps up on that part.

Below mentioned few observations and (possibly reply for above VP’s doubts too)

  1. As some one raised question on the tax part, I think they have some tax benefit in the location wise (plant in tax soap zone). We need to check till when the benefits are going to last, if it is there. Some of the existing plants are getting tax benefit; new capacities are coming in Baddi, again tax benefit area.

  2. I observed that the business is somehow capital intensive; it has to pour in capital to build capacity and the drive will be there in future too. In AR2014, the company mentioned that, In last 5 years, the company has made an addition of around Rs. 20 cr to its plant & machinery/molds. So, a fundamental question come to my mind, in such case raising RoCE/ RoE would be tough, so have they managed to do in the past ? No.

  3. Some one mentioned in the early comments, about the crude price. Guys, most of the companies who use a commodity and that goes down 50% and especially when the whole world knows it, do you think the buyer of its products will be fool to buy at old price. The underlying point is, Unless u have a extremely strong brand or extremely weak peers or insane customer, you cant keep the benefits for the raw material price drop. Does this guy enjoy any of that at least ? Just to refer, even players like Gulf Oil and Castrol cant do that fully bcos of competition; how can this company do ?

  4. In Q1, the number suggests that the cost of raw material has gone down, bcos of which PAT jumped. But big question is, can it be sustainable ? If it can deliver better margin in coming qtrs, then the case may be worth looking at.

  5. The company mention in AR14, " It may be noted that with most of our customers, our selling prices are linked with variation in raw material price (i.e PET price)
    hence we are not adversely effected by the variation in the Pet prices which is quite volatile". THE SAME WOULD BE APPLICABLE WHEN PRICES GOES DOWN !!

  6. they have a chit fund business too. 2014 they had some loss i guess from the same. Is it a good business practice ? No.

  7. Good clientele; should appreciate but despite being 25 yrs in the industry, the scale up is not visible. Either it lacks in leadership or the industry is not growing or it has limited competitive advantage and so its is loosing mkt to others. I assume, it could be any of these two. We need to check.

  8. As mentioned above, the big question is whether they can deliver a better margin sustainably in next few qtrs ? If they can then the stock is available at a attractive valuation. may be below 10x for FY2016 earnings. The RoE may also look better by end of the year; roughly around 20%.

  9. So the key is how sustainable is the margin in a falling crude price environment ? And till what time the tax benefit will remain ? Is it involved in chit fund still ?

Hope it will give some clarity to our thought process !!

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I bought this stock when I first posted it here. Still holding. Lets see. I donot want to do over engineering with balance sheet and nos. But would like catch some fraud if highlighted.

Regards
av_30.

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I was going to open a new thread on this when VP told me there was an existing one. Has anyone noticed that the company has acquired another listed entity, Jauss Polymer Ltd.

I was recently going through recent company results when I came upon the Sep’15 results of Jauss Polymer.
Excellent performance - 7.32 crore / 2.60 crore vs 4.92 / 0.08 crore in Sep’14 (Rev / NP). Half yearly performance stands at an EPS of ~8 compared to full year FY14 EPS of 4. Currently, the company is trading at ~Rs 24 at a PE of 3.

Now the question which arises is, Jauss Polymer actually seems like a better bet than Innovative Tech Pack. I also noticed that Innovative Tech Pack is not showing consolidated results with Jauss included. What could be the reason for that? The management of both companies is now the same. Would Jauss be delisted at some date?

At the moment, there seems to have been some catalyst for Jauss Polymer’s results, any clues on what has happened? Could not be purely just raw material costs, as top line has expanded significantly.

I was quite interested in Jauss Polymers, but Innovative Tech Pack does not appeal to me and I do not know if I wish to get into bed with this management.

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Acquisition was done on 6-May. This is not new. Also consolidated results could be expected in year end. Jauss Polymer at the time of acquisition was around Rs.15 and now it is 23. My views are management neutral. I would like to see the nos. and on Half yearly basis P/L looks fantastic. On Balance sheet side does not look extra ordinary but decent.

  1. Increase in Long term borrowing could be price of acquisition built in. Not sure ?
  2. Good Improvement in Current Liability section.
  3. Management has 73.66% holding still
  4. All three plants in Tax free zone
  5. Trade investment in Jauss Polymer is up 50%.

It would be in their best interest to merge Jauss Polymer with In Pack as they have 74% holding here and cost of operating / filing 2 cos. But these are wild guess. Lets see. Philosophy is

I got nothing to lose, much to gain.

av_30.

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Merging Jauss will take time and a lot of regulatory compliance (share swap etc). At the moment, Jauss seems to be a better bet in terms of performance.

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Innovative Tech Pack Ltd. looks like a promising story. The Co. is into packaging business for FMCG companies like Patanjali, Dabar etc. & has 3 plants running at Pant Nagar, Baddi & Guwahati. The Pant Nagar facility which was recently commissioned is a modern, state of the art plant. Another new plant is in the process of being set up at Baddi. These new plants will help the Co. attract the bigger names in FMCG & Pharma, leading to higher sales with improved margins & that primarily for me is the investment thesis here. The Annual report & the Mgt. Discussion n Analysis are pretty exhaustive & give a decent insight into the working of the Co.

The Company has been a beneficiary of falling crude & is doing well. Due to a big fall in crude, the Sales growth, though higher in volume terms is not reflected in the figures.

The Co. has recently acquired another listed co. called Jauss Polymers Ltd, which is in the same line of business, & having a few marquee multi-national clients. Part of the new plant coming up at Baddi will be leased out to Jauss. The Co. owns 41% of Jauss directly. With the promoter holding another 12% in his individual capacity, the mgt control of Jauss is with the Co. Jauss, too has been coming out with very good numbers, though on a much smaller base. It is logical to expect a merger of Jauss with the Co., & since the promoter holding is much higher in Innovative, than in Jauss, the chances are that the merger ratio would be in its favour!

The Co. should do Sales, EBIT & Pat of about 80 Crs, 9.6Crs & 7.85 Crs. There are some one-time expenses pertaining to the Jauss acquisition. The Co is not paying any taxes due to MAT credits. For the year ending 2015-16, the Co. will be coming out with consolidated numbers for the first time, which could act as a trigger in rating the stock. Jauss should do Sales, EBIT & PAT of about 31Crs, 5.1Crs & 4.16Crs for 15-16. There is a one time gain of Rs. 1.6Crs that I am ignoring to be on the conservative side. 41% of Jauss’s earnings would be added to Innovative in its consolidated numbers, taking the consolidated EPS for the year 15-16 to be about Rs. 3.15 We are now almost through with 15-16, & very shortly the markets will start extrapolating 16-17 numbers, where in the new capacities will come on stream.

The current market cap of the Co. is about 61 Crs, which appears to be under-valued. The debt levels too are comfortable. As on September 30, 2015, the combined debt was about 23 Crs. This includes debt if any, taken for Jauss’s acquisition.

The Company also has a subsidiary called Innovative Container Services § Ltd., which has been allotted land in Kakinada to build a Container freight Station. Since it is still at an early stage of implementation, perhaps it would be prudent to just be aware of it without taking any future projections into account.

Concerns: The story is still unfolding & there could be delays in project execution. The investment thesis is based on future growth & the numbers are still to come in, & we all know that there is many a slip between the cup & the lip!!

Disc: Invested & looking to add as the story unfolds!

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Whats the average asset turnover in such packaging companies? Regarding CFS, how much capex would they need?

Discl: Not invested

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Innovative Tech Pack to consider Interim Dividend on March 7. What it does perhaps mean is that the Co. is doing well & we could expect good numbers in Q4 as well as for the full year, more so as the Co. would be coming out with consolidated numbers for the first time having added Jauss Polymers as a subsidiary.

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packaging sector should c a boom in demand… Innovative Tech pack seems to be a very good bet in the segment…acquisition of Jauss, new facility in Baddi should aid good growth going forward…I would also like to track developments related to the proposed CFS facility…considering all this 60 odd crs market cap looks very attractive from a medium to long term perspective…

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@RajeevJ Sir, what’s your view on promoter integrity?

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@nerolu_praveen Do you have any reason to doubt promoter integrity? I obviously cannot vouch for mgt. integrity, but by default I am willing to trust the mgt, unless proven otherwise. Perhaps not an ideal situation, but in these changing times, it pays for the promoters to be honest, for the sake of market cap! Only rarely have I felt let down by the mgt. One can always put filters while evaluating a story, but for me personally it helps being a believer!!

As an aside, Kakinada is one of the 20 smart cities approved by the Govt. This throws up interesting growth opportunities for the container freight station business.

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@RajeevJ ji, What happens if Crude reverses? Do they have the ability to pass it on to the customers?

Thanks,
Ravi S

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Hi Ravi,
When crude rises, it does so for the industry as a whole, so it is always passed on. In the worst case, with a lag but the problem always comes when raw material prices crash as the closing stock is valued at cost or realizable value, which ever is lower. This results in hitting the bottom line instantly.

The Co. announced an interim dividend of 15% (last year 10%). The Co. is trying to do all the “right” things, though I would prefer if it conserves its resources in its current phase of expansion. I guess the markets tend to take numbers with a pinch of salt for Co.'s not paying dividends!!

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Just want to highlight, Management is turning out to be a red flag. I mailed a list of questions to Vishesh (CS) and Satish (Head, Operations). when I called Vishesh on Friday he said he didn’t receive any mail. I resent the mail and confirmed with him. Since then he has been avoiding my calls and hasn’t reverted back.

this is just FYI.

Discl: Invested, Tracking position. Less than 1% of portfolio

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Can you publish a list of issues you raised with the management??

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Questions:

Operations

  1. From your website and disclosures I understand you have 4 plants right now at Rudrapur, Baddi, Guwahati and Sohna. One is expected to come in South. Out of the 4, I suppose, 2 are new plants which are on various stages of completion. Would you please help me fill the table below for more clarity.

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  2. Your website shows you have a new plant coming up in South. Can you please share some information? Is that again a packaging unit? How much investment would you need?

  3. Jauss Polymers – I understand jauss polymer acquisition was strategic in nature as they were doing a fantastic job for one of the MNC. Does that plant is included in the table above. If not, can you share more details about the plant i.e details as asked in the table above.

Financials

  1. Major concern has been ending of sunset period at the Rudrapur plant. This is going to have a big impact on revenue as well as profitability. Can you please tell how much impact will it have on revenue because of excise duty and what could be the effective tax-rate post 31st Mar 2017 for this plant.
  2. What is the order book for ITPL and Jauss Poly separately? And what kind of margins do you expect going forward after incorporating expenses related to your new plants?
  3. Your other expenses items include some LOSS ON CHIT FUNDS. I am not sure why company is engaged into such activity. Is there any more risk pertaining to this line item.
  4. Read somewhere that you have approvals to set up a Container Freight Stations in South. Can you please share more details on the same? Trying to understand how much impact it would have on the financials as most likely you will raise debt to fund this new business.
  5. What is the current debt position post your expansion (i.e 2 new plants)?
  6. What kind of asset turnover typically we can expect from these new plants. Given your new plants would be USFDA standard (subject to approvals), what kind of margins can we expect from these plants?
  7. Your recent press release suggests you have added new clients in last 6 months incl. Patanjali Ayurved. What kind of growth can we expect from the marquee clients? Would it be possible for you to give client wise break-up or atleast some indication how much revenue does your Top-3 clients contribute to your total revenue.
  8. Do you cater to Pharma companies already? If no, what kind of growth opportunity do you see from Pharma companies
  9. Lastly, If you can give some guidance about Revenue, EBITDA and PAT for FY17 and FY18, that would be very helpful.
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Thanks for enriching us…