4 May 2022
A list of stock with high ROCE was created for analysis.
Average return on capital employed 3Years > 20 AND
Market Capitalization > 500 AND
Market Cap to Free Cash Flow <10 AND
Market Cap to Free Cash Flow >0 AND
Debt to equity < 0.5
I revised this query further by adding one check for 3 year average cash flow. Result was so miniscule that I had to drop that idea.
*AND Market Capitalization / Free cash flow 3years 3 < 15
This query gave a list of 26 stocks. on first glance analysis looking purely at few basic parameters, some of these stocks were selected for further analysis. After Antony Waste, this stofck is the second one from that list which I am analysing.
At Market Cap to FCF ratio of 6.86, Jindal polyfilm is best in industry. It has shown a healthy profit growth of 29% in last 1 year, although that is one of the lowest in industry.
At 850 Cr. debt, it is sitting at a debt to equity ratio of 0.27, which is comfortable.
However key lies in last year trend. There was an exceptional growth in revenue, cash flow and ROCE.
Even if it is able to maintain 1100 Cr operating cash flow (same as FY21) with 500 Cr of fiixed investment, it is priced at 8 times of FCF. This pricing leaves a safety margin of 20% even at 0% growth. With even 5% growth it gives a safety margin of 45%. Big question is - whether it will be able to survive even at current cash generation levels.
To be explored further
- Why there was such exceptional growth in FY 2021. Lockdown and increase in eCommerce might be probable reasons.
- Past history of capital allocation and why so many merger demerger happened. SEBI invetigation also needs to be explored further.
- Brookfield investment - how will it impact current business.
6 May 2022
Annual report does not give much of an idea about future prospect of this company or industry. Key growth driver is increase in income levels and demand for packaged foods. Lesser penetration of packaged food in Asian market creates an opportunity. Company is well established leading player in the industry and claims to be a low cost player. Growth in eCommerce will definitely help the company.
On the other hand supply chain disruption and continued high crude prices are dampner to margin. Higher cost might force lower consumption from end industry although this needs to be explored further. Food industry might be able to pass cost increase to customer and importance of packaging might be high enough not be tamper with. Fragmented nature of industry is also a serious threat to margin and bargaining power of Jindal.
9 May 2022
Jindal Polyfilm is flagship company of Jindal Group. Group is diversified in various sectors.
- Pipes (Jindal India)
- BOPP and BOPET Films (Jindal Polyfilms - Indian Company + Jindal Films : Overseas entire international acquired business from Exon Mobiles)
- Power (Jindal Thermal Power, 2 units of 600 MW)
Overall history of company can be read at http://www.jindalgroup.com/the-group/milestones.
BOPP and BOPET is used in variety of products for packaging. Food, medical, electronucs and many other indutries. I understand these application superficially and not very clear about exact differenciation. Details can be looked at BOPP Uses and BOPET Uses.
Red flags for this company is
- Biggest read flag is acquisition of Exon Mobile business under Jindal Films. It was controversial and unfair to minority shareholders, least to say. Basically 49% of business was grabbed by relatives of promoters at a meager sum of 34 lacs. Details can be read here. This raises a lot of doubt about promoter’s ethics.
- Overall share holding is compplex with cross holdings and % share distrbution. Though I have not done deep research, but more I investigate more complex it seems.
Polyfilms is a comodity business. Recent growth in eCommerce and Home Delivery has undoubtedly given a boost to industry. Last year was spectacular in terms of growth and hence cash flow. Based on which comany is available at 6.5 times.
However if we consider last 3 years cash flow, company is available at 21.5 times of FCF. So enttire valuation lies of fact that whether company will be able to sustain current cash flow or not. On superficial level, there investment of 200 Cr. last year seems low. However revenu and hence cash flow from operation should sustain considering growth in packaging requirement. Hence FCF of approx 400-450 Cr seems likely. Which puts marllet cap to FCF at 10 times, not very lucrative for commodity business but neither pricey.
More reaserch needs to be done to understand market future outlook and company position to sutain these cash flow levels. However I am inclined to give it a pass considering past promoters behavior and not so lucrative pricing of a commodity business. Will keep this under radar for further valution correction.
Details at which I am leaving this company are as below.