Prakash Pipes and Fittings (PPFL) - Not just Pipes

Stock Opportunities Untested - but worth a good look
1

Hi,

This is my first writeup on VP, so consider any lapses kindly. I will keep the writeup short, and based on questions or conversations, attempt to find and update related information.

I wish to draw attention to a small scale regional player in plastic pipes - Prakash Pipes- PPFL.

Primary investment thesis - A subsidiary business with impressive performance while the primary business is likely to benefit from the tailwinds in the plastic pipes space.

Business history - Primary promoter in business since 1981. Initially part of Prakash industries which also has interests in steel, power and mining (Refer thread on Prakash Industries on VP). PVC pipes and plastics division demerged out in 2019 into separate entity with investors getting shares in ratio 8:1. (for 8 in parent, get 1 in new). Company starts trading on BSE/NSE as separate entity from June, 2019.

Current Business - Initially, as part of Prakash industries, PPFL was primarily a plastic pipes company. While plastic pipes industry faces reasonable tailwinds in the business today, Prakash pipes is relatively small and decent regional player in the north (UP primarily and then the Delhi, Haryana and Northwards belt, with influence gradually diminishing as we move north east or south). In 2018, however, PPFL diversified into the flexible packaging space. The key attractiveness of the business lies in the flexible packaging division which is growing at an incredible rate.

The story in numbers is as follows -

Particulars FY19 FY20 9MFY21
Total Revenue 345.6 389.2 342.4
EBITDA 43.2 42.4 43.6
EBITDA margin (%) 12.50% 10.90% 12.70%
Depreciation 4.7 6.5 6
Interest 0.2 1.6 1.5
Profit Before Tax 38.3 34.3 36.2
Income Tax 9.7 9.5 10.5
Profit After Tax 28.6 24.8 25.6
PAT margin (%) 8.30% 6.40% 7.50%
Sales Volume (MTPA) FY19 FY20 9MFY21
Pipes & Fittings 42,012 43,305 28,025
Flexible Packaging 316 3,227 5,227

Current year highlights (Q3 - Fy2021)

Quarter Ended Dec, 2020

  • Revenue - INR 127 Crores, up by 37% (YoY)
  • EBITDA - INR 16 Crores, up by 63% (YoY)
  • Profit After Tax - INR 9 Crores, up by 25% (YoY)

9 Months Ended Dec, 2020

  • Revenue - INR 342 Crores, up by 14% (YoY)
  • EBITDA - INR 44 Crores, up by 34% (YoY)
  • Profit After Tax - INR 26 Crores, up by 25% (YoY)

Pipes & Fittings Division

  • Recorded sales volume of 10,013 tonnes in Q3FY21, up by 4% (YoY)
  • Contribution of the Fittings in the sales mix has increased to 7%, up by 83% (YoY)
  • Installed 3 new Moulding machines to expand the Fittings range
  • Added Chlorinated Polyvinyl Chloride (CPVC) Pipes & Fittings in the product range

Flexible Packaging Division

  • Sales volume grew by 60% (YoY) in Q3FY21
  • Increased capacity by commissioning 3rd Printing Machine
  • Commissioned Rotogravure Cylinder plant as a step towards backward integration

Incremental planned Capex - Company is planning significant further Capex in both its divisions, as of now, all funded through internal accruals.

Capex Current Target FY21/22 Percent Increase
Pipes & Fittings 55000 TPA 67000 TPA 22%
Flexible Packaging 9600 TPA 19200 TPA 100%

It is interesting to note that flexible packaging incremental capex is comparable (12000 TPA to 9600 TPA) to its long standing pipes division in absolute terms, while in percentage terms absolutely blows the pipes capex out of the water (at 22pc vs 100 pc that’s a no-contest really) and in my opinion indicative of where the management thinks future profits will be from.

From screener, With ROCE at healthy 29%, EPS of 14, P/E of 10, and debt-free, it seems pretty fairly valued with respect to its pipes competitions as well as packaging competition.

Short Business Note - Pipes

  • Current plant at Kashipur UP.
  • 500+ dealer and distributor network
  • favorable tailwinds with consolidation in pipes industry and Jal Jeevan Mission, Krishi Sinchayee Yojana and Pradhan Mantri Awaas Yojana.

For a fuller discussion of the pipes industry please check this link - https://www.valuequest.in/deep-dive-series-plastic-pipes/

Short Business Note - Flexible Packaging -

  • again, plant at Kashipur UP.
  • backward integration with printing inks, blown PE films and Rotogravure cylinders.
  • very healthy client list with repeat business across FMCG, food and Infrastructure/Others.
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Overall, company looks favorably poised to benefit from the pipe industry tailwinds, with the flexible packaging division serving as the cherry on the pie. At current prices and valuations, looks like there is significant upside to the stock, even after the nearly 5x runup over the last year.

Views/questions/opinions invited from esteemed members of this forum.

Disclosure: Invested and accumulating.

Edit 1 : Apparently, RJ is invested in this from lower levels.

Edit 2: In response to Sahil’s questions below. Have added what I think are the key risks as well as links and pointers to more information (as much as I could find).

Key risks

  • PVC resin imports is the most significant raw material needed. India imports 56% of its PVC resin needs. Larger players have better cost efficiencies in procurement. Not sure where PPFL stands in this regard. PVC resin import also has ADD (Anti Dumping Duty) applicable, but again, whether that’s a good thing or bad thing for smaller players is subjective based on costs involved for the player and the ability to pass the cost downwards to its customers…
  • Promoter risk - Prakash Industries, the founding company, is involved in lawsuits filed by CBI against certain operations of its mining businesses.

Business and prospects details -

Pipes - the value quest article above is a good starting point. It has several details about the process, the inputs, the market segmentation and the overall industry business prospects.

Flexible Packaging - the best source of information I could find was this pdf presentation by Dr Ranweer Alam, Director, IIP (Indian Institute of Packaging). http://missp.ch/docs/1590652928The%20Indian%20Packaging%20Industry%20-%20Post%20Covid-19%20as%20an%20Opportunities%20in%20Packaging%20Business.pdf. Most other articles and research reports are behind a paywall.

Other links

The Annual report of the company is a very good read. The overviews of the business landscape, both overall and division wise are excellent. The rest of it is also eminently readable, unlike most, where you actually have to push through.

In addition, one other point, although minor, does make a good impression. Both the annual report, and the site, are among the most polished of any small business I have seen. The Annual report is excellent in terms of its readability, while the web-site is slick and fast.

Web-site - https://prakashplastics.in/
Annual report link - Annual Report - Prakash Pipes Limited

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Hi blue,

I absolutely love your post and it has forced me to evaluate this business. Would like to add that all first posts about a business must include key risks section mandatorily. Without that some moderator will end up locking this thrrad.

Can you please add a small section in the first post on the key risks presented in the business and the company/investment so that investors get a balanced viewpoint from first post itself.

In terms of digging deeper this is a noob question but can you please describe what both the divisions do (what products or services do they provide?). If you could share links to these sections on their website or small writeups on the products or services provided under both the divisions that would be great too. If you are unable to do so that any reason, no worries. :grinning: I’m sure someone else (which might very well end up being me because I am excited to study this business soon) will take up the mantle and post answers to these basic questions about what are the goods or services provided in each segment. What is flexible packaging? What are cpvc pipes ?

Again, thanks for starting this thread.

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Hi Sahil,

Thanks for the response. Having read some of your analysis on other threads, I will be keenly waiting for your findings.

W.r.t your questions, have added a key risks section as well as some pointers to the different industry segments. This, more or less, encompasses most of what I know so far.

Certain details like what fraction of the flexible packaging is in repeat business, what are the shares of the highest clients are not available. I would have liked to get those from somewhere. But overall, my sense of risk here is not high. The worst, imho, is that the main growth phase is past and we may not see a significant up move from here on, but it does not look like that for me, especially considering the significant investments into capex (both divisions), and the diversification of pipes into CPVC from PVC and the added focus on fittings, it seems that the firm is gearing up well to tackle competition in its home grounds at least (pipes division).

The next few quarters performance should be quite enlightening though.

On a separate note - congratulations on successfully kicking the sh*t out of C19. No doubt it was a most miserable experience, but you are now out on the other end, and looking at the brighter side, you don’t have to queue up for the miraculously unavailable vaccines, not for a few months at least.

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Open ED and CBI cases against promoter entities

I Quote from following 2018 article 1:

I quote from a similar 2021 article 2:

As per the ED article The promoters have been involved directly in wrong filings with exchanges leading to stock price manipulation. As per the CBI article there are political risks as well with some tussle between leaders of ruling party. IMO the promoter entity related risks are far too high. Specially in a microcap like prakash where most information is already opaque (no concalls), it becomes very difficult to trust anything coming out of a promoter entity which has previously been accused of wrong BSE filings. IMHO avoiding permanent loss of capital is and should always be the first course of action when deciding where to invest one;'s monies. We don’t need to hit a shot on every ball that is pitched to us. Due to serious risks WRT the promoter entity, IMV any time spend on business analysis would be time I could spend analyzing any other business, because anyway a meaningful allocation cannot be made to a microcap where promoter entities have open ED and CBI cases directly related to stock manipulation. With serious cases like these, it anyways becomes very difficult for an investor to expect any serious rerating of the underlying business. That takes away 1 engine of strong stock price appreciation among the 2 (earnings expansion and valuation expansion).

The only thing which would make me change my mind is complete recusal by High Court or Supreme Court. Even if that were to happen, it would take years. Hence, I will be giving this company a skip.

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Yes, I was worried about this. Even though the firm itself seems to be dealing quite decently, That was a big negative.

I encountered the mining related reports, but not the incorrect filing one. Given the above I totally agree with you. If I cannot trust the filed reports then everything else is just thin air.

Disclosure: Exited completely as the risks are disproportionate.

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Thank you for the analysis.

The company seemed interesting. Specially their flexible packaging business.

While doing some quick due diligence, I noticed that the two largest public shareholders are ‘Amarjyoti Vanijya LLP’ and ‘Makrana Tradecom LLP’. Further googled these names and found out the following details:

  1. Partners in the Amarjyoti LLP are Ved Prakash Agarwal, Vikram Agarwal and others.
  2. Partners for Makrana Tradecom LLp are not mentioned
  3. Email ids, and registered addresses for the companies are the exact same.

How should we interpret this? Is this a red flag? Why would promoter own a stake in the company through a LLP?

Source:

  1. AMARJOTI VANIJYA LLP - Company, directors and contact details | Zauba Corp
  2. MAKRANA TRADECOM PRIVATE LIMITED - Company, directors and contact details | Zauba Corp
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Well, to be honest, this is beyond my circle of competence. Additionally, I have exited based on the findings shared above regarding the open cases against promoters.

But my initial reaction here is ‘I don’t like it’. There could be many reasons from taxation or other purposes, but no matter what, it indicates that the promoters are doing more than minding their business, which is what I would expect an earnest promoter to be doing.

Someone with experience in these matters though, would be better placed to provide a more objective response.

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How can we trust that the capex was executed ? I find it cumbersome to visit factories of the companies I own and the promoters have been known to file incorrect filings on bse to aid stock price increase. Do you see the problem now? :slight_smile:

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I was willing to consider (to some extent) the mining issue. However, if the filing problem is a matter of record, and there is very few other ways of getting information, how can you verify the plans/numbers as reported through the filings?

Unless you are someone with considerable means and influence, that is pretty much impossible.

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I understand - Promoters credibility is questionable for this company.

It is noticeable that 100,000 shares are bought from Market by the Promoters. Valuation wise they are cheap. Their foray in fitting and CPVC category is a good move.

Not necessarily for longer term, but for short/medium term perspective, does it make sense to allocate? Am I missing something

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Quite a coincidence that you should post this today. I had stopped tracking this but only yesterday I went and looked up the action on this stock in the current meltdown.

To allocate or not needs to be an individual decision. For me, capital protection takes priority over capital appreciation, so even though I am positive about the prospects (assuming the numbers are valid), I am not invested.

However, from my point of view, If I were to invest here it would be for the long term and not for the shorter term. Being a small/micro cap, It will have to show a few quarters of consistent performance before market acknowledges the potential. And secondly, given the scale of sales increase we have been seeing in the numbers, If that trend continues, the rerating/PE normalization with the industry will happen only after sustained performance is seen. and when that happens its likely to be significant.

As such to me this is more of a longer term play rather than a short term one.

However, I am very new to this entire business of stocks and investing, so do take your own decisions.

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Hello people

Any insights on why the company is quoting at such a low valuations ?

Is it promoter integrity ?

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Seemed quite undervalued initially until i came across to
ED attaches properties of Prakash Industries under money laundering case | Business Standard News
never touch a stock where promoters lack integrity cause such allegations are selodm wrong no matter how much your biased mind tries to convince you with a ton of positives, thus, the research is over.

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Flattish Q3 results from Prakash YoY; Decline, particularly, in pipe division QoQ. Getting the sense on demand for Pipes during Q4 would be key monitorable.

What I noticed on screen is that Dolly Khanna has acquired 1.35% stake during last quarter. Whereas Rakesh Jhunjhunwala seems to have exited. :slight_smile:

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Promoter Mr. Ved Prakash Agarwal is buying 23000 - 50,000 shares almost every other day since 17-Feb…

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It seems Mr. Ved Prakash Agarwal concluded his buying with about 5.6 lakhs shares worth ~ 9 Cr. representing 2.5% of the equity. Big confidence from the biggest shareholding promotor.

Disc-Invested, Biased

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The Profit is looking inflated due to Other Income of 1766 Lakh(Sale of an asset). If you ignore that it is even less than last Quarter.

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@shubhambhardwaj - Thanks for highlighting! I deleted previous post as it would be misleading.

Below figures provide a good representation. Pipes sale is down QoQ but increased ~32-36% YoY. Packing revenue growth is impressive both QoQ and YoY.

image

The gross profit remained similar to previous quarter(if we exclude one time exception income) - Hence the actual(excluding one time income) EPS should be read as about Rs. 5/-

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Any updates on the promoter case? Has the corporate governance been any better this FY?

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49% holding is locked. is there any reason?

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