Rajshree Polypack - The food packaging specialist

sahil_vi · June 12, 2021, 2:00am

Mold tek is one listed player which is into similar products. They also sell to FMCG players and also paint players (asian paints is one big client)

Valuations are far far complex than just pe or p/s we have to understand following:

Opportunity size
Value added nature of products
Quality and stickiness of clients
Growth rates of specific industry they are in
Scarcity premium

Pe or p/s hides all these factors.

Mold tek is at much higher Valuations. Packaging industry specially the one that rajshree is in: rigid packaging is growing at 20-25% cagr. This is industry growth rate I am talking about.

What kind of multiples would you give to a company that is dominant and has marquee clients in an industry which is growing at 20-25% cagr? Every investor must figure out for themselves.

Look at laurus labs. Last several quarter’s, MFs are selling retail are buying and Laurus has been one of the greatest wealth creators. Let us not try to second guess motivations of other players who might be optomizing for several different things.

Eg: to buy this company I had to sell X company. X is also a company I expect would grow profits at 25% over next 3 years. Still I am selling. Doesn’t mean anything is wrong with X.

Disc: have a small position, positively biased

vikas_sinha · June 12, 2021, 4:16am

Issuer not cooperating, when loans size is not insignificant for company of such small scale.
And we have a 50% capacity increase which just came online, for which funds were raised via IPO.

Is plastic packaging such a high tech industry or high quality to be a defensible differentiation?
Are not lots of plastics packaging liable to getting banned or reduced preference? (bit long term)

Looks all priced in, a fund entering such a micro cap will cause a big splash, a self-fulfilling prophecy, more operator behavior than a value find.

Dated: July 08, 2020

Disc: not invested

Inimitable_Investor · June 12, 2021, 5:11am

We should not read too much into issuer not cooperating. Let’s just accept that SMEs are a different ball game altogether. Credit rating agencies actually sap in lot of resources from these small companies and costs should be another factor. Having spent some time working closely with SMEs all I can tell you is these companies are less bothered about their credit rating than about growth and building relationships.

vikas_sinha · June 12, 2021, 8:16am

Rating costs have already been paid upfront, these agencies are not writing reports for free. Guess the company did ask for moratorium due to covid, and they do not have any plans which would need more funds anytime soon.

sahil_vi · June 14, 2021, 1:06am

Been studying this company for last many days. Here are my findings:

Business description

They are a plastic manufacturing company. Create plastic sheets with extrusion then use some of it captively and thermoform the rest into packaging material and products (like plates) for FMCG/QSR/Food delivery and similar industries. They have marquee FMCG clients. Work closely to co-design products. Have 4 manufacturing units in Daman. Machines are imported from Switzerland (more on that later). Their key products are dairy products packaging the kind you find for 500ML curd cups or ice cream cups. They also create recyclable plastic packaging and biodegradable plastic packaging.

Growth

Rajshree grew well between 2015 and 2018 based on previous capacity expansions. They were planning to utilize the IPO proceeds to construct unit 4 roughly by November 2019 end. Then, covid struck and they have been unable to productionize Unit 4 until now (June 9 2021 to be precise). Given that Large (and growing) part of their revenues come from FMCG packaging, it wouldn’t be unreasonable to expect some ramp up in revenues in FY22 and beyond. Key growth drivers would be:

Capacity utilization ramp up: They were already in talks with several clients to book these capacities since 2018 so i dont think capacity ramp up should be a problem. Also from what I know, capacity ramp up would be reasonably fast once it starts.
More value added products: They are working on several value added products such as tubes (example: lotions used in cosmetic sector). They are also working on better extrusion machines in order to cater to other sectors (they haven’t mentioned these, although from the DRHP i suspect this might be pharmaceutical packaging).
Industry growth & trends: Rigid packaging industry is growing at 20-25% in India. When industry grows this fast, lot of wealth is generally created, by multiple players. Also, this seems to be a very fragmented industry with not many large indigenous companies. Listening to Mold tek concall, there is a clear focus on hygienic packaging from even SME FMCG players, which would drive demand for organized players like mold tek and rajshree. As industry gets to be dominated by organized players, rajshree can grow faster than industry.
Barrier packaging: Company is also working on another innovative product called barrier packaging. This sort of packaging enables food to remain fresh and hygienic for longer, enabling indian FMCGs to export to the world packaged foods such as our sweets. Reason i call this innovative is that these cannot be made even on the older swiss machines they had, had to buy a new one to make them.
Exports: Exports fell during last year as covid hit, shipping costs went up and supply chains were disrupted. However, management wants to focus on exports and wants to penetrate US and UK markets. I dont yet understand how easy or difficult this would prove to be to penetrate these markets but if shipping costs prove to be low (which might very well be the case since plastic is light and can be stacked and packed easily) this might be an optionality which has higher chances of playing out than not.

Profitability

Scale will drive profitability. 2 years ago, EBITDA/ton in rigid packaging was 30,000/ton and now it is 33,000/ton. Operating leverage will play out as capacities are ramped up.
The newer products are higher value add and have higher profitability. For example, the tubes for cosmetic segment have 45,000 to 50,000/ton profitability compared to 33,000 for current FMCG products.
Operating efficiencies would also drive efficiency. Management actively thinks about this. They intend to consolidate Unit 1 and 3 and thus save on labor costs and other fixed costs.
Key risk here is raw material volatility. They are able to pass on RM prices to customers to some extent, but not fully. My guess is that the extruded plastic sheets might be harder to pass on RM price deltas (but haven’t verified it). Last 3 years, Gross Margins have been in the 38% to 43% range. The interesting thing is that mold tek says in their concalls that they are able to pass on RM increases 100% (although this varies from Q to Q). When mold tek was near rajshree’s scale, their GM were much lower (around 28%) but have been on a steady up trend. This also shows us value-added nature of rajshree’s products. Moldtek’s GM’s are 43% now, and they are 4x larger.
Unit economics looks healthy and co is able to make 25% ROCE when capacities are ramped up. In general they expect payback period of 3.5 to 4 years for investments.

Key sources of durable competitive advantages

Clients: it is Difficult to enter supply chains of these FMCG giants like the ones shown:

Screenshot 2021-06-14 at 6.09.00 AM1028×599 177 KB

They are very stringent on quality checks and it takes many years to enter these supply chains. Their largest customer has been their customer since 2014. They haven’t lost any major client in last 10 years. These are sticky client relationships. FMCGs are very picky about feel and branding of a product, would not switch for saving on costs (compromising of quality, hygiene) which are negligible wrt end product. Having said that, we should note that these are only 1 quarter contracts with clients, but that seems to be industry norm. However, relationships are far longer and durable.
Company only uses best quality machines. Their machines are imported from switzerland. They have a very interesting relationship with their swiss machine supplier Wifag‐Polytype who own 20% of the company. This means that wifag is invested in the financial success of Rajshree.
Company seems eager to innovate. They are ready with biodegradable products (made from corn) and can supply whenever their clients want to move. This will prove to be a very interesting trend. Has already played out in USA. The PLA products are much costliers, and thus would be higher gross margins for rajshree. But the key point is that they are innovative, ahead of the curve: biodegradable packaging, recyclable packaging, barrier packaging, tubes packaging.

Comparison with moldtek

Mold tek is another listed player which is into similar line of business. Mold tek sells packaging for FMCG products which require sturdier packaging (eg: solid boxes) and paint buckets (asian paints) and lubes.
Can one disrupt the other?: Rajshree replies on thermoforming (TF) which is essentially creating sheets of plastic then bending them with heat into desired shape versus mold tek which uses Injection molding (IM) which is about taking small pellets of plastic then injecting them into the mold at high temperature. This para from rajshree drhp makes it seem like TF is superior to IM:

A more neutral sounding comparison makes it seem like both processes have their own pros and cons https://www.thomasnet.com/insights/injection-molding-vs-thermoforming-what-s-the-difference/#:~:text=Injection%20molding%20involves%20injecting%20molten,them%20to%20a%20mold’s%20surface.
The point is, both cos use processes and machines which are very different from each other and have spent years perfecting their processes and gaining experience. Changing tracks and disrupting each other might not be easy. In fact mold tek mentions in their concall that Zomato and swiggy look for flimsy products which they are not providing, and this is exactly where rajshree comes in. I put low probability on the event of mold tek or rajshree stepping on each other’s toes even when they supply to same company. As an example consider baskin robins: the larger sturdier ice cream buckets are supplied by mold tek, the smaller flimsier ice cream cups by rajshree.

Valuations: Mold tek is much higher valued than rajshree and rightly so, they have a much larger track record of execution, have larger scale, more “seen” and thus more widely owned. But my biased opinion at this point is rajshree has equal quality if not more, comparing to mold tek. Besides, as i have explained market is very fragmented (Indian Rigid packaging is a 26B$ market. Global one is 250B$) both can continue to grow for a very long time to come, with direct competition being low probability event in medium term at least.

Quality of business: Rajshree’s client’s business is a higher annuity business (you eat curd every day and ice cream every week) and thus slightly higher quality than mold tek who get largest part of revenue from paints segment, and one only paints their homes once in 5-10 years. On the other hand, mold tek is able to do in mold labelling using robots, which enables them to do interesting things like creating QR codes as a part of manufacturing process. Robots would also result in lower opex. On this front, mold tek is better. On quality of clients, both seem to be tied to me, both have very large established client base.

Another company worth comparing to is EPL if one wants to.

Risks

Contracts are not long term. Clients can leave whenever they want to, although this is a low probability event given how FMCG supply chains work and given the amount of time and effort both invest into building relationships.
Company has repeatedly stated that their products are of a much higher thickness than the ones which government has seeked to ban. However, there is always some risk of regulators becoming more aggressive. However, given the deep FMCG supply chain penetration, i expect such regulatory action to be resolved via discussions and product upgradation (higher thickness plastic) rather than loss of revenue.
All their factories are in Daman. Geographical concentration risk.
Microcap on SME board. Liquidity risk. Position sizing risk.

A few sample Sources

https://rajshreepolypack.com/wp-content/uploads/customize-upload/H1FY2020-2021.pdf
https://www.rajshreepolypack.com/wp-content/uploads/2018/09/Rajshree-Polypack-Limited_Prospectus.pdf

https://www.rajshreepolypack.com/wp-content/uploads/2018/03/Rajshree-Polypack-Limited-AR-2019-2020.pdf

Disc: Own a small position, might scale up.

suns · June 14, 2021, 4:18pm

Really well written and complete analysis

Compounder · June 15, 2021, 7:11am

@sahil_vi Thanks for the detailed post. Couple of observations/clarifications if you can help as under:

Company has witnessed a contraction in margins in the last 5 yrs from 21% to 14%. Assuming bulk of this being led by rise in RM, is the company facing challenges in smooth pass through of these to its customers on a BAU basis or there is something else I am missing?

Moldtek earnings call indicates their production facilities are generally colocated in and around their customer plants calling for a wider spread of their facilities pan India. RPPL have all their facilities concentrated in Daman. Considering the similarities in the businesses I could not understand why RPPL runs such a concentrated location mix. Is this not a disadvantage from freight, timely delivery point of view other than other catastrophic risks?

Disc: Just tracking presently, not invested

sahil_vi · June 15, 2021, 9:33am

If you want to focus on RM prices volatility look at the Gross margins.

Operating margins should be used to analyze company’s operational efficiencies.

My guess is higher costs due to costs being front loaded for the coming capex (hiring, machines, depreciation, rent etc).

My understanding is that they pass through some (undisclosed amount) to clients. I have covered this in my note.

Please re-read it. My suspicion is that might find it more difficult to pass increases for the sheets. But just a guess.
Also as the product mix changes, margins would evolve. Difficult to compare to past since company is a movie, not an image.

Did you read all the concalls, IPs and listen to all the videos? the answer is in those. Answer is: cost of power is considerably lower in Daman. Similar products but different industries, hard for an outsider like me to say why 1 is ok other is not. Mold tek colocates plants which make Paint buckets with AP plants, maybe this might be an AP requirement? I dont know. At best a minor irritant.

It is.

No.

Agreed, covered in my post too.

Inimitable_Investor · June 15, 2021, 4:46pm

I don’t think it is AP requirement. I’ve interacted with several suppliers of AP whose plants are far off(>300kms). Idea is these plants need RM too. Proximity with RM suppliers instead of customers can also help protect margins and this is just one factor.

Ashwani_Agarwal · June 18, 2021, 10:28am

Hello Sahil, the EBITDA/ton was mentioned in the Investor Presentation of H1FY2020. https://www.rajshreepolypack.com/wp-content/uploads/2020/06/3.-IP_11_19.pdf

The company did 5010MT of Extrusion and 2010MT of thermoforming in H1FY2020, this should give them an EBITDA of about 27.82 Crores (41500/Ton for Extrusion and 33838 for Thermoforming)

But, the total EBITDA declared by the Company for the H1FY2020 is only 11.91 Crores.
Where am i going wrong in my calculations? Am i missing something?

Nimit · June 20, 2021, 2:53pm

Going through RPPL’s AR i saw they have repeated related party transactions with
Rajshree infotech, Bobson Industries and Orbit Industries.
I didn’t find more details on what RPPL gets from these parties and all 3 of them are private.
Upon searching Orbit industries is manufacturing of disposable cups. . So is bobson
Rajshree infotech is in search engine optimization.

Anyone who knows about this? Or else how do you guys find more information if required?
Imo the transaction amount is not very significant but neither negligible.

Pratul_Gupta · June 21, 2021, 6:00pm

Thanks for starting the thread. The company looked very interesting at first glance - A micro cap with a enviable set of marquee clients which also does con-calls! Wow.

But as I have started digging deeper, I am not able to find an answer to a very simple question - How are they different from any other packaging player? Here are my findings about the company:

(1) A quick search on Indiamart for Thermoformed plastic cups throws a list of about 20+ manufacturers. All of them seem to provide the same cup at the same price as Rajshree! I have quotations from a few of them in my inbox! What is the product differentiation?

(2) Moreover, if we search for thermoforming machines, Indiamart again shows a large number of vendors with machines ranging from ₹4L (for vaccum thermoforming) to ₹72L (for automatic machines). What is the extra added benefit of these swiss machines which Rajshree is procuring?

(3) QSR and Delivery restaurants on Swiggy/zomato should not be considered a big potential market for Rajshree as most restaurants will prefer to tie-up with local packaging providers for speed/flexibility. Rajshree is based solely in Daman. Moreover, most of these restaurants use simple plastic containers for curry/gravies and do most of their branding on external paper packaging which is cheaper and more eco-friendly! This leaves only the FMCG market which already seems penetrated. How much scope for growth is available?

(4) Due to intense competition, pricing power of the business seems limited which makes them susceptible to raw material fluctuations. Most rating reports mention the same. The BOPP/BOPET market with operators like Polyplex, Uflex, cosmo flims has similar raw materials and the industry is valued at single digit PE multiples for the same reason! Will the valuations take a hit once the market realises this is a commodity?

Don’t get me wrong, Rajashree has done really well to garner marquee clients in a highly competitive industry. But I am not able to look past these points! Would be super helpful if people on this thread can find answers to some of these queries!

sahil_vi · June 23, 2021, 1:52am

What is available in public: The product differentiation is ability to print on products. Hygiene. Quality.
Getting next level of details here is only possible by quizzing the management in concalls. Given their marquee clients list and given that these FMCG players typically only have 2-3 suppliers after strict quality checks the largest differentiator is quality. One cannot measure quality by googling, or even by touching. You’d have to talk to some FMCG client to understand why they go for rajshree. Figuring that out, is not central to my investment thesis. But if you do figure out, do add back to forum. I’ve mentioned the known part above. There might be some unknown part too.

Please ask the management. As a general principle I can tell you the answer; why does anyone import anything which is locally available? Because of higher quality. Lower downtime, higher precision, lower operating costs. As an example one of the extrusion machines they recently imported is for creating barrier packaging which enables higjer shelf life for food products. Mold tek imports their machines too. Provides some credense to the practice of importing by high quality packaging suppliers.

Packaging is provided by the aggregator I think to ensure some sort of rregularity in customer experience. (have you observed how similar the containers are most of the times regardless of which restaurant you order from).I disagree that they aren’t a big market. Rajshree expects around 5cr from their tie up with swiggy which already exists (this is a fact, not a speculation). Which imo translates to > 50 lakh packaging already. This is already a big market for them and would grow larger.

We have to see the full context otherwise it paints an incorrect picture. The same credit rating report also says that they are able to pass on price increase to some part of their client base. As per Rajshree this is 80-85% of clients. (Of clients not revenue). And that ability to pass on is limited by scale. Given that a major part of investment thesis is improvement in scale, the magnitude of this concern should reduce over time. As an example mold tek who are into somewhat different but similar products are able to pass on 100%. Can rajshree reach that scale? Each investor must evaluate. Besides all this, gross margin has been around 38-43% in last 3 years. I consider that to be fairly stable. And also they have multiple margin expansion triggers lined up as I have stated before:

Lot of Newer higher margin products like barrier packaging, tubes.
Operating leverage from new facility
Higher scale leading to higher bargaining power.
Exports remain an optionality here.
Any move to increase lowest permissible limit for plastic will actually help rajshree as packaging per unit of FMCG sale would go up.
Any move towards green packaging will benefit rajshree too since very few players would have the ability to manufacture with the newer substance.

Overall I think these concerns are tangential to my investment thesis at least). I personally don’t think this level of detail would be available for any 100cr topline company. Investors discomfort then might be with microcap investing not Rajshree. Which is perfectly alright. One should try to find their area of comfort and stick to it.

Disc: invested and biased

Suyog_Patil · June 24, 2021, 5:50am

I see majority discount brokers don’t allow to invest in below 100cr mcap companies i can’t find this on those brokers. Which brokers do you use to invest in microcaps?

sahil_vi · June 24, 2021, 5:51am

Zerodhaaaaaaaaaaaaaa

itsnitin · June 24, 2021, 1:16pm

Good results by RPPL

Karan_Khanna · June 26, 2021, 6:54pm

This is a intersting way to look as margin of safety. For my knowledge I would like to know what all does Reserves include. Does Reserves include Cash? Does it include other investment done like Mutual Funds that company might have invested in? How to include assets like land etc.

"I took (Reserves - Debt)/ no.of shares.
(89.2cr - 8.46)/1.12 = 72/share
"
@Tar any insights are highly appreciated

sahil_vi · July 2, 2021, 1:19am

The con call is today at 3:30 pm,

Please join and ask all your questions , I could see many people have many questions here on forum

sahil_vi · July 2, 2021, 12:07pm

Some partial concall notes. I had to attend RACL concall so only contains notes until 4:01 pm:

Successfully commenced the commercial production in unit 2 expansion. Unit is adding new value-added products. Already making inroads in barrier packaging.
Doing modernization and consolidation of Unit 1 and Unit 3. 15cr funding. 75% through the bank, 25% through internal accruals. Increase capacities by 15%.
Developed 15 products in H2FY21.
Can manufacture PLA and compostable products if demand arises.
Capacity utilization was ~100% for all the capacities (printing, thermoforming, extrusion) in H2.
Gross margin came down in H2. After Dec 20, RM prices have gone up 30-40%. We do have a variable price mechanism with customers. Monthly and quarterly and spot price mechanism. So we are able to pass on the price with few month lag.
WC: Increase in prices of RM has caused inventory rise. Increase in sale has also caused debtor days to increase. General debtor days is around 60 days and we will stay around that level going forward.
Capacity utilization ramp up 60-70% in FY22.
In FY18 we were at 21% OPM , and now it is 13-14%. RM we have been able to pass in. There is increase in other expenditure on account of electricity, legal , professional (for developing new products), insurance (cost of machinery) which has brought down margin, added go downs for operational efficiency.
Reason for lower GPM: Regrouping of some expenses was done in FY17, FY18, FY19 as well. That was earlier shown as part of other expenses. Now it is part of raw material.
Going forward Operational EBITDA 17% ±1% we can look at.
Base material is supplied by Rajshree and butama is doing printing for kinderjoy.
Thermoforming vs Injection molding: We are open to evaluating other tech : injection molding. Difficult to do barrier packaging in injection molding. Extrusion and thermoforming are a little difficult in terms of capex requirement but volumes can be larger. Injection molding cant do higher volumes.
Manjushree is one rigid packaging bottles. Mold tek is also there. But applications are different. RPC, kovaraice, international companies
Can expect 60-70% capacity utilization in FY22 with 40-50% topline growth.

Disc: invested and biased.

gurjota · July 2, 2021, 5:04pm

Today’s concall recording

Disc: On my watchlist