Rajshree Polypack IPO Analysis (Neutral)

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Review By Finception on September 7, 2018

Rajshree Polypack Limited IPO

Rajshree Polypack is in the business of manufacturing and selling plastic products. They began operation in 2004 with a small manufacturing facility in Daman and have since scaled and set up a total of three manufacturing facilities with an annual capacity of over 10000 MT. The company makes plastic sheets, cups, containers and sells it to the likes of dairy manufacturers and beverage companies.

 The company says its decision to set up their facility in Daman was strategic in nature.

'By operating our manufacturing facilities out of Daman, our proximity to north India and south India is equally coverable. Within a radius of 1,200 kms. from Daman, we are able to serve a substantial length of our country. Additionally, the cost of power at Daman is relatively low compared to other states in India, which helps to keep our production costs down'

But that could have easily backfired after Maharashtra banned the manufacturing and distribution of certain plastic products in the state in March 2018. Because of its close proximity to the state, one would be inclined to think that this decision would have a material impact on the company. Fortunately for Rajshree Polypack, revenue from Maharashtra contributes to only about 2% of its total revenue. But this should serve as a reminder about the implication of a nationwide ban on certain plastic products.

So how are they doing as a business?

1. 1. Rajshree has shown some remarkable strength in terms of its revenue growth. The top line has grown from 30 crores in 2013 to 112 crores in 2018 i.e. 30 % CAGR since
2. The operating margin although is not as consistent as revenue growth, it still looksreasonable. Operating margins indicate the profit the company can make on every rupee of sale before paying interest or tax. The fluctuations may be attributed to the changes in prices of raw materials, which is indirectly linked to oil prices. So, any rise in oil prices will have a defining impact on Rajshree’s profits
3. The company has been successful in growing its bottom line as well, up to 8 times i.e. from 1.9 crores in FY 13 to a profit of 9.3 crores in FY 18

How well are they using their Current capacity?

The capacity utilization tells another story. The company continues to add capacity and generate enough demand to sell the additional products they keep making every year, a good sign.

Why IPO?

The company wants to raise money to set up its fourth manufacturing facility at Daman which will then be used to make more rigid plastic sheets and thermoformed packaging products (cups, containers etc.) More capacity incoming it seems. The Manufacturing facility is expected to be operational in 2019.

Does the company bear significant Debt?

The company’s operations rely on big capital investments. So, it's reasonable to assume the company will have to rely on debt to fund their operations. But the company’s borrowings have steadily decreased over the years. In comparison to the profits, their interest expense hasn’t increased disproportionately. And since the company plans to fund its new manufacturing facility through proceeds from the IPO. The company’s debt levels ought to remain under control.

Is Export the next big thing?

Currently, 90% of the company’s revenue comes from domestic sales while 10% of its revenue is attributed to exporting products to the likes ofChina, Saudi Arabia etc. The company has said

'We intend to expand our customer base to US and UK and increase our footprint in the Middle East. We feel there is a large potential/market for us to explore and supply our products. We will continue to explore all such options which help in increasing our customer base and diversify over different geographies and markets'

Point of Interest:

As of today (pre-issue), 27% of the total outstanding equity shares are allocated to a Swiss company called Wifag Polytype Holding AG, which provides plastic manufacturing equipment. The company maintains that this investment has helped them with access to technology and knowledge base but we are not quite sure why a plastic manufacturer from Switzerland holds equity in Rajshree. We also observed related party transactions with Wifag in 2017 amounting to 2.5 Cr. Wifag has been holding these shares since 2012.

Can Rajshree be the next growth story?

Based on the annualized earnings the asking price of Rs 120 translates to a PE of about 15 post issue. The company could turn out to be a growth story if it continues growing its revenue by installing new manufacturing facilities, bagging export orders and improving its operating margin vis-a-vis. But what if it doesn’t? What If something goes wrong? What if there is a nationwide ban on plastic. What if manufacturers are forced to comply with harsh restrictions and all this new capacity becomes a pointless endeavour. We will let you decide.

We here at Finception, wish the company all the best in its future endeavour.

The review has been compiled by Pawan Kumar - NISM Certified and cofounder, Finception.