Flexituff International IPO Analysis

Flexituff International (FIL) promoted by Kalani Industries Pvt. Ltd., Miscellani Global Pvt. Ltd. and Sanovi Trading Pvt. Ltd., is a multi-product company engaged in the business of manufacturing polymer products like flexible intermediate bulk containers (FIBC), reverse printed BOPP woven bags, special PP bags and leno bags, geo-textile fabrics and cround covers. These products are manufactured at three manufacturing units located in Pithampur (Madhya Pradesh) and Kashipur (Uttrakhand). It has a current capacity of 48,500 million tones (m) and proposes to expand the same to 70,311 mt by next fiscal.



The SEZ unit at Pithampur enjoys certain tax benefits in the nature of income tax exemption (up to 31 March 2013), excise duty exemption, sales tax exemption and many other statutory duties. The unit at Kashipur is in the excise-free zone and has received a tax exemption for 10 years from payment of excise duty (up to 19 January 2019) and income tax (up to 31 March 2018).

The company has three direct subsidiaries and two step down subsidiaries. Direct subsidiaries: Flexiglobal Holdings, Cyprus, (100%) is a holding and investment company; Nanofil Technologies Pvt. Ltd. (99.9%) is carries research and development by using various technologies such as nano technology, chemical technology, biochemical technology and polymer technology to use in polypropylene, polyethylene, and PVC products; and Satguru Polyfab Pvt. Ltd. (78.6%) is in the business of manufacturing, process, and produce and deals in reprocess of plastic waste to use in polypropylene, polyethylene, and PVC products.

The two stepdown subsidiaries abroad; one in the United Kingdom, Flexiglobal (UK) is in distribution and marketing of FIBCs; and the other, Lakshmi Incorporated in the US, manufactures the special closure, added on to make a bag (paper, polyethylene or woven) into a re-closable bag and acts as a distribution platform for the company's products in the US.

The company exports to around 30 countries across the globe and present in four continents with major thrust of exports being to US and Europe. The packaging products cater to various sectors like FMCG, agro products, pharmaceuticals, retail, fertilizers, cement, and minerals. Its geo-textile products find applications in the infrastructure sector. Its marquee clientele on the domestic front includes likes of HUL, Ultratech Cement, JSPL, Zuari Rotem, Chambal Fertilizers, Nagarjuna Fertilizers, and Dhampur Sugar Mills and overseas clientele includes intermediaries catering to end users, many of which are Fortune 500 companies like LG Dow and Eastman Chemicals.

It has a recycling and reprocessing plant at Kandla, which is used for recovering polypropylene and making various compounds of plastics. Its stepdown subsidiary, Lakshmi Incorporated, US, manufactures reclosable extruded zipper profile, which is used as a secondary closure for 5-50 kg bags. It recently manufactured Trap bags for AmeriGlobe US, which was contracted by the City of Fargo to provide Trap bag container barrier system for flood protection in eight Fargo City locations. It has manufactured 35 miles of 100 feet long, 4 and 6 feet tall Trap bags chains, which have been air freighted to different flood locations at Fargo, North Dakota and Lafayette, Los Angeles for Red river and Mississippi river.

The company intends to enter capital market to raise money in the range of Rs 97.9 crore to Rs 104.6 crore by issuing around 67.5 lakh equity share of face value of Rs 10 each at the price range of Rs 145 to Rs 155 per share. Out of the total 67.5-lakh equity shares on offer, 22.5-lakh equity shares are offer for sale by the shareholder, Clearwater Capital Partners (Cyprus) Ltd., which constitutes 33.33% of the issue size. The proceeds from fresh issue of shares will be used by the company for expansion of manufacturing facilities at SEZ and DTA units at Pithampur amounting to Rs 18.93 crore, setting up of dripper project at Kashipur amounting to Rs 8.1 crore, and working capital requirements of Rs 25 crore. The projects are scheduled for commissioning by December 2011.

Strengths

The SEZ unit at Pithampur enjoys certain tax benefits in the nature of income tax exemption (up to 31 March 2013), excise duty exemption, sales tax exemption and many other statutory duties. The unit at Kashipur is located in the excise-free zone and has received a tax exemption for 10 years from the payment of excise duty (up to 19 January 2019) and income tax (up to 31 March 2018).

The company has well diversified products portfolio: flexible intermediate bulk containers (FIBC), reverse printed BOPP woven bags, special PP bags and Leno bags, geo-textile fabrics and ground covers.

It is not dependent on a single market and present both in overseas as well as domestic markets. It exports to around 30 countries across the globe and present in four continents

Weaknesses

Exports to US and Europe contributed 49%, 62 % and 78% of its total revenue for FY 2011, FY 2010 and FY 2009, respectively. Any change in the policies governing the packaging industry and /or an economic slowdown in these regions may affect its financial condition and business operations. Also foreign currency exchange rate fluctuations can have a material adverse effect on its financial conditions.

The company had negative cash flow from operating activities of Rs 5.6 crore in FY 2010 and of Rs 2.08 crore in FY 2008.

As on March 31, 2011, contingent liabilities not provided for appearing in consolidated financial statements as restated aggregated to Rs 38.38 crore. If any or all of these contingent liabilities materialize, it could have a material adverse effect on business, financial condition and results of operations

There exists a potential conflict of interest between the company and its promoter, Sanovi Trading Private Ltd., and its group company, Pusti Trading Pvt. Ltd., which may adversely affect its business.

Valuation

The company's consolidated net sales for FY 2011 have increased by 80% to Rs 577.94 crore due to increase in production at the Kashipur unit. Of the total net sales, revenue from reverse printed BOPP bags was Rs 81.72 crore (14% of total net sales), geo-textile fabric and ground cover Rs 25.6 crore (4% of total net sales), special PP bags and leno bags Rs 47.35 crore (8% of total net sales), FIBC Rs 391.59 crore (68% of total net sales), and other products Rs 3.14 crore. Sales from exports were Rs 440.36 crore (76% of total net sales) and from domestic market was Rs 137.58 crore (24% of total net sales). The operating profit margin has gone up by just 20 bps to 13%. Net profit was up by 574% to Rs 30.97 crore due to topline growth.

At a price band of Rs 145 to Rs 155 per equity share of Rs 10 face value, the P/E at the lower band works out to 10.3 times and at upper band it works out to be 11.1 times the EPS of Rs 14 for FY 2011 (on post-IPO equity). In the packaging sector, companies such as Jumbo Bag, Neo Corp International and Emmbi Polyarns are trading at a PE of 21.8x, 11.4x and 9.1x times their respective FY 2011 earning.