Multi Baggers

PG Foils Ltd.

PG Foils started with a small unit for the manufacture of aluminium conductors in 1962 and has today grown and has the third largest aluminium foil rolling capacity in India with a capacity of 5000 MT per annum and with product applications across various industries ranging from pharmaceutical, food & beverages, communications, air-conditioning and health products etc.

PG Foils products mainly consist of aluminium foils and foil laminates. The company has an extensive range of products, which are used for various applications. The major consumer industry of aluminium foil is the pharmaceutical industry. Other sectors that the company caters to include cigarette and soap industries, photographic material manufacturers, milk and milk product producers, tea & coffee manufacturers, confectionery and biscuits manufacturers.

EXPANSION PROJECT

The company is currently undertaking a capacity expansion by installing a new plant of 6000 MT per annum capacity. A part of the expansion project has become operational and the entire capacity will be operational by Nov-Dec 2010. With this the total capacity of PG Foils will increase to 11000 MT per annum.

FINANCIALS

The latest financials of the company are given as under :-

A closer look at the Profit & Loss account of the company For FY 09 makes you believe that it may not be as bad as it looks. The lower profit/ loss for FY 09 is on account of two reasons :-

Loss of Rs 8.40 crores on Forex Hedging

An amount of Rs 4.50 crores on account of payment made towards Keyman Insurance Policy.

There is thus a provisioning for extraordinary expenses of roughly Rs 13 crores resulting in lower profits. The loss incurred on Forex Hedging may be a one-off and may not be recurring in nature.

Again for FY 10, the company has charged an Exceptional Items of Rs 12.82 crores to the P&L account which include premium payment of Keyman Insurance policy, Employee-Employer policy and Loss in Investments. The company has registered a PAT of roughly Rs 4 crores after providing for the Exceptional Item of Rs 12.82 crores.

Concern/ Opportunity

The company has a number of group companies involved in similar business and with whom financial transactions take place. This could therefore lead to a conflict of interest. However, this may also be an opportunity since if a merger of all these companies take place at ratios which is fair to the minority shareholders of PG Foils, this may lead to the creation of a much bigger entity and may lead to a complete rerating of the stock of PG Foils in the market.

Comparison with Peer Group

There are three large players in Aluminium Foil Business in India – Hindalco, Ess Dee Aluminium and PG Foils. Since Hindalco is fully integrated and Aluminium Foils represents a small business segment of the company, we have done a comparison of PG Foils with Ess Dee Aluminium.

As is evident from the table, Ess Dee Aluminium is a much bigger company with a size of operations which is roughly 3.5 times that of PG Foils, has Operating Margins which are double of PG Foils, has profitability which is significantly higher and a host of other positives when compared with PG Foils. However, the valuation gap between PG Foils and Ess Dee Aluminium is huge. The market cap of Ess Dee Aluminium is 40 times that of PG Foils. Ess Dee Aluminium has a market cap of Rs.1500 crores where as the market cap of PG Foils is just Rs.37 crores.

Valuation & Investment Rationale:

Now coming to the valuation of PG Foils independently –

The company has a market cap of Rs.37 crores and a debt of roughly Rs.50 crores (as on 31.3.09), The latest Annual Report for FY 10 is not available as yet, however given the fact that the interest cost for FY 10 has come down by almost 50% compared to FY 09, debt would also have reduced significantly. Assuming a total debt of Rs.30 crores as on 31.3.10 makes the Enterprise Value of the company as Rs.67 crores.

As on 31.3.09, the company has investments of Rs. 26 crores invested in various Mutual Funds and Cash and Bank Balance of Rs.16 crores – the cash and cash equivalent are therefore roughly Rs.42 crores. Part of this cash may have been utilized in the ongoing Capital Expenditure, however given the small market cap of Rs.37 crores, the amount of Cash and Cash Equivalents is significant.

Besides the business which currently does revenues of Rs.150 crores, generates an OPM of 12% resulting in an Operating Profit of Rs.18 crores a year. The company is current undertaking a capacity expansion of 6000 TPA, part of which has gone operational and the full expansion will be operational by December 2010. Completion of this capacity expansion will take the total capacity of the company to 11000 TPA which is more than double its current capacity. One can therefore expect much higher revenues and profitability in FY 11-12.

The benefits of the premium paid for Keyman Insurance Policy which is fully charged to P&L account would flow to the company when the policy matures. The total amount which the company receives on account of maturity of Keyman Insurance policy may be potentially more than the current market cap of the company, whether the money comes as lumpsum or annuity payments.

We believe the stock of PG Foils is currently available at extremely cheap valuations – this is probably because of the fact that the market has failed to look beyond numbers which are understated for the reasons mentioned above. The stock at the current market price provides sufficient margin of safety. However, the Extraordinary Item which may be a concern for the market today, is a big positive on account of future Cash Flows which the Key Man Insurance policy can bring. The cash flows may be higher than the current market cap of the company.

The stock has all ingredients to turn into a Multibagger –  a) there is potential growth coming in the future on account of – the Capital Expenditure programme currently going on; b) the user industry the company caters to is doing well. This coupled with deep value and good margin of safety that the stock provides at the current market cap. We believe that the stock if held on for a few years has the potential to turn into a MULTIBAGGER.

Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members have a position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him email and welcomes comments, feedback & queries at nexgenfin@yahoo.com.
This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.