Midcap Mania: Is BOPET industry in a sweet spot?

Common examples of flexible packaging are various single or multi-layer packaging structures like pouches and bags. PET films find its applications in the shampoo sachets, milk cartons, chip packets, credit cards, laptop screens and top lid of cheese cubes that you peel off.

Demand in packaging is quite resilient as it relates to consumption of food products and consumer staples, which to a large extent is non-discretionary in nature. But the key monitorable to track is the demand supply dynamics, which has turned more favourable for the BOPET industry globally.

Worldwide, majority of the new capacities announced in BOPP films are likely to keep the utilisation levels at 70 percent, much like the current levels.

Due to lack of new capacities coming up and higher demand growth, BOPET film prices have shown a uptick compared to BOPP prices. During 2008 to 2011, global average capacity utilisation in thin PET films were in the range of 80-85 percent of rated capacity. Since 2012, the utilisation rates have declined sharply to 70-75 percent due to excess capacity build up. Levels between 80- 90 percent can be considered high and close to the full producible capacity.

The average gross margins of BOPET have increased from mid 30’s to 45 per kilogram that was not seen for many years. Major BOPET players worldwide includes Toray, Dupont Teijin, Uflex, Tianjin Wanhua, Mitisubishi, Polyplex, Jiangsu, SKC Inc, Taghleef Ind, Fuwei Films and big players in India includes Uflex, Jindal, Garware, Polyplex, SRF and Ester.

The focus of this episode is Polyplex Corp, which is one of the world's largest manufacturers of thin PET film catering to packaging, industrial, electrical and imaging industry through its state-of-the-art manufacturing plants and distribution facilities in India, Thailand, Turkey and the US, with market share of five percent in the thin PET film.

Polyplex Corp’s H1FY19 profitability is almost equivalent to the FY18 PAT (profit after tax). The company's H1FY19 margin stood at 16 percent and is the best in the past many years. The company holds 51 percent stake in its Thailand listed subsidiary, Polyplex (Thailand) Public Corporation (PTL), whose market capitalisation is Rs 2,800 crore.

Comparing the valuations, Polyplex Corp trades at a sharp discount on a market capitalisation to sales ratio. Polyplex Corp trades at 0.5x market capitalisation to sales, but its Thailand listed company trades at more than 1x market capitalisation to sales on a trailing basis.

Polyplex Corp is a net cash company and had paid Rs 10 per share on H1FY19 and EPS (earnings per share) of Rs 47 per share. The industry, however, don't get a very high PE multiple as its return on equity (ROE) is in low double digits and is very cyclical in nature.