Tuesday, December 27, 2011

>PIRAMAL GLASS LIMITED (PGL): Manufacturer of glass containers for the Cosmetics & Perfumery (C& P), Pharmaceutical and Specialty Food & Beverages (SF& B) industries

Piramal Glass Ltd (PGL) has a multi product industrial profile and is a global leader in deliveringworld-class packaging solutions. It is a manufacturer of glass containers for the Cosmetics & Perfumery (C&P), Pharmaceutical and Specialty Food & Beverages (SF&B) industries. PGLhas its manufacturing facilities in India, US and Sri Lanka with 11 furnaces having a total installed capacity of 1145TPD(tonnes per day).

■ Focus on high-margin C&P business to drive revenues: PGL believes the market share in the C&Ppremium segment can grow to 7-8% over the next two years from current levels of ~3%.PGLcurrently has a global leadership position in the colour cosmetic (Nail polish bottles) segment with a 50% market share. We believe that as the contribution of theC&Psegment to the revenue increases and with the share of the premium segment within the C&P segment also increasing rapidly, will drive growth and improve margins going forward.

■ Significant cost advantages Labour Arbitrage: In countries like US, which accounts for 37% of the global C&P premium segment, 80% of the C&P requirement is imported. The total cost of production in India, where manpower is among the cheapest in theworld is ~60% of the global costs and is less than half of that in France and almost half of that in the US. This gives PGL to have a significant cost advantage over its global peers.

■ Stronger balance sheet to support growth:  PGL had a debt of INR 9200 mn (as per FY11 Consol. balance sheet) and debt/equity of 3:1. In H1FY12 the debt/equity ratio was reduced to 2.5:1 from 3.4:1 in H1FY11. The debt service cover improved to 3.2 in H1FY12 as compared to 3.4 in H1FY12. PGL has been able to restructure its debt by going into to relatively lower interest rate of 7.5% foreign currency loan from peak rate of 13% to strength its cash flow. PGL follows an active hedging policy to its naked exposure which is currently to the tune ofUSD12-14 mn.

■ Capacity expansion to meet the future demand: For FY12 and FY13, the company has a planned capex of INR 2600 mn, with INR 1000 mn assigned to a Greenfield expansion of 160 TPD for the C&P segment to the at Jambusar. This project is scheduled to be operational by March 2012. The remaining INR 1600 mn will be spent on realignment of 4 existing furnaces which will increase the capacity by ~50-60TPDand will increase the total capacity by ~210 TPD.

At theCMPof ~INR92, the stock trades at ~8.0x and 5.2x of its FY12E and FY13E earning respectively. The company has been steadily shifting its product mix from low margin commodity business to high yield specialized business of C&P. We expect the C&P contribution to company's revenue to increase from 49% in FY11 to 56% in FY13E which is expected to boost EBITDAmargins from 23% in FY11 to 25% in FY13E.We have valued the company at ~8x of it FY13E earnings which is at premium compared to other domestic peers, due to PGL's better margins profile and return ratios. We maintain our BUY rating on the stock with a target price of INR143.