A manufacturer and exporter of flexible packaging, Flexituff International (FIL) has clocked healthy growth and diversified successfully into new segments that will gather steam from FY-12. The risks, however, lie in its high debt, export orientation, execution in new projects and the severe market volatility of late. Investors with a stomach for higher risk can consider subscribing to the initial public offer of this company.

At the upper end of the price band of Rs 145-155, the offer discounts the FY-11 per share earnings by 11 times and estimated FY-12 earnings by 9.4 times on post-issue equity. On offer is a fresh issue of 45 lakh shares and an offer for sale by a private equity investor of 22.5 lakh shares.

Diverse segments

Flexible Intermediate Bulk Containers (FIBC), used for bulk packaging and mechanical handling of materials, has long been the revenue mainstay. Most of this comes from exports to the US and Europe, the primary consumers of bulk packaging material. Of the issue proceeds, Rs 18.9 crore will go towards increasing FIBC capacities. FIBC accounted for 90 per cent of revenues in FY-09, which dropped to 68 per cent by FY-11 on expansion of product mix. Such a diversification reduces concentration risks and allows the company to tap domestic markets. A new plant was set up for these in FY-10, manufacturing three new products.

Printable polypropylene bags, used to package products such as rice and sugar already contribute 14 per cent to revenues, and address a sizeable international and domestic market. Polyolefin sacks also have wide applicability. In this segment, FIL primarily caters to the domestic market.

The third product is geotextiles, a nascent segment in the Indian markets, used in infrastructure projects such as roads. The segment looks poised to ramp up contribution to revenues from the current 4 per cent, with the company securing the necessary approvals to supply to Indian developers. FIL also recycles and sells waste material. Rs 8.9 crore of issue proceeds will fund the setting up of a unit to manufacture drippers for the drip irrigation industry. This project, however, carries significant execution risks, being a new area .

Raw materials for the company are primarily polyethylene and polypropylene. FIL does not have long-term supply contracts for raw material and is vulnerable to swings in crude oil prices and exchange rates, besides the pricing power of its suppliers. FIL has set up machinery to produce polymer compounds in FY-11, half of which is for captive purposes. Operating margins, currently at 11 per cent, could improve.

Margin pressures

Consolidated revenues have clocked a three-year compounded annual growth of 38 per cent , while net profits have grown 98 per cent. This growth, however, is largely attributable to a stupendous FY-11 due to revenue contribution by new segments and benefits from additional tax breaks. Net margins stood at 6 per cent in FY-11, against 3 per cent in FY-10, on lower tax. Any change in taxation or SEZ policies, as may well happen, could squeeze margins.

The post-issue debt-equity is high at 1.2 times. Projects outside the scope of the issue objects could raise debt. Working capital, partly funded by the issue proceeds, could also require additional debt. The pressure from interest costs, therefore, is likely to persist. With new capacities, depreciation could also rise.

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