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Saturday, December 24, 2011

Small cap stock analysis – Piramal Glass

Piramal glass gives you an indirect opportunity to be part of FMCG market in very niche categories of Cosmetics, Perfumes, food-beverage and pharmaceuticals. Why indirect? Because Piramal glass supplies glass packaging to these industries. This business model of theirs directly links them to two of the steady and recession proof sectors of FMCG and pharmaceuticals. Let’s see if this niche business is an opportunity to buy stocks of this small cap stock and make money.

Company
Piramal Glass Limited (PGL) is a Ajay Piramal owned company from Piramal Group. It manufactures glass containers (flaconnage) for Cosmetics & Perfumery (C&P), Specialty Foods & Beverages (F&B) and Pharmaceuticals industries. The glass containers manufactured by company are used for products such as nail polish, perfumes, skin care creams, foundations and attars in Cosmetics & Perfume industry. Company manufactures amber bottles, amber and flint vials for liquid oral formulations and injectibles for pharmaceutical industry. Bottles for wine, liquor and food are manufactured for food and beverage industry by company. It has manufacturing plants located in the United States, Sri Lanka and India. Piramal Glass markets its products in more than 54 countries worldwide.

Growth and Financials
Piramal glass is planning to grow its capacity by another 22% by the end of this fiscal. It was a loss making business till FY09. But after FY09, it has performed steadily with growth in its earnings. For FY11, company’s net sales were Rs. 1,218.5 crore (it was Rs 1,104 crore in FY10). Net profit in FY11 was Rs 103.4 crore (Net profit was Rs 3 crore in FY10). Net sales itself has more than doubled in the last five years. The company made a rights issue in 2009 for debt reduction. The debt to equity ratio was 15.7 in 2009 when rights issue was done. Now the debt to equity ratio stands at 2.4. And debt reduction has helped in reducing interest payments.

The Cosmetics & Perfume segment earns roughly 30% operating margin against 22% for the pharmaceutical and Food & Beverage segments. Cosmetics & Perfume category is increasingly contributing towards revenues for company. Revenue share of it has grown from 35% in FY09 to almost 50% in FY11. This has helped company in growing cash flow over last two years. Due to this higher revenue share and increasing sales, Piramal glass turn around and swung into profits from losses.

Investment Rationale
Piramal Glass is expecting to increase it’s capacity of manufacturing cosmetics and perfume bottles by 40% and for this, company is setting up new manufacturing facility in Gujarat by March 2012. This capacity increment will make Piramal Glass the world's second largest cosmetics and perfumes bottle manufacturer after France's SGD. As discussed earlier, higher sales and higher profit margins from Cosmetics & Perfume segment has helped the company to improve it’s profitability. Also, company had acquired a US company. This US company has customers such as Calvin Klein, Estee Lauder and similar brands which are very popular in western world and in rest of the world too.

Piramal Glass, having manufacturing operations in India, has a huge cost advantage over other such companies as most of these companies are based out of Europe. Obviously, cost of production for Piramal Glass is much lower thatn it’s European peers (it is just 46% compared to its European rivals) The company is lining up capital expenditure of Rs 260 crore in the next two years from internal accruals to increase the capacity of Cosmetics & Perfume packaging unit. With the debt reduced in past two years, interest outgo is reduced and will go lower in future increasing net profits.

Stock Valuation
Promoters hold 72.30% as per shareholding pattern, which is excellent. The company has given a growth guidance of 17% CAGR for next two years. At current stock price of Rs.93, the stock trades at a P/E of 9. Company had paid out dividend in August 2011 and the stock dividend yield is at 3.79%. If it continues it’s performance, it could be a good dividend yield growth stock in future. At this stock valuation, it is a very attractive stock to buy with 2 years of investment horizon.

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