Bottled-Up Profits

Here is yet another example of how changes in the way investors evaluate companies can make or break a scrip: Two years ago, Pearl Polymers (PPL) was quoting in the range of Rs 90 to Rs120, as the Sensex swung between 3,100 and 3,300 points. The earning per share of the company then was of Rs 6.32. Today, the PPL scrip is trading at a five-year low of Rs 12.50, the Sensex is at around 3700 points, and the company's expected results for March 1997 will take the EPS to Rs 6.12.

So does that mean that investors can forget about this scrip for now and look for greener pastures? A closer look at PPL suggests that investors should probably give it a second thought. Look at the current position of the company:

 

PPL performance in 1994-95 was excellent (see table) and the market rewarded the stock by sending it beyond the Rs 100 level. But in financial 1995-96, prices of its raw material (PET chips) zoomed up and hence, the companys margins crashed. The stock price also crashed. In the next year, i.e. in FY 1997, (from February 1996, to be precise) PET chip prices started to come down again.

And today, PET chip prices are at one third of the earlier price of $2,400 per metric tonne. This means that the price reduction has been going on for a sufficient period of time, enough to make an impact on margins this year.

And that, in fact, is apparent from the company's performance in the first half the last financial, i.e. till September 1996. The company should end FY97 with a net profit figure close to, or slightly more than the FY95 level. And therefore, it could be time for the stock to be re-evaluated from the present price of Rs 12.50.

A pioneer in the polyethylene terepthlate (PET) industry, PPL commands around 55 per cent share of the PET bottles market in the country today. Its brand, PearlPet, has become almost synonymous with the product. The company manufactures the broadest range of PET bottles and jars in the country, with an output of around 160 million bottles per annum. PPL's clientele comprises of almost all the big names in industry, including McDowells, ITC Agro, Nestle, Nocil, Brooke Bond and Cadbury's.

One of the main strengths of PPL is its presence in four centres in the country -- Delhi and Gurgaon in North India, Mahad (near Mumbai) in the west, and Jigani (near Bangalore) in the south. The multi-locational presence enables the company to service all major customers in the north, east and the south.

PET chips constitute almost 90 per cent of the companys total raw material cost. In 1995-96, the latest year for which the balance sheet is available, raw material cost comprised 26.27 per cent of the company's total expenditure of Rs 84.12 crore.

The cost of PET chips went up 76 per cent from Rs 22.23 crore in 1994-95 to Rs 39.13 crore in 1995-96. In terms of quantity, over the same period, the volume of PET chips consumed went up from 2988.04 tonnes to 3816.27 tonnes, an increase of 27.71 per cent. At the same time, the sales figure went up by around 42 per cent.

Looking at it from another angle, so far as PET chip prices are concerned, by the first quarter of 1995, they were ruling at around $2,250 per metric tonne. Then, prices went up to around $2,600 per metric tonne by June 1995.

The end result? In the financial year 1995-96, PPL suffered a 50 per cent fall in net profit, apart from the obvious squeeze in margins. While PET chip prices went up, the company was unable to pass on the entire price rise to end-users, engaged as it was in trying to increase market share. The other reason for fall in margins was rise in depreciation and interest charges. Together, the two went up to Rs 8.06 crore as compared Rs 6.17 crore in FY95.

Cutting across to the current position, while there was almost an instantaneous slide in PET chip prices after they zoomed up, it has taken long for PPL to benefit from the fall. The full impact of the price reduction in PET chips is expected to come through only in the current financial year.

At the moment, the free-on-board (FOB) price is around $850 per metric tonne. Company sources estimate that the average cost of PET chips in FY97 now works out to roughly $900 per metric tonne against $1,700 in FY96.

This reduction in prices will not automatically be translated into net gains for the company. Just as the rise in PET chips was not all borne by PPL, company sources say that any raw material price change has to be worked into the end-user price. Thus, while raw material prices for PPL have gone down, endusers such as McDowells will also negotiate a new and reduced ottle price.

These price equations tend to vary across buyers and so it is not possible to estimate what PPL's new prices and subsequent gains will be. The large volumes in this sector also tend to make this difficult to judge. Moreover, the company is involved in a Rs 50 crore expansion programme that will take its capacity to 198 million bottles.

Suffice to say here that PPL's increased profitability as result of fall in chip prices is evident in the results for the half-year ended September 1996. The sales figure has remained almost the same, Rs 41.32 crore in September 1995 as compared to Rs 41.63 crore in September 1996.

However, in the same period the net profit has increased to Rs 3.7 crore, a jump of almost 40 per cent. The September 1996 net profit is, in fact, almost the same as the Rs 3.83 crore made in the full year 1995-96.

For FY 97, the company estimates a profit before tax of around Rs 9 crore. Even assuming that it pays more than the required MAT, prfot after tax should work out to around Rs 7.5 crore at the very least. On this figure, the EPS works out to around Rs 6.12. This implies a discounting of 2.04. The scrip is traded regularly on the bourses.