Writing A Better Future

Padmini Polymers, the largest manufacturer of compact disks and CD-Roms in India, is close to completing its comprehensive restructuring plan that it had initiated about a year ago. Post restructuring, the company is expected to be more focused on the compact disk and

multimedia business. And to highlight this focus on multimedia business, the company would rename itself as Padmini Technologies very soon. This change of focus would impact the financials of the company significantly as multimedia business is a high margin business.

Profile

Padmini Polymer was originally set up to manufacture and supply plastic containers and caps. Over the years the company evolved into a significant manufacturer of packaging materials and PET bottles. In 1995, the company diversified into manufacture of Compact Disks (CDs) and has gradually moved into Digital Video Disks (DVDs) and multimedia software. The foray into multimedia business has been highly successful and over the years its contribution to the total revenues of the company has gone up to 75 per cent with balance 25 per cent coming from the PET business.

 

With focus shifting to multimedia business, the PET business gradually slipped and started making losses. The company also accumulated debt of more than Rs 200 crore which affected its performance adversely. These developments forced PPL to initiate a financial and business restructuring process. While the purpose of financial restructuring was to make the company debt free by the June 2001 the business restructuring was aimed at making the company more focused on the multimedia

business.

To achieve desired business focus PPL is looking to sell its PET bottles division which has been a drain on the performance of the company. The division, having six plants with a total capacity of 15,500 tonnes per annum, is likely to end the 18 month fiscal, ending June 2000, with a net loss of about Rs 10 crore on a turnover of about Rs 110 crore.

The company is believed to have identified a buyer for this division and the deal is likely to be closed by the end of this month. The sell out of the plastic division has already been approved by the share holders at the AGM of the company in March this year. The sale of this division is likely to result in a cash inflow of about Rs 50 crore which is likely to be used for financial restructuring.

The financial restructuring initiated by the company has also been progressing well. It has managed to bring down its debt burden from Rs 215 crore in December 1998 to Rs 125 crore currently. It hopes to be debt free by June 2001.

New focus

The multimedia division of the company has a facility to manufacture 16.5 million CDs per annum. The same capacity gives the company flexibility to 11 million DVDs per annum. Currently, about 80 per cent of the capacity is used for manufacturing CDs and remaining 20 per cent for making DVDs. Almost 90 per cent of the DVD production of the company is exported and the remaining 10 per cent is sold as titles to different domestic companies. With domestic demand for DVDs picking up the company intends to increase its DVD production three fold.

To further add value to the business, the company has moved up the value chain and started selling titles. It has already set up a full fledged Multimedia development centre which is equipped with CD/DVD replication and mastering facility. The centre also has a very good title development studio. This facility makes it the only fully integrated multimedia company involved right from CD manufacture to title development.

PPL already has collection of more than 500 world class titles of which about 65 are of its own. It has exclusive distribution rights from some of the leading multimedia majors for distribution of their titles in India. The company is looking to add another 2,000 titles in the near future through a mix of copyrights and own production and for which it is to incur an expenditure of about Rs 35 crore. PPL has also made a foray into 3D film titles and game titles.

Financials

The financials of the company are in a maze as it has gone for two successive 18 month financial years. The latest audited results available pertain to the 18 month fiscal ended December 1998. And in view of the ongoing restructuring, the current fiscal, ending June 2000 is also 18 month long. The vague financials that are available from different sources indicate that the company would end the 18 month fiscal with a turnover of about Rs 410 crore and a net profit of about Rs 50 crore even after

making a net loss of about Rs 12 on the plastic division.

But it can be said with reasonable certainty that that post restructuring the company would be stronger financially for not only it would be rid of a loss making unit but also be almost debt free. The company has projected a turnover of Rs 453 crore and a net profit of Rs 70 crore for the year ended June 2001. The EPS for the same year has been estimated at Rs 14. These projections do not include any contribution from the PET business.

Future

The emphasis of the company would be towards moving up the value chain by developing proprietary and new products. One such product developed by the company is `Designer CD' for which it has even filed a patent. This is a CD that can be played on a normal player but comes in different shapes like that of a heart. These are mostly gift or promotional items that are usually sold at a premium. The company has set up a one and half million units per annum manufacturing line for these designer CDs in November last year. This product has already notched up sales of about Rs 10 crore since then.

Another step towards value addition is setting up of a music portal on which the company would make its titles available. Putting up of these titles on the portal would cost the company about Rs one crore but it hopes to generate a revenue of Rs 8-10 crore from this.

The company is also very optimistic of demand for CDs and DVDs and is even looking to put up more line. The target is to double the capacity by the end of the year. But, the constraint is not demand for these products but funds for which it is looking to make a preferential allotment of equity shares.

Valuation

Before investing in the company few things have to be considered. In January 2000, the Mumbai Stock Exchange had announced a list of top 20 companies against whom a number of investor complaints were pending. Topping the list was Padmini Polymers with 356 complaints pending as on January 31, 2000. The second important thing to consider is that the company has gone for two successive 18 months financial years. This means that not much of financial information available in a very vital period.

On the flip side, the company hopes to make a start with a clean slate in the fiscal beginning July 2000. By then the company would have managed to sell off the PET division and brought down debt.

As far as the business is concerned, the company seems to have got its act together and has the first mover advantage in the highly lucrative multimedia business. But it needs to bring in more resources to implement its ideas.

The scrip is currently trading at about Rs 70, a substantial decline from the 52 week high of Rs 270, at a PE multiple of about 23. At this price the scrip looks attractive but it would be better to wait for the company to complete this fiscal and announce its results for the 18 month period ending June 2000. This would not only quantify the gains of restructuring but also provide a clearer picture of financials.