Hindustan Adhesive Ltd
(CMP- Rs.70 ; MCAP- 35 Crores ; EV- 87 Crores)
Company Brief
- Established by Mr. Madhusudan Bagla, a first generation entrepreneur, pioneered self-adhesive water based Carton Sealing Tape manufacturing in India when he set up Hindustan Adhesives Limited in 1988. Currently his son, Nakul Bagla(CFO) is the driving force behind the company
- Company operate 3 plants in UP, Uttarakhand and Gujarat respectively and employs around 300 employees
- Promoter & family owns around 70% stake in the company
- Company is manufacturer of Acrylic Packaging Tapes which is suitable for all type of Carton Sealing applications. The product range includes various tapes like heavy-duty tape, tear tape, low noise tape, printed tape, coloured tapes, jumbo tapes, freezer tapes etc.
It also manufactures Polyolefin Shrink Film which is fully recyclable way of packing FMCG goods -
It is catering big brands like Unilever, PepsiCo, Coca Cola, P&G, Reckitt Benckiser, Cadbury, Nestle, ITC, Amway, Colgate, Dabur etc. since a decade
Co. has over 500 total customers
Industry Scenario
- BOPP Tape market size in India is estimated around Rs.100 crore/Month. This market is divided primarily into two parts – Organized sector and unorganized sector.
- The organized sector contributes around 40% of the demand while the remaining demand is fulfilled by organized sector.
Growth Visibility
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Company operated via 2 legacy manufacturing units in U.P and Uttarakhand each with combined capacity of 62 Million square meters and catered to the domestic market
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In 2017 co. planned on expanding its adhesive tapes manufacturing capacity substantially by adding 216 Million square meter plant, taking total capacity to 278 Million square meter at total cost of 35 Crores
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By April’18 the new plant(imported from Italy) was commissioned near Special Economic Zone (SEZ), Mundra (Gujarat). It is an Export Oriented Unit (EOU) and management aims to cater the export market via it
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The plant was set up near port to mainly cater export markets as there was demand visibility and higher volume offtake in export business compared to smaller order size in domestic markets which it caters through older plants
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Mundra plant is also vertically integrated as it manufactures Adhesive solution which gives stickiness to the tapes and corrugated boxes wherein the finished products are packed and shipped
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Co. also set up one marketing unit in the US with branches in various parts of Europe under the name Bagla Films LLC for catering to foreign units of its Indian customers and subsequently new clients in foreign geographies
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Co’s Realizations are around Rs.13-14/ square meter. At optimum utilization (85%), Co. has the potential to achieve top-line of around 300 Crore of topline without incremental investment vs the FY19 Sales of 140 Crores & 75 Crores in FY18
Financials:
- Annual revenue was around 75 Crores until FY18 which was constituted- 50 Cr sales of adhesive tapes and 25 Crores sales from POF shrink films
FY19 Could see clear growth in numbers wherein the top-line increased to 140 Crores due to commencement of the Mundra plant vs 75 Crores YoY - FY19 export sales stand at 77 crores vs 10 crores in FY18. Exports also fetch export incentive of around 3 crores in FY19
- Currently debt stands at 53 Crores. The overall gearing remained stable to 1.29x as on March 31, 2019 as compared with 1.30x as on March 31, 2018
- The operating cycle of the company improved to 59 days in FY19 vs 100 days.
The improvement in operating cycle is on account of improvement in collection period to 50 days in FY19 from 72 days in FY18 due to increase in export revenue. The improved collection period and more export demand led to improved inventory holding period to 58 days in FY19 - Despite almost double top-line YoY, the OPM largely suffered mainly due to commencement of new plant at Mundra, Gujarat and FY19 being the first year of operations.
- Volatility in EBITDA % suggests that company’s margins depends on the volatility in the RM prices- crude derived which needs to be monitored
- Cumulatively past 10 year EBITDA is 100 Crores vs cumulative adjusted cashflows of 76 Crores which signifies that the reported profits is converted into cash and it is not only accrual based earnings
Weakness
- Co. operates under single brand- Bagla group wherein they also operate their private entity- Bagla Polifilms Ltd which is involved in POFF Shrink film manufacturing.
However, their product profile is different from Hindustan Adhesives Ltd because proportion of POFF shrink film to top-line is around 18% - Raw-material susceptibility: As the core raw material are crude derive, any fluctuations in the crude affects the realizations of the co and impacts the profitability and EBITDA %
Valuations
- Currently the stock is trading at lucrative forward valuations of 2.8x EV/EBITDA
- If co. successfully ramps up the production from Mundra plant at optimum utilization, it could generate EBITDA of 30 Crores (300 Crores Topline * 10% OPM) whereas current market-cap is only 35 Crores
Sources: AGM, Website, Credit Reports.
Disclosure: Invested but no transaction since past 3 months
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