24
PIRAMAL GLASS CEYLON PLC COMPANY UPDATE- 2QFY12 CRYSTAL CLEAR FUTURE WITH EXCELLENT 2QFY12 RESULTS Thilina Ukwatta: [email protected] Amali Perera: [email protected]
PIRAMAL GLASS CEYLON PLC
COMPANY UPDATE- 2QFY12
CRYSTAL CLEAR FUTURE WITH EXCELLENT 2QFY12 RESULTS
Thilina Ukwatta: [email protected]
Amali Perera: [email protected]
1
COMPANY UPDATE
Glass giant Piramal Glass Ceylon PLC (GLAS) is a domestic
monopoly and a manufacturer of flacconage glass for food and
beverages, cosmetics, perfumery, as well as pharmaceutical
sectors. The company continues with its simple yet steadfast
objective of fully serving the domestic market which is well on
its way to recovery as well as increasing the business in the
specialized liquor and beverage segment in the international
markets.
The company reported a net profit of LKR384.0 mn during first
six months of FY12 as against the profit of LKR210.0 mn posted
during the corresponding previous year period.
The quarterly turnover grew by 25% from LKR1, 027 mn to
LKR1, 280 mn compared to that of the corresponding previous
year period.
Quarterly net profit too increased significantly by circa 55.0%
compared to the same period of previous year. Net profit
moved up from LKR157.0 mn in 2QFY11 to LKR242.0 mn in
2QFY12.
Furthermore, the four quarter trailing PE is at 10.0x (based on a
Share Price of LKR7.90 and an EPS of LKR0.79) when compared
to the Sector PE of 11.2x and Market PE of 14.1x. This testifies
that the counter is UNDERVALUED compared to both sector
and market.
With the decision to switch from mass market exports to
premium exports niche boutique wine bottles & assorted high
end products, the glass giant is expected to release its full
potential, thereby generating higher ROE’s to the shareholders.
Moving forward with buoyant solid performance and a shining
future, we expect the forward PE multiples to be 7.3x and 6.0x
in FY12 and FY13 respectively solely on recurring
earnings.Hence we rate GLAS as a BUY.
PIRAMAL GLASS CEYLON PLC
“BUY”
-
50.00
100.00
150.00
200.00
250.00
300.00
350.00 Indexed Price Movement
GLASS MFG MPI ASI
2
WORLD OF GLASS OVERVIEW OF THE INDUSTRY
History of Glass
Glass has been produced far back as the second millennium BC
by Egyptians and Phoenicians, however evidently originated in
Mesopotamia. Man has been making the use of glass and it
dates back to 3000BC. Historians have discovered that a form of
natural glass obsidian formed within a mouth of a volcano. With
the intense heat of the eruption, man first used that melt sand
as tips for spears. Glass blowing became the most common way
of making glass containers from the first century. However glass
made during this time were highly colored due to the impurities
of the raw material.
The secret of glass making emanated to Britain by the Romans.
However, the skills and technology required to make glass were
closely guarded by the Romans and it was not until the Roman
Empire disintegrated that skills for glass making spread
throughout Europe and the Middle East. The Venetians, in
particular, gained a reputation for technical skill and artistic
ability in the making of glass bottles and a fair number of the
city's artisans left Italy to set up glassworks throughout Europe.
Glass production is a capital-intensive project, which captures
high amount of CAPEX at the initial stage (The setup cost),
which remains as a barrier to new entrants. Further, the
production process is such that the furnace runs throughout,
making operating cost also pricey. “Energy” accounts to nearly
30%-35% of the production cost where LP Gas, Electricity and
Furnace oil are the three main sources of energy, which is highly
exposed to price volatilities. In addition, Raw material that
accounts to 20% of the production expense spreads as follows:
53%
17%
14%
8%7% 1%
Raw Material Mix for 1000kg
Sand
Sodaash
Doamite
Calcite
Pheldspar
Salt cart
3
Batch house
Forming Process
Furnace ( Hot End)
Forming Machines
Internal Treatment
Annealing Inspection Packaging Coating Ancillary Process
Marketing
Types of Glass
There are many types of glass with different chemicals and
physical properties, which can be broadly categorized as:
Borosilicate Glass-type of glass with the main glass-
forming constituents’ silica and boron oxide.
Commercial Glass
Glass Fiber - Fiber reinforced polymer made of
a plastic matrix reinforced by fine fibers of glass.
Lead Glass-Variety of glass in which lead replaces
the calcium content of a typical potash glass.
Further, there is specialized glass namely: Glass Ceramics,
Optical Glass, Technical Glass, Sealing Glass Vitreous glass. Glass
is being used for many specialized applications in Chemistry
pharmacy, electronic industries, optics construction and lighting
industries etc.
Glass Manufacturing Process By Large
The manufacturing process of a factory can be broadly divided
in to a three parts:
1. The BATCH house
2. COLD End
3. HOT end
4
The Batch House
This is where raw material is stored in large silos which would
hold raw material sufficient for 1-5 days at all times, where by
some batch systems include material processing such as raw
material screening dying preheating etc. The system can be
manual or automated, where the batch house measures,
assembles mixes and deliver glass raw material recipe.
However the batch recipe will differ depending on the type,
color, quality design of the glass etc.
Hot End
Basically the furnace, is where the molten glass is formed into
glass products. These furnaces are natural gas or fuel fired and
operates at tempterures up to 1,575°C. There are types of
furnaces used in Glass containers include “ End port”, “ Side
Port” and “ Oxy fuel”, and the furnace size is classified by Metric
Tons per day production capability. There are primarily two
methods of making glass containers:
The Blow and Blow method used for narrow neck
containers
The Press and Blow method used for jars and increasingly
narrow neck containers
This is basically the forming process of the machnies which then
leads to the internal treatment process. At this stage the glass
containers undergo a special treament to improve chemical
resisitance specialy to those intended to be used for alcoholic
spirits, which is also referred to as dealkalization. Usualy done
through the injection of sulfur or fluorine containing gas
mixture into bottles at high tempreature.
The next is the annealing process where it heats the bottle ( to
about 580°C) and cools it, not letting it to cool uneavenely as it
causes weak glass due to stress.
Cold End
This section would inspect the containers for defects, package
and label the containers for shippment. Glass containers are
100% inspected which is done either through auotmated
machines and sometimes persons. Common faults includes
Small cracks, foreing inclusions called stones , bubbles in the
glass called “Blisters” and excessivley thin walls.
5
Few other Glass Manufacturing Companies
Name Description Country
Nihon Yamamura Glass Co Ltd Nihon Yamamura Glass Co., Ltd. manufactures and sells a variety of glass bottles and plastic containers. The Company also produces bottle-making machinery.
Japan
Ghani Glass Ltd Ghani Glass Limited manufactures and sells glass containers. The Company manufactures international glass containers for Pharma, food and beverage. Ghani Glass also manufactures float glass variations for commercial, domestic and industrial use.
Pakistan
Gulf Glass Manufacturing Co KSCC Gulf Glass Manufacturing Co. manufactures bottles, utensils and other household glassware. The company is also engaged in trading activities associated with the production and distribution of their products.
Kuwait
Excel Glasses Ltd Excel Glasses Limited manufactures premier soda lime glass container ware.
India
Haldyn Glass Gujarat Ltd Haldyn Glass Gujarat Limited manufactures clear glass containers.
India
Majan Glass Co Majan Glass Company produces glass. The Company produces clear and green glass for beverage bottlers.
Oman
Samkwang Glass Co Ltd Samkwang Glass Co. Ltd. manufactures glass containers and kitchenware. The Company mainly provides glass containers to beverage, pharmaceutical and cosmetic companies. Samkwang Glass also manufactures metal cans for beverages
South Korea
St-Gobain Oberland AG Saint-Gobain Oberland AG produces and markets a variety of bottles, packaging glasses, and containers for the beverage and food industries, and ceramics and other glass products for building and industrial purposes. The Company also provides consulting, design, and development services for glass manufacturing plants.
Germany
Zignago Vetro SpA Zignago Vetro SpA produces glass bottles for the beverage and food market, cosmetic and perfumes markets. The Company also produces specialty glasses.
Italy
Source: Bloomberg
6
Piramal Glass Limited- PGL (Holding Company)
The Piramal Group is a conglomorate led by Ajay G Piramal,
driven by its slogan “Knowledge , Action and Care” is one of
India’sforemost business conglomerates.
PGL is a global leader in delivering world-class packaging
solutions for every industry. PGL produces to the Food and
Beverage, Pharmaceuticals, Cosmetics & Perfumery (C&P) and
the specialty Food and Beverage (F&B) industry, containers
ranging from bottles to jars with varying sizes starting from 2ml
to 2.5ltrs. The company offers total flaconnage solutions to its
customers that includes full bottle design capabilities , in-house
mould design, CNC machines for mould manufacturing, high
quality glass manufacturing, dedicated ancillaries for decoration
and accessories like caps cartons and brushes.
The company is one of the leading mould glass manufactures in
the world which has around 26% global share in the cosmetic
(Nail polish) market and around 5% in the perfumery market
which is a premium segment. Together this segment adds a
circa 42% to the revenue, pharmacuiticals adding 31% whilst
the Food & Beverage segment adds 27% of the overall sales.
Segmental Profit After tax contribution
Source: Piramal Glass Limited Annual Report 2010-2011
Top Customers falling to Cosmetics and Perfumery segment.
P&G,
Unilever,
Revlon,
Loreal,
Avon,
Estee Lauder
65.52%
11.33%
0.31%
0.09%
22.66%
0.09% 2011Piramal Glass India Ltd
Piramal Glass USA Inc
Piramal Glass UK Ltd
Piramal Glass International Inc
Piramal Glass Ceylon Plc
Piramal Glass Europe Plc
(200.00) - 200.00 400.00 600.00 800.00
Piramal Glass India Ltd
Piramal Glass USA Inc
Piramal Glass UK Ltd
Piramal Glass International Inc
Piramal Glass Ceylon Plc
Piramal Glass Europe Plc
Indian Rupees Mn
2010
2011
7
Information Sourcehttp://glass.piramal.com, Wikipedia,,
Piramal Glass Limited Annual Report 2010-2011,
WWW.britglass.org.uk
Top Customers in the Pharmaceuticalsegment
Glaxo Smith Kline
Pfizer
Ranbaxy
Avetnis
Cipla
The Food and Beverage division mainly provides bottles to the
Wine, Liquor and food segment particularly to the emerging
markets, and has a unique design and decoration. PGL has
significant global precence with over 65% of revenues
generated by exports.
Subsidiaries of Piramal Glass Limited
• Piramal Glass Ceylon Plc • Piramal Glass International Inc • Piramal Glass USA • Piramal Glass flat River LLC • Piramal Glass Williamstown LLC • Piramal Glass (UK) Limited • Piramal Glass Europe SARL The company has several competitive advantages over the
suppliers of glass containers in terms of their wide sales and
distribution spread across the globe, a strong presence in the US
and monopolistic status in the Sri Lankan market, sophisticated
cost efficient manufacturing presence etc.
8
Factory Facilities
Piramal Glass India has two sophisticated manufacturing plants
located in Kosamaba which and Jambusar, close approximation
to three of India’s major sea ports
The Kosamaba facility has six furnaces – three each for Pharma
and C&P with a combined capacity of 340 tons per day.
Jambusar, Gujarat
The Kosamaba facility has six furnaces – three each for Pharma
and C&P with a combined capacity of 340 tons per day.
The product range includes:
Type iii amber for food and pharmaceuticals vials and bottles
Type iii flint for food and perfumery bottles
US Facilities
Plant in Flat River, Missouri, with eight lines of Type III flint
bottles, for the C&P, Pharma , liquor and food products
industries
PVC coating line for chemical bottles in Mays Landing, New
Jersey
Plant at Williamstown, New Jersey, with five lines for value-
added services like coating, colouring, printing, gluing and
sleeving.
Sri Lanka Facility
The newly commissioned Horana plant in Sri Lanka has a
capacity of 250 tons per day, and has one colouring fore hearth
for Pharma and specialty products
Source: http://glass.piramal.com
9
Piramal Glass Ceylon Plc (GLAS)
Presently is the sole glass container manufacture in the country.
The company is engaged in the process of manufacturing and
distribution of glass containers to both local and foreign
markets. Company, which was incorporated in 1955 under
“Ceylon Glass Company”, was formed by a group of investors
including Sri Lankan Government, Mitsui of Japan and The
Development Finance Co-operation of Ceylon (DFCC).
Recognized in the Colombo Stock Exchange back in 1994, was
acquired by Piramal Glass Limited India in 1999, buying over the
stake held by DFCC bank (39.4%).
Piramal glass provides flaconnage to 90% of the Sri Lankan
market, via its sophisticated manufacturing plant based in
Horana, while 7% is being imported by the company from its
parent Piramal Glass Limited India, which highlights the fact
that the company is catering to 97% of the local Market.
The new glass production plant in Horana, commenced
operations in 2009 runs on 5 production lines with a capacity
of 215-250MT per day that increased from a capacity of 120MT.
The Production lines operate with an efficiency ratio of 80% -
85% under normal circumstances that could go to a level at 90%
as an when quantity produce increases, (At the same time,
during short run production the efficiency ratio reduces).
Piramal glass does not foresee any expansion strategies towards
the short run.
Glass employees 600 personnel, of which 400 falls under the
permanent carder of which around 100 are in the executive
level, and approximately 200 are on casual basis.
The company transacts with the prime local and export
customers, of which India covers up 60% of the exports market
whilst New Zealand, Australia, UK and Mauritius are amongst
the other countries that the company provides exports to.
10
QUARTERLY RESULTS QUARTERLY FINANCIAL PERFORMANCE
-40%
-20%
0%
20%
40%
60%
80%
-100
100
300
500
700
900
1,100
1,300
1QFY
08
2QFY
08
3QFY
08
4QFY
08
1QFY
09
2QFY
09
3QFY
09
4QFY
09
1QFY
10
2QFY
10
3QFY
10
4QFY
10
1QFY
11
2QFY
11
3QFY
11
4QFY
11
1QFY
12
2QFY
12
LKR m
n
Revenue vs QoQ Growth
Revenue QoQ gowth %
(180.0)
(80.0)
20.0
120.0
220.0
320.0
420.0
1QFY
08
2QFY
08
3QFY
08
4QFY
08
1QFY
09
2QFY
09
3QFY
09
4QFY
09
1QFY
10
2QFY
10
3QFY
10
4QFY
10
1QFY
11
2QFY
11
3QFY
11
4QFY
11
1QFY
12
2QFY
12
LKR m
n
Quarterly Performance
Gross Profit EBIT EBT Net Profit
11
Gleaming Quarterly Revenue ………
GLAS turnover grew by 24.7% from LKR1, 027 mn to LKR1, 280
mn compared with that of the same period previous year.The
main driver for this achievement was the export sales which
grew by 47% during this quarter.
Almost 100% of all export sales were conquered by premium
market products, which brought about high realizations. The
turnover was also well affirmed by the domestic sales growth of
18%. Overall sales too showed a constant growth trend in the
first half of FY12. From LKR1, 894.4 mn in first half of FY11 the
sales increased to LKR2, 384.7 mn in the same period, FY12. This
is a growth of 26%.
Domestic sales followed a similar growth path. During the first
six months of FY12 the domestic sales increased by 24%. As per
to last year’s first six month’s tally of LKR1, 411 mn domestic
sales stood at LKR1, 755 mn this year, when comparing similar
periods. Export sales too have shown marked growth of 30%
from LKR483 mn in first half of FY11 to LKR630 mn during first
half of FY12.
Decent Expense Levels ……… Cost of sales increased by circa 32.4% to LKR850.1 mn 2QFY12
compared to corresponding quarter of the previous year
.Furthermore there was a circa 28.1% increase to LKR1.6 bn
1HFY12 compared to LKR1.2 bn 1HFY11. Escalating energy
prices (LP Gas and Furnace Oil) coupled with inflationary raw
material prices led to the respective rise in cost of sales.
Rise in global soda ash prices as depicted by the annexed chart
had heightened the production cost. Nevertheless, lower
customer bargaining power had blown over extra cost through
premium pricing.
Albeit, the rise of cost of sales was quite aggressive, greater
production efficacy had led to enormous cost reduction thereby
the company was able to significantly spread its heavy fixed
production overheads (accounting for circa 20% of production
cost) over a larger output base.
Moving forward, GLAS extensively focused on employee skill
enhancement, thus both inbound and outbound training backed
by the parent company via foreign factory visits (Piramal Group
altogether possess 9 plants) had developed the learning curve
resulting lower wastage and higher productivity.
-4%
1%
6%
11%
16%
21%
26%
31%
-
200
400
600
800
1,000
1,200
1,400
1HFY11 1HFY12
LK
R m
n
Bi-Annual Revenue Growth
Local Foreign Local growth Foreign growth
0 500 1,000
Cost of sales
Distribution costs
Administrative Expenses
Finance cost
Income tax expense
LKR mn
Expense Analysis
2QFY12
2QFY11
507090
110130150170190210
Global Soda Ash Prices
USD/MT
Source: Bloomberg
12
The distribution cost decreased by circa 46.2% to LKR38.1 mn
2QFY12 compared to 2QFY11 as result of reversal of excessive
provisions made in the prior quarter.
However, the administration expenses inclined 27.9% to
LKR94.6 mn 2QFY12 compared to 2QFY11. Inflation motioned
the personnel and other expenses towards the inclement.
Apart from the above, the tax expense too increased to mere
LKR4 mn due to a provisional requirement for the sale of
imported flacconage glass.
Hale and Hearty Margins ……… The quarterly gross profit increased circa 11.5% to LKR429.5 mn
during 2QFY12 compared to 2QFY11. In addition the QoQ gross
profit increased by circa 38.3% compared to 1QFY12.
Nevertheless, the GP margin declined from 37.5% to 33.6% YoY
during 2QFY12. The prime reason was due to the above
mentioned escalating energy cost and imported raw material
(soda ash) price hikes.
The quarterly EBIT margin was much more stabledYoYas the
decent expense levels offset lower GP margins. This was mainly
due to the reversal of expense provisions by 46.2% YoY when
benchmarking against the prior quarter.
In addition, the EBT margin was healthy and showed persistent
YoY improvement to 19.3% 2QFY12 due to low finance cost. The
tax shield with improved EBT lead to a robust bottom line made
a significant contribution to the NP margin (18.9% 2QFY12).
Debt and Finance Cost……… Drastic reductions in debt levels coupled with curbed interest
rates reaped out the benefit of lower finance cost. The finance
cost showed an impressive circa 35.6% reduction YoY to
LKR53.9 mn.
In addition, the rate of interest which prevailed in the range
12%-13%, drastically reduced to 6.5%. Efficient working capital
management had led to less short term borrowings, thereby
stabled the overall debt position.
Also with effect from September 2011, the interest on foreign
currency loan had reduced to 5.5% on an outstanding debt of
mere LKR1.1 bn.
0%
5%
10%
15%
20%
25%
30%
35%
40%
GP Margin EBIT Margin EBT Margin NP Margin
Margin Analysis
2QFY11
2QFY12
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
2550
2650
2750
2850
2950
3050
3150
3250
3350
2QFY11 2QFY12
LK
R m
n
LK
R m
n
Debt vs Finance Cost
Total debt Finance cost
13
RATIO ANALYSIS
Profitability The revenue growth had been persistent over the past few years with GLAS’s focus was more on premium segments fetching higher prices. We anticipate the local glass giant to maintain revenue growth at circa 11% in the forthcoming periods. Furthermore, the GP margins showed continuous increments from FY09 to FY11. This was due to the fact that the rise in cost of production had been pushed through to the customers via premium prices. We expect the following trend to pursue, thus maintaining a GP margin of circa 35% - 36% in future financial periods as GLAS is renowned for its quality among domestic and export arena. The EBIT margins were healthy in the past due to curbed expenses levels. However, future inflationary pressure is expected to bite the margins in future nevertheless is expected to stay above the hurdle rate of 20%. The EBT margins were unhealthy in the past (FY07 – FY11) due to colossal finance cost and heavy debt levels. This was quite evident from the equity multiplier (financial leverage). However, with healthy cash flows, GLAS paid most of its expensive debt and refinanced via foreign currency loans. Hence the future EBIT margins may have bliss of light in the levels of20%.
-14.0%
-4.0%
6.0%
16.0%
26.0%
36.0%
46.0%
FY07 FY08 FY09 FY10 FY11 FY12A FY13E FY14E FY15E FY16E
Profitabilty
Revenue Growth Gross Profit Margin EBIT Margin
EBT Margin Net Profit Margin
14
The NP margins were quivering in the past due to the low interest cover. Despite, healthy top line and stable expenses levels expect to sustain margins hovering at 16%.
Liquidity and Efficiency Both current and acid test ratios were weak in the history due
to improper working capital management, yet new policies such
pre-order manufacturing, quick debt recovery and prompt
creditor payments had recently improved both ratios, hence we
believe this to strengthen the future working capital of GLASS.
In terms of gearing, the debt to equity ratio exorbitantly
increased to 175.2% due to the syndicated loan obtained to
construct the plant in Horana. Consequently the investment had
started to reap out cash flows, hence persistent debt
repayments expect to substantially improve future gearing.
Investor The ROA’s had been continuously improving with the healthy
cash flows generated from the investment in new factory. Glass
did not significantly invest on PPE subsequent to the giant
investment.
Thus we expect with no future bulky investments down the
pipeline, to generate healthy and heavy ROA’s in the
forthcoming financial periods.
The EPS and BVPS were quite unsatisfactory during FY09 to
FY11; however reverberate in FY levels with a robust bottom
line backed by staggering revenue and dipping finance cost.
We solemnly anticipate GLAS to perform solidly better in the
future with lower P/Es and PBVs, making the counter highly
attractive.
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
FY07 FY08 FY09 FY10 FY11 FY12A FY13E FY14E FY15E FY16E
Tim
es
No
. o
f d
ay
s
Working Capital
Recievable Days Inventory Days Payable Days
Current Ratio Acid Test Ratio
0
5
10
15
20
25
30
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Tim
es
LK
R m
n
Gearing
Total Debt Interest Cover Gearing(debt/equity)
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
(0.30)
1.70
3.70
5.70
7.70
9.70
11.70
FY09 FY10 FY11 FY12A FY13E FY14E FY15E FY16E
Tim
es
LK
R p
er s
ha
re
Investor Ratios
EPS (LKR) BVPS (LKR.) P/E (X) PBV (X)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
LK
r m
n
ROA vs Total Assets
Total Assets ROA
15
DUPONT ANALYSIS
Net Profit Margin
The net profit margin is subdivided as tax burden, interest
burden and EBIT margin.
The EBI margin is the operating profit per rupee of sales. GLAS
continuously changed its product mix switching from generic to
high end niche premium. Hence the gross profit margins were
robust since FY08, which later trickled to the operating profit.
These factors thickened the EBIT margins thus expected to
pursue in future.
The tax burden is the proportion of the company's profits
retained after paying income taxes. With the investment on
new factory during FY09 had brought the tax holiday.
Nevertheless this is expected to exhaust in FY13, hence the
benefit may be curtailed in the future.
The interest burden shows the effect of interest bearing debt on
the income statement. Heavy finance costs resulted in negative
PBT’s during FY09 and FY10. However, during FY11 the finance
cost drastically declined due to debt repayments and lowered
interest rates, hence led to a favourable interest burden.
Asset Turnover
The asset turnover measures the amount of sale generated
from the assets employed. During FY08 and FY09 heavy capital
investment strengthened the asset base, however did not lever
the revenue. Subsequently during FY09 and FY10revenue
growth was at 19% and 18% respectively, which revitalized the
asset turnover.
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
-70.0%
-50.0%
-30.0%
-10.0%
10.0%
30.0%
50.0%
70.0%
90.0%
FY06 FY07 FY08 FY09 FY10 FY11
NP
Ma
rg
in
Margin Analysis
NP Margin Tax Burden Interst Burden EBIT Margin
-
0.5
1.0
1.5
2.0
2.5
3.0
FY06 FY07 FY08 FY09 FY10 FY11
Tim
es
Asset Turnover vs Equity Multiplier
Asset Turnover Equity Multiplier
16
Equity Multiplier
This measures the proportion of debt in GLAS’s capital
structure. Construction of the Horana factory was mainly
financed via expensive syndicated debt which elevated the
financial leverage. However constant repayments had lowered
the equity multiplier in FY11. As per the denominator, healthy
earnings had enlarged the retained earnings that gave a
concrete equity value.
ROE
All the above ratios combine to give the overall return for the
equity holders of the company. The staggering recovery in FY11
successfully converted the negative ROE into an impressive
20.7%. Despite of lower equity multiplier, growing profit
margins and asset utilization efficacy contributed to the overall
growth in ROE.
-20.0% -10.0% 0.0% 10.0% 20.0% 30.0%
ROE
FY11
FY10
FY09
FY08
FY07
FY06
17
THE PLAN FOR FUTURE
GLAS is expected to thrive from the surge in demand, from the
North East markets. The company currently enjoys a monopoly
status locally hence the bargaining power over its customers.
Therefore, gives the opportunity to pass on the increase in costs
via selling price. This would position the company to generate
strong margins even though, at times when cost of production
increases.
Further alcohol consumption increasing, due to rising foreign
arrivals to the country, would definitely add value to its top line,
economic development taking place would increase per capita
consumption that would in turn contribute towards strong top
line growth. This is further justifiable as majority of its sales are
captured by Distilleries Company of Ceylon, Carsons
Cumberbatch (Lion Brewery and Ceylon brewery), Cargills
Ceylon Plc etc which would see their business performance
mounting with the country’s economic development.
The possibility of adding two more furnaces would expand its
production capacity by approximately 500MT per day (250MT
each). This would provide the opportunity of catering to the
incremental demand that will flow from its large customers
upon the economic developments and expected performance
growth expected from them.
Further, as energy costs is a key variable in the cost structure
and the company’s plan of looking at renewable energy plant in
time to come, therefore would avoid the company trimming
their margins owing to high-energy cost.
CONCERNS ON GLASS
As an organization with significant foreign contact, is highly
exposed to transaction risk (Foreign exchange risk). At an
instance where the rupee depreciates against the dollar
importation of soda ash would drive up the costs, which would
negatively affect the bottom-line.
The rise in world crude oil prices would curtail the margins as
energy costs accounts to 30%-35% of its cost of sales. However,
with the company’s target of constructing a renewable energy
plant would answer this issue.
Although the company enjoys 97% of the Sri Lankan market,
providing flacconage solutions, in the long run there is
possibility of its customers opting imports instead of locally
18
manufactured glass containers. This would in turn place the
bargaining power towards the customer.
VALUATION
Current Status……………
Share is valued at 10.0x based on four quarter trailing earnings. The four quarter trailing PE is at 10.0x (based on a Share Price of LKR7.90 and an EPS of LKR0.79) when compared to the Sector PE of 11.2x and Market PE of 14.1x.
Based on a 52 week price movement the share hit its lowest price of LKR3.40 whilst during the Bull Run it hit the highest price of 12.10.
Future Prospects……….
P/E and PBV Based Valuation
Forecast FY12E earnings are in line to LKR1, 024.6 mn. With the company functioning at full capacity of circa 240 metric tonnes per day, with a full pre-order book till 31st March 2012 and reduced finance cost, we expect the earnings to grow by blistering 77.1% YoY in FY12E to LKR1, 024.6 mn and a YoY growth of 21.2% FY13E to LKR1, 241.8 mn.
At a price of LKR7.90, with forecast EPS’s of LKR1.1 and LKR1.3 we derived at forward PE’s of 7.3x and 6.0 xs for FY12E and FY13E respectively.
Similarly, at a price of LKR7.90, with forecasted book values per share of LKR4.0 and LKR5.0 we derived a forward P/BV’s of 2.0x and 1.6x for FY12E and FY13E respectively.
Sharpe Ratio
On an adjustment of GLAS’s return to its risk (deviation of the share price), the derived Sharpe ratio of the counter is at +1.6 whilst the Manufacturing Sector records a Sharpe ratio of -0.2 GLAS’s volatile adjusted risk is high due to the counter’s deviation of returns has been 46.8% as opposed 18.7% of the sector. Hence GLAS’s risk premium (return) per unit of risk (standard deviation) is superior to diversified sector.
Price Assimilation Based Valuation
Based on an analysis of a historic 52 week price movement, we derived a price volatility of 21.4% on a mean of LKR 8.80 and a price standard deviation of LKR1.90. Furthermore, if it is assumed that the same upside momentum is witnessed pushing the price to LKR 9.40 (from the current level of LKR7.90), the forward PE multiples would be 8.7x in FY12E and 7.2x in FY13E.
*Price band LKR9.40 is based on an upside
growth of 21.4% derived via the 12 month
standard deviation of the market price.
**Price band LKR12.10 is the highest traded
price over the past 12 month period.
19
Moving forward, based on the highest price of LKR12.1, the
forward PE multiples would be 11.2x in FY12E and 9.3x in FY13E.
Residual Income Based Valuation
The residual income is net income less a charge for common shareholders’ opportunity cost in generating net income. It is the remaining income after considering the costs of all of a company’s capital.
Based on a risk free rate of 8.7% and current market average return of 10.1%, we arrived at a risk premium of 1.4%. Using the rolling forward method by considering the total return index (TRI) and GLASS share prices, we derived at an adjusted beta of 0.97. Incorporating all these into the Capital Asset Pricing Model (CAPM), we deduced a cost of equity of 10.05%.
The expected per share residual incomes were discounted from the cost of equity to derive at present values. Since GLAS is a local monopoly and nature of the industry is such that it requires heavy initial investment and fixed overheads, we believe the economic profit to sustain in future, hence the terminal value was derived based on a profit erosion factor of 1.
Overall, based on a current opening BVPS of LKR2.94, sum of present values of LKR2.62 and terminal present value of LKR3.87, we derived at an intrinsic value per share of LKR9.40.
Dividend Discount Model(DDM) Based Valuation This is a methodology for valuing the price of a stock by using predicted dividends and discounting them back to present value. The idea is that if the value obtained from the DDM is higher than what the shares are currently trading at, then the stock is undervalued. The prime reason for use of this technique on GLAS is that during FY11, the dividend payout was circa 50% on an EPS of LKR0.61. Also the parent is located overseas (Piramal Glass India), thus is legitimate mode of repatriating profits. Hence we expect GLAS to become a solid dividend payer in future. Current DPS of LKR0.30 and a normalized market risk premium for Sri Lanka of 8% was taken as the growth factor. By discounting with a cost of equity 10.05% we arrived at an intrinsic value per share of LKR15.80.
Sensitivity Analysis
Assumptions
Assumptions
Sensitivity Analysis
20
Discounted Forward Free Cash Flow to Equity (FCFE)Based Valuation
Free cash flow to equity is the cash flow available to the company’s holders of common equity after all operating expenses, interest and principal payments have been paid and necessary investments in working capital and fixed capital have been made.
As mentioned above, we took a conservative cost of equity of 10.05%. A terminal growth rate of 5% and an erosion factor of 1 were taken based on the monopolized status of GLAS and its dominant position among the loyal clientele. However when determining the free cash flow to equity, we solely based our forecast on recurring cash flows excluding any exceptional disposal proceeds from the possible sale of land bank at Ratmalana.
Hence based on an intrinsic value of equity at LKR16.1 bn and total quantity of circa 950 mn shares, we derived at an intrinsic value per share of LKR17.00.
Target Price Range
By considering the all three valuation techniques and incorporating a sensitivity analysis, we derived at a forward price range between LKR9.00 – LKR14.00 over a 12 month time horizon.
Thus, given the expected manufacturing sector steered by economic development in the island together with the company’s change in product mix from generic to premium, and reduced finance cost via debt repayment delivering robust ROE’s, we rate in the medium to long term (over a twelve month time horizon) GLAS as a solid fundamental BUY.
Assumptions
Sensitivity Analysis
21
GLAS VS INDICES
*The radar charts used, benchmarks the GLAS
performance against the relevant index in terms of
PE, PBV, ROE and Dividend Yield.
22
FINANCIAL SUMMARY
Glass Quarterly Performance
1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12
Revenue 469.4 503.8 383.7 657.2 679.4 741.9 813.5 701.3 799.8 951.2 909.5 858.2 868.2 1,026.2 1,166.1 1,102.7 1,105.2 1,279.5
Cost of sales (316.1) (368.9) (328.6) (539.2) (581.0) (614.3) (608.4) (542.1) (624.3) (682.2) (648.6) (659.9) (640.7) (641.0) (806.3) (809.9) (794.6) (850.1)
Gross profit 153.3 134.8 55.1 118.1 98.4 127.6 205.1 159.2 175.6 269.0 260.9 198.3 227.5 385.2 359.8 292.8 310.6 429.5
Other operating income 0.1 0.0 4.1 0.2 0.2 53.0 0.0 0.1 0.0 0.1 0.1 0.1 0.1 0.2 0.3 11.0 3.1 3.5
Distribution costs (10.9) (22.3) 1.2 (8.4) (16.3) (13.9) (17.0) (22.2) (22.0) (33.9) (30.6) (14.9) (18.0) (70.8) (17.3) 8.3 (27.6) (38.1)
Administrative Expenses (63.8) (43.5) (45.3) (49.8) (62.7) (50.2) (64.5) 0.7 (78.4) (67.6) (77.3) (59.4) (69.9) (73.9) (64.7) (72.2) (85.3) (94.6)
Profit from operating activities 78.7 69.0 15.3 (173.8) 19.6 116.5 123.6 137.8 75.1 167.7 153.1 124.1 139.6 240.7 278.1 240.0 200.8 300.3
Finance cost (11.7) (10.2) (11.4) (129.6) (139.8) (149.7) (177.2) (192.0) (193.9) (167.0) (124.5) (95.9) (86.5) (83.7) (74.3) (62.0) (59.5) (53.9)
Profit before taxation 66.9 58.8 3.9 (80.4) (120.2) (33.2) (53.6) (54.2) (118.7) 0.7 28.7 28.2 53.2 157.0 203.8 177.9 141.3 246.4
Income tax expense (23.3) (14.2) (2.3) 25.8 0.0 0.3 0.0 (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 (13.7) 0.4 0.0 (4.0)
Net profit for the period 43.6 44.6 1.5 (54.6) (120.2) (32.9) (53.6) (54.3) (118.7) 0.7 28.7 28.2 53.2 157.0 190.1 178.4 141.3 242.4
FY08 FY09 FY10 FY11 FY12
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The report has been prepared by Asia Wealth (Private) Limited. The information and opinions contained herein has been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information
has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness, reliability or suitability. All such information and opinions are subject to change without
notice. This document is for information purposes only, descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of
an offer, to buy or sell any securities or other financial instruments. In no event will Asia Securities be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising out of,
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Asia Securities may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Not all customers will receive the
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