Qualitative

Moat Analysis

XYZ 1 XYZ 2 XYZ 3 XYZ 4 XYZ 5 XYZ 6

1) Intangible Assets
Brands/Qualit Strong Strong Strong Strong No Yes
Patents & Tra No No No No No No
Regulatory Pro No No No No No Yes

2) Switching C No No No No No No

3) Network Ef No No No No No No

4) Cost advantage
Distribution Yes Yes Yes No Yes Yes
Location No No Yes No No Yes
Access to raw No No No No No Yes
Relative Scale No No No Yes Yes Yes

Company growt 25.00% 25.00% 23.00% 20.00% - 13.00%

ROCE (%) 25.00% 32.11% 28.98% 32.33% 20.00% 25.11%
Capex or Utiliz Capex Both Capex Capex Capex Capex

Industry Attractiveness

Risk of techno Low Low Low Low Low Low

Threat of subs Low Medium Low Low Low Medium
Extent of pric Medium Medium High High High High
Reliance on si No No No Undecided No No
Threat of conc Emerging Yes Emerging Yes Yes No
Threat of new Medium Low Medium Low Very Low Low
Industry Struc Oligopoly (U) Duopoly (O) Oligopoly (U) Monopoly (U) Oligopoly (O) Duopoly (U)
Industry Growt 15.00% 13.00% - 5.00%

Stock Evaluation

Price Moment Weak Strong Strong Flat Weak Flat

Quality of the Narrow Moat Wide Moat Narrow Moat Narrow Moat Wide Moat Wide Moat
Cheap/Expens Expensive Expensive Expensive Fair Fair Fair
Re rating stag Over Over Over Over Underway Underway
Earnings Mom Slowing Steady Strong Slowing Strong Strong

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 Qualitative

XYZ 7 XYZ 8 XYZ 9 XYZ 10 XYZ 11 XYZ 12

Yes Yes Weak Yes Yes Yes

No No Yes No Yes No
Yes No No No No No

No Yes No Yes Yes Yes

No No No No No No

Yes No Yes Yes Yes No

Undecided Yes Yes No No No
Yes No No No No No
Yes No Yes Yes Yes No

10.00% 15.00% 25.00% 13.00% 12.00% 20.00%

14.00% 27.27% 18.00% 25.00% 20.00% 18.00%
Capex Utilization Capex Both Utilization Utilization

Low Low Low Low Low Low

Medium Low Medium Low Low Medium
High Low Very High Medium High Medium
No No Yes No Undecided Undecided
No Yes Emerging Yes No Yes
Undecided Low Low Very Low Low Low
Oligopoly (U) Duopoly (O) Oligopoly (U) Oligopoly (O) Oligopoly (U) Oligopoly (U)
7.00% 12.00% 10.00%

Flat Weak Strong Weak Strong Strong

Wide Moat Wide Moat Narrow Moat Wide Moat Narrow Moat Narrow Moat
Undecided Fair Fair Cheap Fair Cheap
Underway Underway Underway Early Early Early
Weak Slowing Steady Weak Strong Steady

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 Checklist

Sl no Category

1 Industry & Market Size

2 Competition

3 Business

4 Financials

5 Shareholding

6 Due Diligence

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 Checklist

7 Valuation

8 Risk Management

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 Checklist

What products/services is the company into?

What is the market size and what has been the industry growth rate?
What has been the rate of technology change in the industry?
Who are the key influencers on the buying decision?
How has the industry changed over the past 10 years?
What is the extent of Govt regulation/interference?

Is the industry structure consolidated or fragmented?

What is the share of organized and unorganized players?
Is the company a Top 3 player in the industry?
What is the extent of product/service differentiation across competitors?

Is the demand cyclical or structural?

Who are the firms customers & suppliers?
Is this a business driver or a business enabler?
What is the annuity component of the business?
Is demand capacity utilization or capacity expansion driven?
Can this business grow at 12%+ over the next 5 - 10 years? Why?

Notes on Balance Sheet

Notes on P&L
Notes on Cash flow
What is the current capacity utilization?
What has been the trend in working capital over the period?
What capex plans has the company announced?
Does the company have avenues to invest cash back into the business?
How has realization been growing over the period?
What is the incremental ROIC expected to be?
Is the company forced to give aggressive discounts to push sales?
What has been the investment into ASP over the years?
Has the company been working on product portfolio expansion?

What is the promoter holding?

What is the MF/DII/FII holding?
Who are the marquee investors currently invested?
Split/Bonus actions?

What is the quality of voluntary disclosures in the AR?

Has the management followed through on past announcements/strategies?
Has the accounting policy been consistent over the years?
Has the depreciation been consistent over the years?
What
What is
arethe
thepromoter remuneration?
related parties & transactions? If this is a business group, how well are the
other entities being managed?
Any over the top statements/plans by the management?
Has the management shown the tendency to bite off more than they can handle?
Equity dilution/accelerated debt raising instances?
How has the management been allocating capital over the years?

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 Checklist

What proportion of the promoter holding is pledged?

What scenario is the CMP discounting?

What parameters is the valuation most sensitive to?
What real world events need to play out for this growth rate to materialize?
What is the margin of safety on offer?
Stock discovery process - what stage are we at?
How many analysts regularly track the stock?
Does this offer a realistic possibility of 2X in 3 years?

Risk of rapid technology obsolescence?

Risk of Govt intervention/regulation?
Customer concentration risk?
Commodity Risk?
Invisible/Quasi debt?
Valuation Risk wrt growth?

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 Checklist_template

Sl no Category

1 Industry & Market Size

2 Competition

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 Checklist_template

3 Business

4 Financials

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4 Financials
Checklist_template

5 Shareholding

6 Due Diligence

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 Checklist_template

7 Valuation

8 Risk Management

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 Checklist_template

What products/services is the company into?

What is the market size and what has been the industry growth rate?

What has been the rate of technology change in the industry?

Who are the key influencers on the buying decision?

How has the industry changed over the past 10 years?

What is the extent of Govt regulation/interference?

Is the industry structure consolidated or fragmented?

What is the share of organized and unorganized players?

Is the company a Top 3 player in the industry?

What is the extent of product/service differentiation across competitors?

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Is the demand cyclical or structural?

Who are the firms customers & suppliers?

Is this a business driver or a business enabler?
What is the annuity component of the business?

Is demand capacity utilization or capacity expansion driven?

Can this business grow at 12%+ over the next 5 - 10 years? Why?

Notes on Balance Sheet

Notes on P&L

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Notes on Cash flow

What is the current capacity utilization?

What has been the trend in working capital over the period?

What capex plans has the company announced?

Does the company have avenues to invest cash back into the business?
How has realization been growing over the period?
What is the incremental ROIC expected to be?
Is the company forced to give aggressive discounts to push sales?
What has been the investment into ASP over the years?
Has the company been working on product portfolio expansion?

What is the promoter holding?

What is the MF/DII/FII holding?
Who are the marquee investors currently invested?

Split/Bonus actions?

What is the quality of voluntary disclosures in the AR?

Has the management followed through on past announcements/strategies?

Has the accounting policy been consistent over the years?

Has the depreciation been consistent over the years?

What is the promoter remuneration?
What are the related parties & transactions? If this is a business group, how well are the
other entities being managed?
Any over the top statements/plans by the management?

Has the management shown the tendency to bite off more than they can handle?

Equity dilution/accelerated debt raising instances?

How has the management been allocating capital over the years?
What proportion of the promoter holding is pledged?

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What scenario is the CMP discounting?

What parameters is the valuation most sensitive to?

What real world events need to play out for this growth rate to materialize?

What is the margin of safety on offer?

Stock discovery process - what stage are we at?

How many analysts regularly track the stock?
Does this offer a realistic possibility of 2X in 3 years?

Risk of rapid technology obsolescence?

Risk of Govt intervention/regulation?

Customer concentration risk?

Commodity Risk?
Invisible/Quasi debt?
Valuation Risk wrt growth?

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Notes
Paperboard based packaging solutions for clients in the Liquor, cigarette & FMCG space, conversion work for some clients as
their specifications & corrugated boxes
Scope of services includes -
Designing the folded cartons based on inputs from brand managers and ad agencies
Programming the printers to print the artwork using the right combination of ink, labels etc followed by laminations, pressing an
other associated activities
Deliver the finished product to client packaging centers in flat form
Assist client teams in coding the right combination for the CNC machines in folding the cartons the right way
Market size for paperboard packaging appears to be in the range of 12000 -13000 Cr per annum
Paperboard market growing at 7.5-8% per annum with value added segment (used in packaging) growing at 10%+ as per ITC
SBU & other sources

Technology is imported from Europe, most players in the segment end up buying from the same tech vendors (KBA Germany e
Refresh of technology is periodic with large investments needed into building assets that can be used to print
1) Brand Management team of FMCG players to ensure the right message through packaging
2) Creative agency in charge of the campaign design & execution
3) Procurement teams for commercial & sourcing discussions
4) Packaging shop floor teams to integrate on the actual packaging execution

Packaging is assuming greater importance in the end segments due to -

1) Premiumization
2) Greater range of sizes due to pricing pressures & packaging regulations
3) Modern retail where customers picks the product off the shelf as opposed to asking for a particular product in a mom and po
kirana store
4) Customers demanding a lifestyle product in the affluent segment

On an average 3-6% of sales is being spent on packaging by clients which indicates that packaging is a large component of th
marketing and branding efforts. This is surely not a commodity anymore

Minimal other than the following -

1) Packaging regulations from time to time
2) Import duties on raw material (paperboard)
3) Excise duty on paperboard manufacturers and packaging players

From the point of view of paperboard makers Govt interference is huge due to a deficit of raw materials and controllership of fo
land by the Govt. Raw materials will either need to be captively developed, bought from forest dept or imported

Paper Mills – Consolidated structure due to lack of access to raw materials, scale needed to spread process manufacturing co

Packaging players -

Low end box manufacturers – Dime a dozen, long tail of unorganized players
High end packaging manufacturers – Consolidated structure (ITC Packaging, Parksons Packaging, TCPL Packaging, Ruby Ma
(now MVW), Manipal Packaging, Borkar Packaging)

No clear data available on this, ITC is the largest player by far followed by other players each with 3-6% market share
Yes, appears to be a Top 5 if not Top 3
Differentiation in quality and integration with customer organization is high compared to unorganized players
Within large organized players the difference is minimal, customer relationships will be the key differentiator in combination wit
strength of the balance sheet

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Structural since demand drives off categories that are traditionally slow to medium growth industries (lower to higher single dig
Demand can show spikes and troughs but nature is surely not cyclical

Once locked in customers will continue to give repeat business

Customers – Cigarette makers, Liquor makers, FMCG, OTC Pharma players

Suppliers – Paper Mills
Equipment – Europe based printing equipment manufacturers
Paperboard – India based paper mills or imported from SEA
Ink – Sourced from the specialist makers or made inhouse
Business Enabler clearly, an important piece in the overall chain
Mostly annuity based, B2B model with limited players will ensure that repeat business is high
Capacity utilization based, sudden collapse in demand is a low probability event. Once capacity is in place it is very likely that t
production engine will keep going

Industry growth in the value added segment is 10%+

Specific company growing volumes at 14% over the past 7 years
Realization growth has been more than 5% per annum
Good chance that the business can grow at 12%+ unless paperboard realizations collapse from here big time

The business has and will be heavy on fixed assets and will not be a high turnover business – Likely that the company will get
based advantages beyond a point
WC needs have been kept under control, at no point of time has the WC spiked over the past 7 years
Growth has not come at the expense of looser credit or higher inventory
Inventory days at < 40 implies that sudden inventory writedowns due to price variations won't be too much
D/E at 1.3+ is high since the technology needed to run a high quality printing press is expensive, this can work as a moat again
new entrants who cannot be profitable unless they operate at a minimum level of scale
So far the value accretion to shareholders has been linear wrt the increase in balance sheet size, need to evaluate where exac
this change in favor of faster value accretion to shareholders
Equity capital has been steady with no major equity dilution over the past 7 years, warrants were issued to promoters in 2011 a
converted

EBITDA margins have been very steady which implies this is likely to be a cost + margin business
EBITDA margins will increase if the conversion work % comes down and exports continue to go up
Likely that this will improve margins as the OCF improves beyond a scale and D/E trends down
Realization growth has been high, this will be the case as long as paperboard prices show a positive trend though this is some
one should not bank on
Sustainability of volume growth appears to be the key here
Clearly these margins indicate a customer advantage as opposed to a production based one
This will not be a high asset turnover business since the underlying technology is not cheap and not easy to procure
Scale based advantages will play out but unlikely to be a game changer here on given that critical mass appears to have been
reached already
This is a 18% ROCE business where the predictability and sustainability of earnings growth is high for entrenched players
No challenges in distribution or logistics since this is point to point shipping, plants can be planned around client locations
Higher cash profits reflect in dividend payouts as well (20% payout ratio)

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Operating cash has always been very high relative to the EV

Investment into WC has been minimal over the period which implies that the relationship with suppliers & customers is very ste
and not subject to sudden changes
High investment into fixed assets has been taking away most of the OCF
Cash flow beyond a scale has the potential to change the nature of the balance sheet since volume growth cannot explode in a
business like this. Once the business becomes FCF positive expect the margins to increase over a period of time
Current OCF yield at 10%+, business appears cheap this way
No clear data available on this
In a business like this where demand and volumes are relatively predictable operating leverage and under utilization of capacit
rare
Very steady and well under control. Do not see any challenges on this front
Approx 60 Cr + capex will be needed here on every year
This will call for regular investments to drive incremental growth
The key tradeoff to be watched will be Cash flow Vs Capex needs
Yes, given that the underlying sector is growing at 10%+. While reinvestment rate will not be very high, don't think cash build u
happen till the D/E drops below 0.5, good 5+ years to go before that happens
Yes but not due to any great value addition, hence may not be sustainable. Do not bank on this
Will be steady since this is not an operating leverage or demand expansion play
No
Not needed since this is a B2B with concentrated exposure to customers
Yes, has been selling to newer verticals. No other product diversification maybe needed here

Approx 60%, has increased in the past 12M

No DII holding, no FII invested
Anil Goel, Vijay Kedia & Dolly Khanna (may have sold off a large part of the stake)
Last Bonus in Sep 1991
Last Rights issue in Sep 1993
No Split
Last change in Share Capital was in 2011

Disclosures over and above what is mandated by regulations is minimal. This is expected for a company of this scale where
institutional investor interest has been non existent. Would not view this as a negative
Not very vocal in articulating their approach and strategy, don't really have too much on the table to make an assessment here
this as a black box
Yes, simple business with not too many moving parts. Not much scope for accounting jugglery as well
Yes till FY2015 where the life of assets has been extended and there is a subsequent fall in depreciation. This is in line with oth
companies as well
In FY2015 the senior management remuneration is 2.5 Cr on a PAT base of 32 Cr.
No significant related party transactions. Family appears to have multiple businesses as per an interview – Textiles, jute, chem
tea & sugar. Colleges in Jaipur – Kanoria group started in 1940
None, Saket Kanoria comes across as a well ground entrepreneur in his interviews

None, Saket Kanoria comes across as a well ground entrepreneur in his interviews
Warrants issued to promoters in 2011 is the last instance of equity issuance. No instances of accelerated debt in the period
considered
Capacity addition has been funded through debt since internal cash flows weren't sufficient all the time. Going forward will nee
see how the debt levels change, any illogical spike in debt will need to seen very seriously. Dividend payout of 20% seems to b
norm
None

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Sales growth (value) of 12% per annum with a reduction in D/E to < 1 in 3 years
EBITDA holds steady at 16% over the period
No non linear PAT growth over the period, just a cleaning up of balance sheet
ROCE at 18% over the period, ROE will trend down over the period from current level due to higher reserves accretion
Predictable & sustainable growth over the period, not much of a delta from realization growth
No collapse in paperboard prices, Govt is likely to step in and safeguard the domestic industry from cheap imports
WACC at 12%
Not much of a range in terms of outcomes

EBITDA margin staying steady needs to play out

Paperboard prices do not collapse from here
Company will turn FCF positive from FY17 onward, incremental cash to be used to pay off debt
Any capex that is higher than current rate
No collapse in urban consumption from here, especially in premium segments
The growth rate being discounted appears doable, not too many things need to go right from here since the variables aren't
unpredictable or high in number
Cheap on a forward P/E basis
High OCF yield, stock appears very reasonable though this isn't a mouth watering level

First stage of discovery over after the Parksons packaging deal in 2014 following which the price has spiked by 2.5X in 1 years
Not many, firstcall and boutiques
Looks likely as long as the bottom does not fall out of the markets in the current correction

Not high, technology changes time to percolate when you have limited equipment suppliers. Threat of substitute products may
medium to high here
Possible only on the raw material side, will affect the paper mills more than converters like TCPL
Inherent in the business model, they will keep selling to concentrated buying centres. Watch out for signs where receivables ar
spiking higher or margins are dropping. Concentration risk is the source of the narrow moat that the company enjoys, hence a
edged sword
Present, paperboard prices may have a down cycle as well. Need a buffer in the valuation for this
Cannot see anything other than a unionized workforce where downsizing maybe slow and painful
At CMP this risk is minimal

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 Capacity Production Utilisation
MT MT %
Flexituff International 36,800 NA NA
Plastene India Limited 38,600 26,273 68%
Jumbo Bag Limited 6,000 5,073 85%
Jai Corp NA 42,315 NA
Positive Packaging Limited NA NA NA
Kanpur Plastipack Limited 14,600 13,627 93%
KCP Karur Limited NA NA NA
Shankar Packaging NA NA NA
Shree Tirupati Balaji FIBC Ltd 6,000 NA NA
Total 102,000 87,288

Global market for FIBCs to increase from 580 mn units in FY17 to 780 mn units in FY22 at a CAG
Not matching the statistics on pg 77 of Plastene DRHP

MT mn units
Export from India 291600 83
 Revenue 5 yr revenue growth
INR cr %
NA NA
612 8% Sales / MT 155
86 4% RM 77
474 2% labor 22
NA NA power + others 14
150 NA 42
NA NA 27%
NA NA
68 31% EBIT / MT 18
1,390
56
mn units in FY22 at a CAGR of 6.4%
32%

MT / unit
3513.253
Criteria Value
FINANCIAL ANALYSIS

1 Sales growth CAGR >15% for last 7-10 years

2 Profitability NPM >8%

3 Tax payout >30%

4 Interest coverage >3

5 Debt to Equity ratio < 0.5
6 Current ratio > 1.25
7 Cash flow CFO > 0

8 Cumulative PAT vs. CFO cPAT ~ cCFO

VALUATION ANALYSIS
1 P/E ratio Read: 3 Principles to Decide the Investable P/E Ratio of Stocks
P/E to Growth ratio (PEG
2 ratio) <1

3 Earnings Yield (EY) > 10 year G-Sec yield

4 P/B ratio <1
Price to Sales ratio (P/S
5 ratio) < 1.5

6 Dividend Yield (DY) > 0%

BUSINESS & INDUSTRY ANALYSIS

1 Comparison with Sales growth > peers
industry peers
Increase in production
2 capacity and sales Production capacity & sales volume CAGR ~ Sales CAGR
volume

3 Conversion of sales Profit CAGR ~ Sales CAGR

growth into profits

4 Conversion of profits cPAT ~ cCFO

into cash
Creation of value for
5 shareholders from the Increase in Mcap in last 10 yrs. > Retained profits in last 10 yrs.
profits retained

MANAGEMENT ANALYSIS
A) Subjective parameters

1 Background check of Web search

promoters & directors

2 Management succession Good succession plan should be in place

plans
B) Objective Parameters
3 Salary of promoters vs. No salary increase with declining profits/losses
net profits
 4 Project execution skills Green/brownfield project execution

5 Consistent increase in Dividend CAGR > 0

dividend payments

6 Promoter shareholding > 51%

7 Promoter buying the Insider buying ++

shares
8 FII shareholding ~ 0%

OTHER BUSINESS PARAMETERS

1 Product diversification Pure play

2 Govt. influence No govt. interference in profit making

Margin of Safety
MoS in Purchase PEarnings Yield (EY) EY > 10 Yr G-Sec Yield
Self Sustainable Growth SSGR > Achieved Sales Growth Rate
MoS in Business Rate (SSGR)
Model
Free Cash Flow (FCF) FCF/CFO >> 0
Credit Rating
1 Credit Rating History BBB- & above
 Remarks

Growth should be consistent year on year. Ignore companies where sudden spurt of sales in one
year is confounding the 10 years performance.
Very high growth rates of >50% are unsustainable.
Look for companies with sustained operating & net profit margins over the years
Tax rate should be near general corporate tax rate unless some specific tax incentives are applicable
to the company.

Look for companies with D/E ratio of as low as possible. Preferably zero debt

Positive CFO is necessary

It’s great if CFO meets the outflow for CFI and CFF
Cumulative PAT and CFO are similar for last 10 years

Such companies provide good margin of safety

EY should be greater than long term government bond yields or bank fixed deposit interest rates
However, I find P/B ratio irrelevant for sectors other than financial services
James O’Shaughnessy: Buy if P/S ratio is < 1.5 and sell if >3
Higher the better.
DY of >5% is very attractive. However, do not focus a lot on DY for companies in fast growth phase

The Company must show sales growth higher than peers. If its sales growth is similar to peers, then
there is no Moat

Company must have shown increased market penetration by selling higher volumes of its
product/service

A Moat would result in increasing profits with increasing sales. Otherwise, sales growth is only a
result of unnecessary expansion or aggressive marketing push, which would erode value in long
term
If cPAT >> cCFO, then either the profits are fictitious or the company is selling to any John Doe for
higher sales without having the ability to collect money from them

Otherwise company is destroying wealth of shareholders

There should not be any information questioning the integrity of promoters & directors

Salary being paid to potential successors should be in line with their experience

promoter should not have a history of seeking increase in remuneration when the profits of the
company declined in past
Company should have shown good project execution skills with cost and time overruns.
Exclude capacity increase by mergers & acquisitions.

Dividends should be increasing with increase in profits of the company

Higher the better

If promoter of a company buys its shares, investors should buy too

the lower the better

Company should be either a pure play (only one business segment) or related products. Pure play
model ensures that the management is specialized in what they are doing.

Entirely different unrelated products/services are a strict NO. An investor should rather buy stocks
of different companies, if she wants such diversification.
No cap on profit returns or pricing of product.
No compulsion to supply to certain clients.

Higher the EY than 10 Yr G-Sec Yield, the better

Higher the SSGR than achieved Sales Growth, the better

Higher the FCF as proportion of CFO, the better

Current credit rating should be minimum BBB-

Credit rating should have been improving over the years