Garware Polyester Ltd. – Introspeck

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Incorporated in 1957, Garware Polyester Ltd. (GPL) is engaged in manufacturing of polyester films, which are used in variety of end applications like Packaging, Electrical & Motor and Cable Insulations, Shrink Film for label application, Coloured Polyester Films for Window Tint application, TV Screen, Safety etc. GPL has been leading exporter of polyester films and also holds patented technology for manufacturing the UV stabilized dyed films (sold under the brand name ‘Sun Control Films’ and ‘Global Window Films’ in both domestic and exports market). Key application is commercial / residential buildings and automobiles.

Over the long term the company fundamentals have been quite poor –

Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 899 795 777 843 896 857 874 833 948 925
increase by -12% -2% 8% 6% -4% 2% -5% 14% -2%
   
EPS 83 14 12 4 8 7 10 14 35   37
increase by -83% -11% -64% 73% -7% 36% 48% 146% 5%
   
Book Value 182 197 233 237 244 251 538 556 591 604
increase by 8% 18% 2% 3% 3% 114% 3% 6% 2%
   
EBITDA 31.7% 11.1% 8.9% 8.2% 6.7% 9.5% 8.3% 10.0% 15.2% 17.5%
EBIT 27.3% 5.8% 3.8% 4.2% 5.0% 7.5% 6.7% 8.4% 13.7% 15.3%
PBT 23.8% 4.2% 1.7% 1.6% 3.0% 3.1% 3.8% 6.0% 12.6% 14.6%
Tax rate 10.7% 3.3% nmf 25.9% 34.6% 38.1% 33.2% 33.5% 31.9% 36.1%
PAT 21.3% 4.0% 3.6% 1.2% 2.0% 1.9% 2.6% 4.0% 8.6% 9.3%
Dividend Payout 6.5% 10.9% 0.0% 0.0% 0.0% 0.0% 10.3% 14.0% 28.5% 27.0%
Asset Turns 1.1 0.9 0.8 0.8 0.9 0.8 0.5 0.5 0.6  0.6
Total Assets / NW 1.9 1.8 1.8 2.0 1.8 1.7 1.3 1.2 1.2  1.2
RoNW 45.6% 7.0% 5.2% 1.9% 3.1% 2.8% 1.8% 2.6% 5.9% 6.1%
Core RoNW 34.7% 3.4% 2.5% -0.1% -0.1% 1.5% 1.2% 2.1% 5.5% 5.6%
RoCE 39.4% 7.2% 9.0% 3.5% 3.4% 4.8% 2.7% 3.4% 6.6% 6.6%

While 2011 was a very good year for the company on account of increased export orders and improved realizations due to high demand (especially from the Solar PV cells manufacturers), its financial performance after that has been quite lacklustre. While the revenues have been stagnant over the years, there are some indicators of revival in fundamentals –

  1. Operating margins have been on an increasing trend over last 3 years, almost doubling from 8% to 15%. This has been on account of higher sales mix of value added products, and better capacity utilization.
  2. Despite the margin improvement, GPL’s RoE and RoCEs are still not above the cost of capital. However, these numbers are somewhat understated since the company revalued its landbank upwards in 2017 by almost 680 crores, which has depressed the Balance sheet ratios.
  3. The company has started paying a dividend in the last 3 years.
  4. Borrowing, which stood at INR 312 crores as of Mar 17, currently stand at INR 121 crores as of Mar 20.
  5. GPL’s WC cycle has also been improving over the years –
Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Debtor Days 12   9 20 25 20 17 26 17 22 21
Inventory Days 58 61 49 70 60 64 51 46 39 50
Payable days 18 13 16 19 19 21 22 31 38 32
Cash Conversion Cycle 52 57 53 76 60 60 55 32 23 39

The above improvement in working capital has also led to improvements in cashflows.

Despite its improving fundamentals, there are certain serious lapses in corporate governance which make these improvements quite unsustainable –

  1. Transactions with related party entities –

GPL has outflows to its related parties in the form of processing charges paid to a group company called Garware Industries Ltd. (100% owned by Garware family), rent paid to family individuals and group companies, expenses incurred for Garware Community center (excluded from CSR exp) and exorbitantly high remuneration to family members in Board of Directors.

Below are the related party transactions for the last 5 years (in INR crores)  –

Particulars 2016 2017 2018 2019 2020
Processing Charges – Garware Inds 18.3 32.3 30.4 32.0 33.0
Rent – Group Companies   2.6   3.0   2.9   4.8   4.8
Community Center       0.8   1.3   5.5
Garware Family Remuneration 11.5 11.1 11.9 13.7 15.4
           
Total Value outflow 32.4 46.4 45.9 51.8 58.7
           
PBT 26.7 33.6 49.8       119.9       134.7
outflow as a % of PBT 122% 138% 92% 43% 44%
as a % of sales 4% 5% 6% 5% 6%

As can be observed from above, money siphoned out through related party transactions forms a significant part of profits and sales. Payment of Processing charges to Garware Industries Ltd. started in 2017, before which there was lower sale and higher purchase from this entity (another possible method of siphoning the funds out

2. Revaluation of Assets

IND AS in 2018, allowed one time retrospective revaluation of assets, which could either be their market values, or it could be their written down values as on date in the books of accounts. While most companies went for WDV as deemed value for assets, GPL decided to revalue the land bank in its books, which led to an increase in block of assets from INR 638 crores to INR 1,222 crores, increasing the book value per share from INR 231 to INR 538.

However, what is noteworthy here is while the land value has appreciated significantly in the books, the company took a significant write off to their plant and machinery reducing its value from INR 266 crores to INR 166 crores, reducing the P&M by 33% –

This leads to 2 observations –

  1. Company’s depreciation as a % of sales has gone down, aiding its margin expansion, as while P&M are depreciable assets, Land has no depreciation –
Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Depreciation as a % of Sales 4.4% 5.3% 5.1% 4.0% 1.7% 2.0% 1.6% 1.6% 1.5% 2.2%

2. With a 33% write down in plant and machinery, it implies that GPL was under depreciating its assets in the earlier years, thus overstating its margins.

Thus despite the improving business prospects, I have not looked at the business further, since corporate governance measures are likely to negate all the profitability improvements.

Happy Investing!

Disclaimer: I am not a SEBI registered analyst and this is not a Buy/Sell recommendation. Pls do your own due diligence before taking a call. I have not traded in the stock in the last 90 days.



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Umang Shah

Umang Shah

Through his writing, Umang shares his perspectives on how he thinks of investing, decision making, books and life in general.
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