John Keells Stock Brokers (JKSB) is forecasting Piramal Glass (Ceylon) Plc to record earnings of Rs. 688 million in financial year 2012 up by 19% over the previous year.
This projection was following GLAS releasing its first quarter accounts. Here are excerpts of JKSB earnings update on GLAS.
Piriamal Glass Ceylon PLC (GLAS) was incorporated in 1955 and is currently the sole manufacturer of glass and glass containers in the country, catering to over 95% of domestic demand. The company’s sand processing plant and shrink film plant is currently located in Naththandiya (where silica, the key raw material in glass production, is found). The company’s main glass plant in Horana has a production capacity of 250 tonnes a day, to cater to the full demand for its products (domestic and export). The company’s key market segments include food & beverage, pharmaceuticals, agro chemicals and cosmetics, with over 50% of revenue driven by supplying glass bottles to the food and beverage sector with the balance spread among other segments.
GLAS recorded an impressive earnings growth of 165.7% YoY during 1QFY12 to reach Rs.141.3 m, on the back of a healthy revenue growth of 27.3% YoY and improved gross profit margins from 26.1% achieved in 1QFY11 to 28.1% during the quarter (which however stood below the FY11 average of 30.4%).
GLAS enhanced its product mix to include value added products and premium pricing, thereby enhancing revenue growth during the quarter. Production volumes improved during 1QFY12 over the last year’s comparative quarter, while exceeding a capacity utilisation of 90%. The current average daily production is about 235 tonnes per day.
The domestic market segment showed an impressive revenue growth of 32.5% YoY to reach Rs. 823 m during 1QFY12 (from Rs.621 m in the last year’s comparative quarter). This resulted in an increase in the domestic market contribution to 74.5% from 71.5% in the respective quarter last year (which however stood below the FY11 average contribution of 75.9%).
The export market demand showed signs of improvement with revenue increasing to Rs.282.2 m during 1QFY12 (from Rs.247.2 m achieved during 1QFY11), representing a 14.2% YoY growth. GLAS’s exports were centered in niche high-end markets (for which the company supplied coloured bottles for the liquor and wine segments), hence realising high margins for the company. India remained as the main market, accounting for a dominant share of 60-70% of export revenue.
GLAS’s gross margins improved due to production efficiencies and economies of scale. Operating margins improved marginally from 61.7% in 1QFY11 to 64.6% in 1QFY12, given a sharp increase in operating costs. The company achieved higher margins despite increased production costs driven by, 1) increased raw material prices (furnace oil and LP Gas); and 2) higher electricity expenditure (which is the main cost component accounting for over 35% of production costs).
Other operating income exceeded Rs.3m during 1QFY12, mainly due to scrap sales.
Distribution and administration costs grew by a sharp 53.7% and 22% YoY during 1QFY12, due to increased production and marketing activities aimed at stimulating sales volumes.
Finance costs declined by a substantial 31.2% YoY during 1QFY12 enhancing GLAS’s bottom line growth, on the back of lower interest rates and improved working capital management.
The company is currently enjoying a tax free holiday, which is due to expire as at the end of FY13 (a tax rate of 10% will be applicable for FY14 and FY15, and a 20% rate from FY16 onwards).
Outlook and Valuations
Going forward growth in the food and beverage industry and other segments should continue to grow demand for glass containers despite competition from other packaging substitutes manufactured from plastic sources (as glass is considered a preferred form of packaging).
The company’s capital expenditure is estimated as Rs.150 m, for regular factory maintenance and upgrades during FY12. If the current demand growth trend continues into the future, the company anticipates value creation, capacity addition, and focus only on high-end value added products for niche foreign market segments (as GLAS has already exited from supplying to the low-end export market segment). This should strengthen the contribution from the export market in GLAS’s production mix. However, GLAS’s key focus will remain in satisfying the local market demand.
The company is exploring possibilities to unlock the value of its Ratmalana land (a freehold land categorised as an investment property with an extent of 21 acres and a carrying value of Rs.1 bn approximately), where the company’s glass plant was located prior to shifting to Horana.
The company expects a pick-up in sales volumes during the next three quarters of FY12 (as volumes are subject to industrial seasonality effects). We expect a slight improvement in the average gross profit margin for FY12 from the FY11 average of 30.4%, given improved operational efficiencies. We have projected FY12E earnings for GLAS to reach Rs.688 m, resulting in an 18.9% YoY growth, which translates to an EPS of Rs. 0.72. The counter is currently trading at a forward PER of 11.7x, indicating an 11% discount to the broad market at a current market price of Rs. 8.50 per share.