PRIMA PLASTICS LIMITED

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A Small-scale Play in the Plastic Industry

Prima Plastics Limited (“the Company” or “Prima”) is engaged in the business of designing, manufacturing and selling of plastic moulded furniture. Prima started with a single plant in November 1993 owing to the great response and demand for the plastic products in the market. Prima is the 4th largest plastic manufacturing company having a market share of 6-7% after Wimplast, Supreme and Nilkamal. The Company celebrated its 25 glorious years in the plastic industry in the year 2019 and the Company expects to expand its product portfolio and reach wider horizons in the next 25 years. Prima has a wide range of products catering to consumer needs and they adhere to umbrella branding where they market all their products under the brand name of “Prima”.

Prima caters to the following segments:

• Hotels
• Restaurants
• Households
• Industries
• Municipal Corporations
• Institutional clients

Origin of Prima

In 1950, Shri Manharlal V. Parekh started a factory that manufactured plastic buttons. Over time he was able to set up a brand name “National” in complete agreement with plastic products. He was also the Vice-Chairman of Kapole co-operative bank. Understanding the need for plastic products and the demand that it has in the markets, he thought of doing something great. “Big things often have small beginnings” and this was true in his case. He founded the Company in 1993 with a single factory that manufactured plastic products.

With time, the Company witnessed an increase in the demand and to cater to wider markets, Prima started acquiring new plants and machineries and entered into the expansionary phase.

Shri Bhaskar M. Parekhand Shri Dilip M. Parekh, sons of Shri Manharlal V. Parekh, have been a part of the Company since incorporation. Shri Bhaskar M. Parekh has more than 35 years of experience in plastic injection moulding, blow moulding and extrusion industry. He introduced furniture in a wide range of attractive colours and is the Executive Chairman. Shri Dilip M. Parekh is the Managing Director and has been the primary driver in achieving the organizational goals. He is the mastermind responsible for getting Prima on the global front by setting up a Joint venture (JV) Company at Cameroon (West Africa) and incorporating a subsidiary Company in Guatemala.

Indian Plastic Industry

  • The Indian plastic industry is well-diversified and hosts more than 2,000 exporters. It furnishes employment to about 4 million people and comprises of more than 30,000 processing units out of which 85-90% are small and medium-sized enterprises.
  • The industry has a huge latent in terms of capacity, infrastructure, and skilled manpower. It is supported by a large number of producers, process machinery, and manufacturers in the Country.
  • As per India Brand Equity Foundation (IBEF), plastic exports stood at $7.1 billion with the highest contribution from plastic raw material at $2.9 billion during April 2019-January 2020.
  • The industry suffered huge domestic demand crunch due to environmental issues and the GST rate of 28% which has now been revised to 18%.
  • Despite having huge growth avenues, the industry is still exposed to multifarious challenges like the cleanup of hazardous chemicals as plastic usage contributes to environmental pollution, lag in tech growth, and poor infrastructural platform.
  • Health care initiatives (Swachh Bharat Abhiyan), infrastructural developments, rapid urbanization and increasing industrial production are the key growth drivers of the industry.
  • The Government of India is going to invest ₹43.4 crore in order to increase the domestic production of plastics. This will increase employment and will achieve sustainable growth. Massive steps such as Atmanirbhar Bharat Abhiyan is going to improve the railways and shipping infrastructure, transport, power, irrigation, and sanitation management. Since, plastic plays an imperative role in these fields the investment made will correspondingly boost the demand for plastics in the coming years .

Business Model

  • Prima caters to the following business segments: Home furnishing, Kids’ range, industrial products, road safety and waste management.
  • The Company is both into B2B and B2C business, where it markets its products to restaurants, industries and hotels as well as to household and domestic market segment. The Company adheres to expansionary strategy and product differentiation strategy to cater to a wider market base. The Company has been churning its product portfolio by improving the design and entering the premium product segment.
    Roto Moulding Machine
  • The Company procures its raw material from Micro, Small and Medium enterprises (MSMEs), polymer producers and crude oil suppliers. Prima exports its finished products to United States, Africa and Middle-east and it imports plastic moulds mainly from Taiwan and Tanzania.
  • The Company has 4 manufacturing plants (1 in Kerala, 1 in Ongole and 2 in Daman) located within the national boundaries and in order to capture a larger market share and have an international presence, the Company has entered into a JV in Cameroon and has established its subsidiary in Guatemala.
  • The Company also employs cost-effective manufacturing methods in order to undertake organic growth by investing in heavy machinery like Rotational (ROTO) moulding machine to increase its production capacity and add a new range of products in their verticals by minimizing their cost.

COVID-19 – Enigmatic upheaval

This pandemic has hit the plastic segment hard on its face. The ongoing coronavirus situation is having a major impact on crude oil prices. The demand for crude oil has deteriorated considerably and the crude oil futures touched the negative zone as well. Decreasing crude oil prices are beneficial for the plastic manufacturers; however, because of a series of lockdown, and halted operations the companies couldn’t take the advantage of these decreased prices of crude oil. The COVID situation has impacted the exchange rate as well. Strong currencies have been able to bear the pain, however, the Indian currency has depreciated to the levels of ₹76/dollar. Moreover, due to the stringent lockdown policies, the Company had to temporarily shut down all its manufacturing plants and enforce work from home policies. This had a negative impact on their supply chain and international trade. The Company has been resorting to various cost-cutting measures to optimize the use of financial resources but the impact of the ongoing outbreak on the financials of the Company will be reflected in the future as well.

Differentiating Strategies

  1. Diversified Product Catalogue: The Company has a widely diversified product portfolio catering to numerous consumer segments ranging from home furnishing to waste management. The wide ranges of products are 100% hygienic, durable, safe and have long-term usage benefits. It has also started a Rotational (ROTO) moulding project to produce larger quantities of products at a low tooling cost. Tooling involves acquiring the manufacturing components and machines needed for production such as fixtures, gauges, etc. and this new ROTO moulding project will reduce such additional costs. Compared to its main competitor Sheetal in the segment of solid waste management, Prima has not been able to capture the market with its waste management products. However, Prima is soon launching its community bins to increase their products under the waste management segment.
  1. Network Foray: The Company continues to expand its business both within the domestic territory as well as internationally. The Company’s manufacturing units for moulded (moulding is the process of shaping the plastics, polymers and other plastic items into a substance by the use of a rigid frame or moulds) furniture are located at Daman, Ongole and Kerala. They export their products to the United States, Africa and Middle-East. It markets its products in Coimbatore, Delhi, Hubli, Jammu, Jaipur, Kanpur, Rohtak, Bhiwandi, Ongole, Telengana, Vapi and Zirakpur. The Company’s Joint Venture Company at Cameroon, Prima Dee-Lite Plastics S.A.R.L (Société A Responsabilité Limitée) manufactures moulded articles and high-density polyethylene {HDPE) woven sack bags. The Subsidiary Company Prima Union Plasticos S.A. at Guatemala started its commercial production in 2017 and it manufactures a wide range of products catering to neighbouring countries in Central America. Prima has their networking spread across the country with 450 distributors and 500 dealers.

  1. Cost-effective Strategy: The Company has adopted several cost-effective strategies in the recent years in order to maintain the cost at lower brackets. In FY18, the Company invested in heavy machinery like Rotational (ROTO) moulding machine to augment the production capacity and improve its product portfolio by reducing the tooling cost. The Company has also started to replace their old machineries at its Daman plant from FY17 with an aim to improve the productivity and reduce the energy cost.

SWOT Analysis

Strengths

  1. Expanding overseas: In an attempt to widen the markets on an international front, the Company has made several investments in the past 2 years both within and outside the national boundary. This has helped the Company register a consistent increase in the revenue and PBT for the past 3 quarters i.e. since Q2FY20 to Q4FY20.
  2. Diversified product portfolio: The Company has multifarious plastic products with different design and quality in their vertical. It caters to different business segments which are: Home furnishing, Kids range and chair, Industrial products segment, Road safety division and waste management segment.
  3. Zero promoter pledge: The Company has adequate cash reserves to meet the liquidity crunch and working capital requirements. Hence, no shares of the promoter are pledged as collateral to borrow the money.

Weaknesses

  1. Cost pressure: The Company has witnessed an increase in the cost of raw materials on a YoY basis for long term projects . Major raw materials for the Company include polypropylene, high-density polyethylene, low-density polyethylene and Polyvinyl chloride (PVC). These raw materials are derived from the crude oil and natural gas processing. The Company’s inability to pass on these high raw materials costs to its customers due to immense competition in the industry has ended up impacting Prima’s financials significantly.
  2. Increasing trend in Non-core income: Income from government grants, exchange gains, sale of scrap/ PP&E and interest income on fixed and inter-corporate deposits might increase which will as well augment the concern of the Company’s core business income from the plastic products. Increase in the non-core income will surely improve the margins even if the Company does not generate enough revenue from its core operations however; this reduces investor’s trust over their main business growth and thus, might lead to a decrease in the share price.

Opportunities

  1. Government-aided projects: The Company has a big scope in multifarious government projects such as infrastructural development, health care initiatives and waste management projects (Swachh Bharat Abhiyan). The Company is expected to see a surge in its demand for storage facilities and insulated products post-pandemic because of the increase in the importance of hygiene . Moreover, in FY16, Prima received a contract of ₹7 crore by Greater Hyderabad Municipal Corporation (G.H.M.C) for supplying of dustbins under the project of ‘Swachh Bharat Abhiyan’ and the Company expects to receive large orders from other regions as well. It is open to huge opportunity on favourable terms .

Threats

  1. Regulatory burden: The Company is subject to growing regulations that govern the disposal and clean-up of hazardous chemicals as plastic usage contributes to environmental pollution. Moreover, there is a weak global outlook for growth plans after the stiff norms taken against the imports from China and shift of focus on ‘Vocal for Local’.

Michael Porter’s 5-forces Analysis

Barriers to Entry

  • The Company undertakes huge investment as it imports raw materials and machinery parts that are used in the production of the finished product. The Company also invests heavily in plant and machinery frequently to improve manufacturing and increase its production.
  • Companies in the plastic manufacturing business require several approvals, licensing & compliances in regards to Pollution Control Board (PCB), Environment Protection Act, 1986 and Plastic waste management and handling rules, 2011 which is very time-consuming and costly .

Bargaining Power of Suppliers

  • The Indian plastic industry has a large number of small-scale and medium-scale players in the market and all of them cater to a wide range of customers with differentiated products so it is difficult for a single player to control the market. Therefore, the suppliers of raw materials like MSMEs, polymer producers and crude oil suppliers, have the power to drive the market due to the presence of numerous plastic manufacturing companies with fragmented market share.

Bargaining Power of Buyers

  • The end-user industries for the plastic products are restaurants, industries, hotels, recreation, packaging, construction and hospitality. These industries are sure to have a huge bargaining power because of the availability of various manufacturers in the market to cater to their demand and low switching costs. Hence, during any exigency or cost-pressure, these industries will have many other options to choose from.

Rivalry among Competitors

  • Since a large chunk of plastic manufacturers are MSMEs and internal rivalry is very high because of a fragmented market share. It is very difficult for the Company to be a price maker, hence any changes in the price bracket from the competitors (Supreme, VV National, etc.) will rage a price war in the industry. Each manufacturing business deals in the production of a distinct variety of products which makes them specialized in their area. This increases competition to capture the market share and cater to the customers with a wide differentiated product base .

Threat of Substitutes

  • Due to the unorganized nature of the industry, many players will want to enter the industry to enjoy the established market and reap the advantages of economies of scope. However, with the given technical know-how, capital investments and access to raw materials, only big-firms will be able to sustain the impact and the small-firms might be at a cost-disadvantage .

Branding and Other Initiatives

  1. Entry into an Online Business: The Company has been improving its product design and durability to cater to larger markets not only through traditional brick and mortar stores but also through e-commerce platforms. The Company caters to a wider customer segment through various online platforms such as Amazon, Flipkart, Pepperfry and Industry Buying. It has also entered Asia’s largest e-tailer (Firstcry) with 30+ products in the kids’ range in an aim to broaden their reach to the digital customers and to augment their customer database .
  1. Corporate Social Responsibility: The Company has taken several steps to bring a change in the society through its CSR policies. In FY17, the Company contributed to Environmental sustainability by establishing a manmade forest. In FY18, the Company took the initiative to help the community by providing free cataract services and eye check-up camp. It had also distributed free eyeglasses which benefitted nearly 800 people. In FY19, the Company organized a camp for handicapped people in Daman by providing free limbs and other appliances to more than 70 families who got their legs and hands amputated due to diabetes, accidents, natural calamities, etc.Through this CSR Program, Primahas been developing trust, loyalty and brand image of their Company on a larger scale .

Financial Analysis

  1. Profitability on the rise
    Being in a competitive industry, prices of crude oil and natural gas play an important role in the cost ascertainment. Any major upward movement in the crude and natural gas prices directly impacts the input cost and ultimately the margins of the Company as an increase in costs are generally not passed on to the consumers. While analyzing the EBITDA margin of Prima, one would note that the EBITDA margin of the Company fluctuated in the bracket of 10-15%. The Company reported an increase in the EBITDA for FY16 after selling off the loss-making Aluminium Composite Panel (ACP) business. From FY17 onwards, it has abated to 13.5% due to an increase in the raw material prices until FY19. However, the minute increase in the EBITDA margin has in FY20 was due to the sharp decrease in the cost of raw materials by 11.6% as compared to FY19 coupled with the adoption of IND AS116, which reclassified rental expense as depreciation expense.
  1. Inventory Turnover Ratio (ITR)
    While analyzing the ITR one could find that during FY10-20, the ITR has been in the range of 3-6.The Company generally has its ITR consistent in this level, however, in the recent years, the Company has seen an increase in its inventory due to bulk orders from the Government and Institutional clients and on account of stocks that are at depots. Thus, the Company has been witnessing fluctuations in its ITR lately .
  1. Current Ratio (CR)
    The CR decreased from 4.3 in FY10 to 2.4 in FY14 because of an increase in the current liabilities in order to gather funds for setting up a manufacturing capacity at its subsidiary in Cameroon. From FY14 it saw an increase in the ratio to 7.3 until FY16 due to short-term borrowings and repayment of the existing liabilities and then it dropped to the level of 2.5 in the FY20. This decrease in the CR is mainly due to an augment in the short-term borrowings of the Company for capacity expansion and investment in the moulding machine for better product design. Though the CR has been fluctuating within the band, the Company is in the position to meet any short-term liabilities that might occur in future since the Company has sufficient current assets available at its disposal that can be converted into cash to fund the liabilities.
  1. Debt- Is it so?
    The Company has maintained its debt at a considerably low level. The short-term borrowings cover a major portion of its debt that the Company resorts to for capacity expansion. Prima repays the debt over the years, thereby maintaining and churning its debt level at lower levels. The Company saw a sharp increase in its debt level in FY12 because of a significant augment in the working capital loan. This happened because scaling up of operations and capacity improvement took longer than the estimated time, which resulted in fluctuating bottom line and sizeable working capital requirements. The Company saw an increase in its ratio for the FY18-19 mainly because of its significant increase in its debt level. The Company increased its debt with an intention to expand its production capacity in FY18 and invested in moulding machine to improve product database in FY19. Short-term borrowings cover the major portion of their debt level and the Company has a good amount of current assets to meet any short-term liquidity needs if it may arise .

For the past 3 years until FY20, the Company has been borrowing and entering into a number of expansionary and long-term investment projects. Thus, an increase in the long-term borrowings of the Company has led to ratings downgrade from BBB+ to BBB/Stable.

Risk Analysis

  1. Input prices: Crude oil and natural gas prices are the main drivers of the Company’s input prices. They are subject to global demand and are cyclical in nature. Whenever there is a spike in the price of crude oil, the raw material procurement cost of the Company gets heated up. The Company has been confronting the burden of this increase in the input prices which ends up impacting their margins considerably.
  2. New Entrants: The industry is exposed to the threat of many new entrants with a low capital base and with the opportunity to serve the local markets. These new entrants are palpable to unethical practices in a temporary phase and they might impact the industry for an evanescent note .
  3. Forex risk: Since the Company is engaged in doing business in the International markets and earning revenues in the foreign currency, it is exposed to the currency risk. Moreover, this Company makes payment in foreign currency for the import of raw materials and pieces of machinery and any change in the exchange rate between US dollars and Indian rupees might have a catastrophic impact on the Company’s financial conditions. There have been fluctuations in the exchange rate in recent periods and these fluctuations are expected to occur in the future as well . However, the Company might enter into a forward contract to hedge its foreign currency risk if it considers it to be required as per the standard procedure.
  4. Regulations: Frequent changes in regulatory laws especially steep penal provisions may create additional compliance burdens which are beyond the purview of the Company’s control, and affect business operations.
  5. Weak Global outlook: Furthermore, weak global prospects especially after the stiff stand by the American government on imports from India and China, pose a threat to the growth plan of the Company.
    Corporate Governance
  6. The Company Board consisted of 7 Directors out of which 4 were Independent Directors including a woman director. The composition complies with the SEBI (LODR) Regulations.
  7. Independent Directors of Prima, Shri Krishnakant V. Chitalia is an Independent Director in Venlon Enterprises Ltd. and Shri Snehal Muzoomdar is a Director in Indo-Nippon Chemicals Company Ltd. and an Independent Director in Perfect Octave Media Projects Ltd. However, none of the Directors on the Board is a member of more than 10 Committees or Chairman of more than five committees across all the companies in which they are Directors.
  8. In compliance with the applicable provisions of the Companies Act, 2013 and SEBI Listing Regulations, 4 Board meetings were held in FY19 with a maximum gap of 120 days . A meeting among the independent Directors was held on March 20, 2019, to discuss the performance and evaluation of the Board as a whole and also assessed the flow of information from the management to the board and current strategy and operations of the Company.
  9. A familiarization programme for the Independent Directors has been put in place wherein an orientation program is conducted that includes familiarization with the Company, their roles and the industry in which the Company operates.
  10. Promoters have not increased their pledged holdings which have remained constant at 46.97% of their total holdings which stand at 58.47%.

The EndNote

  1. The Company has been marching ahead with its expansionary, product differentiation, and cost-effective manufacturing strategies in order to have a wider market base and new product catalogue.
  2. Prices of crude oil, natural gas, and polymers play an important role in the determination of the Company’s bottom line. Fluctuations in the crude prices have been impacting the profits of the Company.
  3. Prima confronts a severe competition from its competitors in the organized sector. Moreover, players in the unorganized sector aim at improving local business. This further adds on to their competition risk.
  4. Management has taken both short-term and long-term loans with an aim to expand its business and improve its product portfolio in order to seize a wider market.
  5. Because of the pandemic, industrial production is moving at a slow pace and construction activities are at a halt. Prima might face the brunt of COVID-19 in their financials; however, with hygiene and safety precautions gaining traction, it could be beneficial for the plastic industry in general and the industry will see a huge demand for storage facilities, construction facilities and the cleaning segment.

Disclaimer: The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade securities – involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. Leveraged Growth, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of Leveraged Growth. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Leveraged Growth to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. The person accessing this information specifically agrees to exempt Leveraged Growth or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold Leveraged Growth or any of its affiliates or employees responsible for any such misuse and further agrees to hold Leveraged Growth or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.

Contributor: Team Leveraged Growth
Co-contributor: Madhav Khemka
Research Desk | Leveraged Growth

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