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Stocks

Gutkha Ban Reaffirmed by Supreme Court

The Supreme Court has reaffirmed the March 1 deadline banning packaging of all tobacco products in plastic sachets. This hurts UFLEX, JINDALPOLY and POLYPLEX. The news was out yesterday but the stocks have slid down 2 to 3% today. The govt. has already banned it on Feb 4 (enforced from March 1):

On February 2, the Supreme Court had refused to grant more time to the Centre for implementing the law to regulate the use of plastic for packaging tobacco products and asked it to notify that within two days. The Plastic Waste (management and handling) Rules, 2011, was notified on February 4.

(Also read: UFlex dives 20% on news that promoter was arrested)

The stocks have absolutely crashed in the last few months, with UFlex at 147, Polyplex at 252, and JindalPoly at 473. All are down between 30% and 50% of their Oct/Nov highs. (Even after adjustment: JindalPoly and Polyplex issued bonus shares in between)

It’s not a huge matter of concern, at least for JindalPoly and UFlex because they have more important lines of business than Gutkha. Yet, it’s a 10-20% hit on their toplines at least; and now, film prices are down to more reasonable levels, so the stocks don’t seem that attractive anymore. Yet, the P/Es are below 5 (unusually good earnings in the last 9 months). The problem? Even though these are unusual profits, the companies have chosen to take on more debt and expand, instead of paying it down and getting less levered. Excess capacity will then need to be serviced, and so will loans as they get higher cost; I doubt demand will expand at the same rate.

Respect your stop losses. I’m lucky I did, and even when recently these stocks showed signs of an upmove, I got in and out fairly fast (lost about 2%). Better, perhaps, than losing 50%.

  • Rudra Chowdhury says:

    >Hi Deepak,

    Can you point me towards a source to show the falling prices of BOPP and BOPET films ?

    The management has indicated that BOPET film prices which shot up from Rs 90/kg to Rs 200/kg in last one year
    are expected to hover at around current levels of Rs 200/kg moving in a narrow band of plus minus 5%, atleast for next 5 quarters.

    The current prices of BOPP films is in the range of Rs 110 – 115 per kg which the management expects to rise to about Rs 125 –
    130 per kg in short period of 3 – 4 months and thereafter stabilizing at that level.

    In addition, management does not rule out a probable rise in the prices of raw material which could be around 5% from current levels but would be passed on to the ultimate finished product prices.

    Going forward Jindal Poly with an expected FY11 EPS of 140+ will rise by at least 10% for FY12 on the bottom line.

    Assuming a conservative P/E of 5 with 100% dividend thrown in for FY11 and FY12, prices should be at (154*5)+20 = 790 by March 2012, implying an upside of 67% even from current levels.

  • Deepak Shenoy says:

    >BOPET is already below 200 according to industry sources (can't find an online link tho) There's a global softening also. BOPP has huge supply and is unlikely to rise. In local markets, due to the gutkha ban, UFlex likely to be hit the most but everyone will hurt.

    P/Es look really attractive, I agree.