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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%.

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