Stock Pointer. Radha Madhav Corporation Ltd. CMP: Rs. 119 P/E 8.6x FY08E BUY. Key Investment Highlights. Valuations

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1 Stock Pointer Radha Madhav Corporation Ltd. CMP: Rs. 119 P/E 8.6x FY08E BUY PRICE TARGET Rs 200 (12 Months) Index Details Sensex 19,080 Nifty 5,755 BSE SMLCAP 11,818 Industry Packaging Scrip Details Mkt Cap (Rs in Cr) Book Value (Rs) 62.6 Eq Shares O/s (Cr) 2.0 Avg Vol 238, Week H/L / 38.1 Dividend Yield (%) 0.0 Face Value (Rs) 10.0 BSE Code NSE Code RMCL Shareholding Pattern (30 th September 07) Shareholders % holding Promoters 33.7 Indian Institutions 0.0 FII s 10.8 Non Promoter Corporate 18.7 Public 36.8 Total RMCL Vs Sensex Radha Madhav Corporation Limited (RMCL), a specialized film packaging company, having more than a decade of experience, is involved in manufacturing of various barrier & functional films used in packaging food, health supplement and dairy products. It is a multi-technology, multiproduct company serving the packaging industry. Key Investment Highlights Positive Industry Outlook The Rs 560 billion Indian Packaging industry has over the last few years grown at a CAGR of 18%. Rising incomes, growing health consciousness, changing consumption habits are some of the triggers for the Industry. Further Pharma Packaging which is growing in stature would provide further fillip to the Industry growth. Aggressive capacity additions to boost revenues & profitability RMCL has recently set up a hi-tech film manufacturing facility in Daman at a cost of Rs 55 crore. It is also setting up two dedicated pharmaceutical packaging units at Uttaranchal & Daman with an investment of Rs 175 crore. This will increase the gross block from Rs 32.7 crore in FY07 to Rs 235 crore in FY09. With ~2.2x asset turnover ratio we expect the revenues to touch Rs 500 crore in FY09. Pharma packaging a growth driver & margin accretive RMCL is making a foray into lucrative Pharma packaging segment by setting up two facilities. Daman unit is likely to be operational by Q3FY08 while Uttaranchal unit by Q4FY08. The margins in this segment are at 30% as compared to 20% in case of Food & FMCG packaging. Valuations With the aggressive expansion under implementation & its entry into higher margin Pharma packaging segment, we expect RMCL s Revenues and PAT to grow at a CAGR of 150% and 250% respectively by FY09. At the CMP of Rs 119 the stock is trading at 8.6x its FY08e earnings of Rs 13.8 and at 5.3x its FY09e earnings of Rs We recommend a BUY on the stock with a price target of Rs 200, an upside of ~68% over a period of 12 months. Key Financials: Y/E March, (Rs in Cr) FY06 FY07 FY08E FY09E Net Revenues EBIDTA PAT EPS (Rs) *22.5 EPS Growth (%) N.A ROCE RONW P/E (x) EV/EBIDTA (x) *Note: Dilution of equity on account of warrants & convertible preference shares Wednesday, December 19, 2007

2 Company Background RMCL is involved in manufacturing of various barrier & functional films used in packaging of food, health supplement and dairy products over more than a decade. Apart from the current four manufacturing units for food & dairy packaging, RMCL is now setting up two dedicated Pharma packaging units RMCL, promoted by Mr Anil Agarwal (Chairman) & Mr Mitesh Agarwal (MD & CEO) is an entity incorporated in January, 2005 upon amalgamation of three existing partnership firms operating under the name & style of Mayura Industries, Radha Madhav Industries and Metro polyprints. These firms were later known as unit I, II and III respectively. It is involved in manufacturing of various barrier & functional films used in packaging of food, health supplement and dairy products over more than a decade. Its product portfolio includes both Primary packaging as well as secondary packaging. Being successful in food and dairy packaging project & in the quest to increase the margins, RMCL is coming up with two pharmaceutical projects in Uttaranchal and Daman to be commenced by Q4FY08. Manufacturing Facilities & Product Profile Until FY07, RMCL was having three units (Unit I, Unit II & Unit III) at Daman manufacturing barrier films for food & dairy packaging. Recently the company has commenced operations at a new unit, namely Unit IV, a hi-tech manufacturing facility which is into manufacturing of specialized films for various applications. Further it is in the process of setting up two dedicated packaging units namely Unit V & Rudrapur Unit which would cater mainly to pharmaceutical industry. Facilities Unit I, II & III Unit IV Unit V Rudrapur Unit Manufactured Barrier films & Folded cartons POF Barrier Cast Film, Coated Films & Printed laminates Modified Atmosphere Films (MAF), Barrier Films, Metallised PVdC PVC, Security films for Pharma & Sleeves for syrup PVdC PVC blisters, Extrusion based laminates, Alu-Alu & collapsible tubes Optimum mix of Primary & Secondary packing materials RMCL s manufacturing activities include Primary Packaging and Secondary Packaging. Primary packaging material is in direct contact of the product and sold as integral part of single saleable unit like soap wrapper, confectionary packet, tea and shampoo sachet. Secondary packaging is used to pack such single units in large number like cartons, stretch wraps, straps, tapes etc. RMCL has an optimum balance of packaging material having primary and secondary nature. of secondary packaging are standard products and are comparatively easier to sell. However, contribution of these products is generally lower than products of primary nature. On the other hand, of primary packaging are higher margin customized products for which one needs to be in close contact with the buyer and concentrated efforts are required. RMCL s presence in both the segments makes it a one stop shop for customers eyeing both the products. These high and low cost products give a unique advantage to the company of having an almost risk free business Wednesday, December 19, 2007

3 Aggressive capacity expansion a major growth driver RMCL is in the midst of expansion plans. Over the last decade it was operating 3 units (Unit I, Unit II & Unit III). Recently Unit IV has commenced commercial production wherein the company is manufacturing specialized films which includes BOPE high end Barrier Shrink Films, Coated Films & Laminates Structures & Wax-coated Structures. The equipments have been imported from Italy & Korea. The total capex for this unit was Rs 55 crore. Old Cap (Unit 1,2 & 3) Addl Cap (Unit 4) Total Capacity Application of that product RMCL has undertaken aggressive expansion plans with a capex of Rs 230 crore. Unit IV which cater to specialized films has already commenced commercial production while two proposed units for Pharma packaging is expected to come on stream very soon PE Cast Film 1,650 5,650 7,300 Barrier Films / Laminates 4,700 7,650 12,350 POF Nil 1,800 1,800 Coated Films Nil 3,300 3,300 Confectionary, stretch films, fragment foods, whisky. Mayonnaise sauces, Ketchups, ready to eat food, spices and cosmetics. Dairy products, meat and poultry, CDs and DVDs, and Pharmaceutical. Grapes packaging, ready to eat products Other Plastic 1,100 NIL 1,100 Industrial Packaging Other Paper 3,600 NIL 3,600 Winding films, yarns and textile products Liner / Mono Carton 2,100 NIL 2,100 Spices, food, tea and dairy RMCL is setting up two dedicated Pharma packaging units, one at Daman & the other at Rudrapur, Uttaranchal which is one of the largest in the country Pharma Packaging Foray Further the company is setting up two dedicated pharmaceutical units in Daman & Uttaranchal at the cost of Rs 175 crore. The Uttaranchal facility with an investment of Rs 105 crore would have a capacity of 45,000 MT which is one of the largest in the country. The operations are likely to commence from Q4FY08. RMCL is setting a target to sell the Pharma packaging material from this unit to approx. 800 companies in Himachal Pradesh & Uttaranchal. Further the facility will be benefited with fiscal benefits such as 100% excise exemption & 100% income tax exemption for 5 years. The other Pharma packaging unit namely Unit V is being developed at Daman with an investment of Rs 70 crore having a capacity of 22,150 MT. The operations from this facility are likely to commence from Q3FY08. Proposed New under Pharma Packaging With the proposed two units at Daman & Uttaranchal, RMCL would be manufacturing high end packaging products to pack various forms of pharmaceutical products like tables and capsules, liquid syrups, ointments and creams. The product range is highly synergetic to the existing business and is targeted to service the existing customer base of the company Wednesday, December 19, 2007

4 The table shown below displays the various Pharma packaging products which would be introduced soon, their applications & the competitors under each category. Applications Competitors Remarks PVdC coated PVC Blister Tablets & Capsules Bilcare, Supreme and Associated capsules Biggest capacity in India. Existing client can consume 60% of the production Mettalised PVdC coated PVC Blister Hygroscopic tablets Imports Only manufacturer in India PVC cast shrink films Sleeves over syrups, beverages & health drinks Imports Only manufacturer in India We expect nearly 60% of the revenues to be contributed by the Pharma packaging segment in FY09. Further Pharma packaging being higher margin segment as compared to food & FMCG packaging, the company is likely to witnessed expansion in margins in FY09. Collapsible Tubes PVC Flexi hygiene Sheets PVC Cling Household films Ointments, Creams & jellies Medicinal (Ampules & Infectibles) Essel Propack and Bates India Imports Existing client can consume entire production Only manufacturer in India Ready to eat foods Imports Only manufacturer in India Alu-Alu Tablets & capsules Imports, Bilcare & Ess Dee Market growing at 25% pa PVdC coated OPP films Health supplement Imports Market growing at 25% pa Printed Labels Liquid syrups, bottled health drinks Imports Only manufacturer in India The full effect on the revenues from these facilities is likely to come into effect only in FY09. We expect nearly 60% of the revenues to be contributed by the Pharma packaging segment in FY09. Further Pharma packaging being higher margin segment as compared to food & FMCG packaging, the company is likely to witnessed expansion in margins in FY Wednesday, December 19, 2007

5 Multi-fold increase in gross block to spurt revenues Once the capacity additions fall in place which is likely to get completed by Q4FY08, the gross block will increase from Rs 32.7 crore in FY07 to Rs 235 crore in FY08. With 2.2x asset turnover ratio (historical 3-5 times), we expect the turnover to reach Rs ~500 crore in FY09. This implies that the revenues would grow at a CAGR of 150%+ from FY07 to FY Asset Turnover Post expansion, the gross block will increase from Rs 32.7 in FY07 to Rs 235 crore in FY08. With 2.2x asset turnover ratio (historical 3-5 times), we expect the turnover to reach Rs ~500 crore in FY FY07 FY08 FY09 Gross Block Revenues FY07 FY08 FY09 The above charts depict the estimated growth in revenues in relation to incremental assets to be added through FY07 to FY09. Further we expect the asset turnover ratio to be at 2.2x in FY09e as against 4.1x in FY07 & 2.4x in FY08e. The asset turnover is expected to come down as the new products to be added / which are added recently are put through multi-layered or multi process production techniques. These products (specialized films) are highly customized as per the customer requirements & therefore are put trough various processes. Industry Outlook The Indian Packaging business which is Rs 560 billion market has over the last few years grown at a CAGR of 10%+ (double digit growth) The Indian Packaging business which is Rs 560 billion market has over the last few years grown at a CAGR of 18%. Rising incomes, growing health consciousness, changing consumption habits are some of the triggers for the Industry. With a promising growth rate, an expanding consumer base, and more than 1 billion inhabitants, India has one of the most rapidly expanding packaging market in the world. Food, pharmaceutical & personal products form the major part of the packaging industry. The following chart depicts the share of growth in the packaging business over the last three years & the share of different sectors in the packaging business. Growth of the Packaging Industry Share of sectors in packaging business Others 10% Personal 20% Food 45% Pharmac eutical 25% Wednesday, December 19, 2007

6 Pharma Packaging Emerging Opportunities The size of the Indian Pharma packaging market size is currently Rs 43 billion & is growing at a CAGR of 5.5% per annum The introduction of biologics-based drugs has changed the pharmaceuticals industry. These highly sensitive drugs, whose efficacy is package-dependent, require high-barrier materials -- a development that has redefined the role of packaging in drug delivery from that of a passive component to an active one. The damage of products dispatched from mail order and Internet pharmacies is also forcing the drug and packaging companies to develop tailor-made solutions for these distribution channels. Lastly, growing regulatory scrutiny by various authorities warrants more consideration into the packaging of these drugs. World pharmaceutical packaging demand is projected to advance 5.3 percent annually to $24.3 billion in However India & China are expected to grow at a faster rate. The size of the Indian Pharma packaging market size is currently Rs 43 billion & is growing at a CAGR of 5.5% per annum. Considering the growing market for these products, RMCL has made foray into Pharma packaging by setting up two facilities, one in Daman & the other is Uttaranchal. We believe that the Uttaranchal facility which is one of the largest facility is located very close to the Pharma city where all the major pharmaceutical units are stationed. Sound Client Profile RMCL has a very strong client database & has served more than 2500 clients over the last decade. RMCL is not dependent on any single client. The top 10 clients constitute only 10% of the turnover. RMCL has a very strong client database & has served more than 2,500 clients over the last decade. RMCL is engaged in diversified packaging & printing activities and caters to varied clientele including Public Sector units, government organizations, institutions, large-scale industries, Co-operative unions, and various small-scale industries. The user industries include infrastructure, metal, cement, publication, inks, FMCG, export, textile and garments, pharmaceuticals, Food and Spices, hygiene, Soaps and detergents, Cosmetics and personal care, coatings, edible oil, confectionary, milk and milk products and various others. The table shown below lists some of the major clients which have been categorized under two segments pharmaceutical clients & other clients Pharmaceutical Clients Non pharmaceutical Clients IPCA laboratories Reliance Wockhardt Apollo Tyres Ranbaxy Lab Atul Ltd Glaxo Smithkline Crompton Greaves Wyeth Lab Britannia Industries J B Chemicals Grasim Cadila Pharmaceuticals Hindalco Torrent Pharma Hitachi Home Sun Pharmaceuticals Hindalco Solvay Pharma Jindal Savita Pharma Micro Inks Alembic Ltd Navneet Publication Medley Pharma Supreme Industries It may be noted that RMCL is not dependent on any single client. The top 10 clients constitute only 10% of the turnover Wednesday, December 19, 2007

7 Non-Cyclical nature of user industry de-risks the business model RMCL is essentially protected from the vagaries of cyclical risk since a majority of its income is derived from the FMCG and Pharma sector, which is not typically cyclical in nature. Further its clients cater to various other industries which include Textile, Food and Beverages, Cement, Metal, etc. Thus RMCL s strategy to cater its products and services to a wider arena of customers insulates it from dependency on any particular industry. It de risks its business to a large extent, as recession in any one industry is offset by boom in any other industry. RMCL is essentially protected from the vagaries of cyclical risk since a majority of its income is derived from the FMCG and Pharma sector, which is not typically cyclical in nature. Also, greater emphasis on agricultural sector in the recent union budget and increased spending on health care have given a further fillip to the growth of FMCG & Pharma sector. This augurs well for the demand of packaging products and translates into sustainable revenues for the company. Further, RMCL is looking for opportunities in terms of exports too. RMCL already has presence in the markets like USA, Europe and the Middle East, though currently the exports form a negligible part of the revenues. The company is currently eyeing exports in the European markets in a major way & in the pursuit, has already tied up with an Italian concern for developing various kinds of films for the Food and Pharmaceutical sector. RMCL expects a 10-15% export contribution to the total revenues from FY09 onwards. Impressive financial performance: Riding on aggressive expansion In H1FY08, revenues & PAT have grown by impressive 129% & 215% respectively over the corresponding period of the previous year In Q2FY08, RMCL has reported 90% growth in revenues at Rs 39.2 crore as against Rs 20.7 crore in Q2FY07 while PAT growth has been even stronger at Rs 5.7 crore as compared to Rs 2.3 crore in Q2FY07, a YoY growth of 146%. The higher growth attained is largely on the back of Unit IV which has ramped up its production significantly during the quarter. Accordingly the OPM margins were up smartly by 650 bps from 16.9% to 23.4%. Net margins also witnessed a jump of more than 300 bps from 11.2% to 14.4%. EPS stood at Rs 2.9, up 134% from Rs 1.2 in Q2FY07. For the half year ended in the current fiscal, the revenues have grown 129% from Rs 31.7 crore to Rs 72.6 crore. Better capacity utilization & volume growth has resulted in the PAT growing by more than 215% from Rs 3.4 crore in H1FY07 to Rs 10.7 crore in H1FY08. EPS for the first half stands at Rs 5.4 as against Rs 1.8 in H1FY07. Financial Outlook We expect the revenues & profitability to grow at a CAGR of 150% & 250% respectively through FY07 to FY09 With the commencement of pharma packaging units, namely Unit V & Rudrapur plant (Uttaranchal) post Q3FY07, we believe that the company would be in a higher trajectory & the full impact of these units would be reflected in revenues from FY09 & onwards. We expect the revenues & profitability to grow at a CAGR of 150% & 250% respectively through FY07 to FY09. Further the operating margins would also improve from the current levels considering that the margins are higher in case of Pharma packaging as compared to FMCG & food packaging segment Wednesday, December 19, 2007

8 Equity Dilution As mentioned earlier, to fund the company s aggressive expansion plans which would entail a capex of Rs 175 crore, RMCL has issued warrants to promoters as well as non promoters and convertible preference shares to institutions such as Deutsche Securities Mauritius Limited & Concordia Asia Pacific Master Fund. Apart from this the company has already allotted equity shares to India Star Mauritius Limited (arm of Citigroup). Post conversion of these securities, the share capital of the company would be diluted further from the current Rs 19.8 crore to Rs 34 crore in FY09. Consequently the promoter s shareholding would also fall from 40.5% to 33.5%. Concerns Raw material cost account for more than 65% of the net sales & is derived from crude prices. However the management is of the opinion that any further increase in the prices could be passed upon to the customers. Any delay in implementation of the expansion plans would have an adverse effect on the financials of the company. For funding the company s aggressive expansion plans, the company is in the process of diluting its equity in a major way from Rs 19.8 crore to Rs 34.0 crore. However the effect of expansion plans on the revenues & profitability going forward would arrest this concern in a large way. Peer Review Once the expansions fall in place we believe that the return ratios would improve significantly to bring in line with the other peers in the industry. Parameters RMCL Bilcare Ess Dee Net Revenues TTM Net Profit TTM OPM (%) TTM NPM (%) TTM CMP (17/12/07) Market Capitalization Market Capitalization / Sales EV / EBIDTA Debt to Equity (x) EPS TTM PE TTM ROE (%) ROCE (%) In peer comparison we have included only those companies who have forayed into Pharma packaging segment. It may be noted that RMCL has just entered into this segment while other two are established players in this segment. Once the expansions fall in place we believe that the return ratios would improve significantly to bring in line with the other peers in the industry. Further the margins would also increase considering that the Pharma packaging products are margin accretive as compared to food & FMCG packaging products Wednesday, December 19, 2007

9 Valuation & Recommendation Rising incomes, growing health consciousness, changing consumption habits are some of the triggers which would aid the growth of the industry going forward. Further Pharma Packaging which is growing in stature would provide further fillip to the overall growth of the Industry. This augurs well for RMCL which is ready to take off under this segment very soon. With the aggressive expansion under implementation & its entry into higher margin Pharma packaging segment, we expect RMCL s Revenues and PAT to grow at a CAGR of 150% and 250% respectively by FY09. At the CMP of Rs 119 the stock is trading at 8.6x its FY08e earnings of Rs 13.8 and at 5.3x its FY09e earnings of Rs We initiate a BUY coverage on the stock with a price target of Rs 200, an upside of ~68% over a period of 12 months Wednesday, December 19, 2007

10 Exhibit 01: Financials and Projections Y/E March, Fig in Rs. Cr FY2007 FY2008e FY2009e Net Sales % Chg Total Expenditure % Chg EBDITA EBDITA Margin % Other Income PBDIT Depreciation Interest PBT Tax Provisions Reported PAT PAT Margin (%) Raw Materials / Sales (%) Other Mfr. Exp / Sales (%) Employee Exp / Sales (%) Tax Rate (%) Balance Sheet Y/E March, Fig in Rs. Cr FY2007 FY2008e FY2009e Equity Capital Reserves & Surplus Warrants Total Loans Deferred Tax Liability Total Liabilities Gross Block Less: Acc. Depreciation Net Block Capital Work in Progress Investments Net Current Assets Misc. Expd not w/o Total Assets Ventura Securities Limited Y/E March, Fig in Rs. Cr FY2007 FY2008e FY2009e Per Share Data (Rs) EPS Cash EPS DPS Book Value Capital, Liquidity, Returns Ratio Debt / Equity (x) Current Ratio (x) ROE (%) ROCE (%) Dividend Yield (%) Valuation Ratio (x) P/E P/BV EV/ Sales EV / EBIDTA Efficiency Ratio (x) Inventory (days) Debtors (days) Creditors (days) Cash Flow Statement Y/E March, Fig in Rs. Cr FY2007 FY2008e FY2009e Profit After Tax Depreciation & W/o Working Capital Changes Others Operating Cash Flow Capital Expenditure Change in Investment Cash Flow from Investing Proceeds from equity issue Inc/(Dec) in Debt Dividend Paid Cash Flow from Financing Net Change in Cash Opening Cash Balance Closing Cash Balance Corporate Office: 11 th Floor, Nariman Bhavan, Vinay K. Shah Marg, Nariman Point, Mumbai ; This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither Ventura Securities Limited nor any of the contributors accepts any liability arising out of the above information/articles. Reproduction in whole or in part without written permission is prohibited. This report is for private circulation Wednesday, December 19, 2007