I was awe struck the moment I realized what a great brand I was missing in my core portfolio, something that not only me but a lot of my friends and relatives have been using for years and swear by its quality and brand, made me literally wonder why the most obvious investment decisions in life have to be so simple that it simply gets ignored. “Prima” is of the most visible and dependable brands in the Plastic furniture industry and is backed by a very conservative, “profitable growth” seeking honest management. This debt free company is generating free cash flows, has been paying dividends for last so many years and has been growing at a frantic pace in such dismal industry scenarios, is available at extremely low valuations and is a direct consumption play. The smart cities and housing for all government initiatives will tremendously increase the already huge market opportunity. This is your typical boring (lynch style) business that can compound our money at a very good pace for a very long time to come. Actually, the story stops here, and if you are already not convinced, man…..you really need to simplify the investment decisions in your life🙂 …anyways, lets carry on.
The Business: Well, for a change there’s no “dard bhari dastaan” (i.e. sob story) tracing this company. This is really a wonderful business run by honest and competent management. What’s great about this particular company is that despite high crude prices and sluggish economy in last few years they have managed to grow very fast, especially as compared to its much larger peers. Prima plastics designs and manufactures plastic molded furniture like chairs, dining tables, stools and teapots. Prima’s MFA (Moulded Furniture Accessories) business has secured top export awards in almost all years in past 15 years from PLEX Council of India. The company also manufactures Aluminum composite panel (ACP) which are used in making building’s exteriors and interiors.
Most of the revenue are derived from the molded plastics division while only around 7-8% (at present) comes from the ACP division. Company exports products to North America, Africa and the Far & Middle East. At present, ACP business is currently loss making (and still the company is generating positive cash flows for some time now) and once this division picks up it (which it surely will owning to industrial revival) will substantially add to the profitability of the Company and make prima, an already debt free cash flow positive company into a cash cow. The capacity of ACP division is underutilized at the current levels of 50%. The company has consciously opted out of (not completely but concentration is less for the last 5 yrs or so as they are working with only selected clients) commercial real estate as the credit cycle is very long owning to slowdown. Aligning to management’s idea of profitable growth only, currently the concentration on commercial real estate is negligible compared to retail real estate (where the credit cycle is much better). Once the economy picks up and credit cycle improves the company will re-start serving that part of real estate sector and this could turn-around ACP division. The smart cities and housing for all schemes would “significantly” add to the company’s growth, both in ACP division and majorly in their plastic furniture division. Furthermore, once the GST is implemented the company plans for a strong nationwide foray. Currently the company’s plastic molding division is running at 75% capacity utilization and once the policy framework of AP, settles down, the company plans to add another plant there (the current plant is in Kerala). Current capacity utilization of ACP plant (located in Daman) is around 50%. Talking to the workers there, one could easily sense how content they are working and it was nice to see the some of the ground level employees taking side of the management when asked some provoking questions (one of the ways I like to understand the union dynamics in manufacturing companies). Furthermore, Prima had set up a joint venture in Cameroon (Africa) in the year 2005. Prima Dee-lite Plastics Pvt. Ltd., is the Joint Venture Company set up at Cameroon with a local partner to produce and sell Plastic Moulded Articles in and around Cameroon and neighbouring countries and manufactures Moulded Articles and HDPE Woven Sack Bags. The JV has been growing at a very brisk pace (and is expected to grow in similar pace in near future too) in last few years (no ebola impact here thus far) and this bodes very well for the company. The JV is profitable too and is expected to deliver dividends for its india parent in near future further enhancing the cash flows of Prima.
Valuations: The company (with high promoter holding of 58%) performed very well even with high crude prices (which directly affects the plastic industry), and with crude prices coming down, the profitability of this company should go in a different orbit altogether. In last three years the company’s consolidated revenues have grown from 69cr to 103cr and PAT from 3.75cr to 7.6 cr (and has been giving dividends un-interrupted, for last so many years) with current year’s EPS being 6.91rs. At current price the PE of the stock is just 6.5 as compared to 25-30 PE commanded by its peers and its dividend yield of 2.5%. Also, company’s operating margins are better than most of its peers (MFA). The company is trading at market cap to sales ratio of just 0.4 times as compared to 3 times. The company is debt free and the earnings are expected to grow at around 25% CAGR for a very long time and if the industrial growth especially the real estate sector revives, and the government does implement its smart cities and housing for all schemes, the company should grow at very high rates of around 30-35% CAGR for a very long time. Given the strong earnings growth and PE re-rating, the gains could be multi-fold.
Technicals: The stock has broken out of 9 yr long consolidation and it will not just double or triple and stop. It will go wayyyy beyond. Interestingly the company has also given a follow-up breakout after giving a weekly close at above 39rs and therefore, further gains should be even faster in the short to medium term.
Remember, Main Street knows more and before dalal street and Main Street tells us that it’s a great established brand. Let’s grab the opportunity while the big guys are busy analyzing messed up big businesses.