My notes on Rajshree Polypack, a company that makes packaging for F&B industry

As I have understood, there are two packaging types – rigid and flexible. In rigid packaging, there are broadly two methods to make packaging – Thermoforming and Injection Molding. In thermoforming, plastic rigid sheets are subjected to heat for molding into a desired shape. IM on the other hand, converts plastic pellets into molten material, which is then injected into a mold. Thermoformed packaging is thinner than injection molded and as such both methods have different applications.

Rajshree Polypack (RPPL) is a microcap company that was started as a partnership firm in 2003 and then incorporated as a pvt ltd in 2011. The company makes plastic rigid sheets and thermoformed packaging for food and beverage industry. Plastic rigid sheets are both sold directly to end-customers and are used in captive production of packaging goods. The company has been steadily increasing capacity of both extrusion (for making rigid sheets) and thermoforming.

In FY23, they got into making IM packaging through a toll manufacturing agreement (i.e., Rajshree supplies the raw materials and pays a fee to access the contractor’s manufacturing capabilities). As of now, the mfg capacity is 1,000 MT.

They have entered into a JV – Olive Pack – to make coated paper cups, glasses etc. The capacity will be 12,000 MT. This will get operational in FY25.

Moat

RPPL has a good list of marque F&B customers that have a stringent quality, timely delivery and turn-around-time criteria for packaging. It is not easy to become an approved supplier to such customers. In a very competitive and fragmented industry, this is perhaps RPPL’s biggest and only moat.

What is stopping me from developing 100% conviction just yet?

RPPL is trading at a market cap of INR 230 Cr (as of 20/12/24). 10 years ago in FY14, Mold-Tek Packaging – which makes Injection Molded packaging for paint, lube and F&B companies – had very similar sales (250 cr) and margin (12-13% EBITDA) as RPPL has today. But, Mold-Tek sweated their assets better and made Rs 3 for every Rs. of assets, whereas RPPL, which has a asset turnover of 2 currently. However, Mold-Tek had a higher D/E of 1.3-1.4 vs RPPL 0.7 currently.

During FY14, Mold-Tek saw its market cap become 5-6x from 50 cr to 250-300 Cr, which is at a shouting distance from what RPPL is trading at today. Mold-Tek then went onto post great results year after year. Although, initially they used a lot of debt to drive growth, but very quickly they pared it down to comfortable levels and used internal accruals to increases sales 3x (from FY14; 4x from FY13) to 730 Cr, expanded cumulative EBITDA margin to 17.5% with a weighted avg asset turnover of 2.3. The company now has a market cap of ~3,000 Cr i.e., 10x after its peak valuation of 300 cr in FY14.

The question is can RPPL replicate Mold-Tek’s growth? I do understand that comparison with Mold-Tek may be unfair since it draws 70% of its sales from paint, lube and oil customers; I am attempting to dig out what worked for Mold-Tek and how is RPPL placed currently.

So, now coming to why I don’t have full conviction just as yet?

1. RPPL supplies to F&B industry only. Thermoformed packaging is thinner vs IM and hence is used in holding lighter content i.e., packaged food. IM packages, on the other hand, find application in a wide variety of industries – paints, lubricants, oils besides F&B. (Back in FY14, Mold-Tek drew 90%+ sales from paint and lube industry and how the split between paints, lubes: food, fmcg is 70:30. Being able to supply do multiple industries seem to have worked well for Mold-Tek). Moreover, thermoformed packaging cannot cater to heavier food content such as ice creams, shrikhand, spreads, dosa batter etc. Not saying thermoforming is inferior. It certainly is not. It finds its end use in different applications, which has limited RPPL to one industry. Make no mistake, F&B industry has great growth potential, but I would have been more confident about RPPL’s prospects if they didn’t stay confined to just F&B.
2. No in-house Injection Molding yet. RPPL recently forayed into IM through a toll mfg agreement for food delivery containers. Since RPPL does not own the IM mfg tech, they likely wouldn’t be able to tech innovate (as Mold-Tek has been able to) and sign up existing and new marque customers for IM containers. Mold-Tek designs, maintains and manufactures their own molds (they also use robots for in-mold printing and decorating), which has given them an edge over competitors and has also helped them get exclusivity contracts with certain lube customers. Large customers are very picky when it comes to packaging since it is the face of their brand and hence they may not source from a company that does not own the mfg process. This may change in the future if and when RPPL begins investing in its own IM capability (and this may also help them foray into other industries).
3. Capital allocation decisions! Value proposition in developing paper packaging? Will it lead to a moated business model? I am not so convinced. Although, this will likely give them good sales uptick serving HoReCa, but then how does it help in building a sustainable competitive advantage? Paper packaging is a non-differentiated / commodity item (but then one might argue that plastic rigid sheets are as well). What stops HoReCa customers from switching to (and keeping) other vendors? I believe the differentiation may not entirely be in the product per se (but because they have a good clientele, they may be to upsell them this new product category). Moreover, this new mfg capability demands an investment of 100 Cr, of which RPPL is putting half. To put it in context, this 50 cr is 1/3rd of RPPL’s gross fixed assets. Allocating an amount equivalent to 1/3rd of your gross fixed assets in a capability with low competitive advantages may not have been the best thing to do in my opinion. I hope I am proved wrong!
4. Possibility of margin expansion? Over the last 5 years RPPL has witnessed its margin deteriorate (although, they have been able to more-or-less pass on RM price increases with a lag). This has been due to low operating leverage, high depreciation and interest cost. As op leverage plays out, they should see their margin expand. Mold-Tek expanded their cumulative EBITDA margin by 5% over the last 10 years because of widening gross margins, operating leverage and low levels of debt. Moreover, in-house IM mfg and automation has aided Mold-Tek keep in its margin expansion. Now, RPPL has in-house thermoforming, but since they don’t own the IM mfg, this may constrain RPPL’s ability to expand its margins to the extent Mold-Tek has been able to.
5. Promoter giving aggressive guidance?. There have been instances (although I am leaning towards not reading much into them for now) where the promoter has not entirely walked the talk e.g., promoter was confident on margin expansion in FY23, but that didn’t happen. They were also expecting the olive pack mfg plant to commence from Oct, Nov 2023, but that didn’t happen. Re: barrier packaging sale, promoter gave a guidance of 30 cr+ in FY24, however only 10 cr in H1 has happened. I like conservative promoters better.
6. Tube lamination business commenced, but was put on halt. The management seemed very ecstatic about this business at one point, but now they are saying it has been paused and will be looked into at a later point.
7. Statutory audit fees increased from 8 L in FY21 to 16 L in FY22 to 22 L in FY23. Sales and scale of operations also did increase from 16K MT to 26K MT in this period. Scale can be equated to more work for auditors. So this is fine for now. However, if the disproportionate increase in audit fees continues then it will be a red flag.
8. Strategic foreign investor gradually reducing their holding. Wifag Polytype Holding AG has been decreasing shareholding; 19.8% FY22 to 17.2% FY23 to 16.4% now. Moreover, Mr. Alain Edmond Berset (DIN: 07181896) resigned from the post as the nominee director of the Company (on behalf of Wifag Polytype Holding AG) w.e.f March 10, 2023.
9. Aging receivables. 8% of the receivables were aged in FY23 i.e., beyond 1 year. This number was 4% in FY21 and 2% in FY22. RPPL has credit terms of 60 days. Since RPPL adds a good number of customers every year. I am assuming not all of these are very known brands. Many of these may be small mom-n-pop F&B businesses. If these small businesses don’t do well, they may shut shop and just not honor their payments to RPPL.
10. Regulatory overhang. RPPL has stated that its products are of a much higher thickness than the ones which the government has sought to ban. Even if the regulations become aggressive, the end-companies wouldn’t stop selling their products. They will resort to alternatives such as bio-degradable packaging or thicker plastic. RPPL has also repeatedly stated that it has the capability to manufacture bio-degradable / sustainable products and they have the required certifications.

Despite having raised the above, one can’t overlook the fact that RPPL has a great set of F&B clients that can be sold more products in the future (but that will take some doing). Even with supplying the existing set of products to these existing clients, RPPL should continue growing. However, I’d like them cover a broader part of the value chain; they are doing it currently, but perhaps not in the way it has been done (by Mold-Tek).

Closing Thoughts and Valuation

It is interesting to note that as per my DCF (after projecting the three financial statements), for RPPL to almost justify its current valuation of Rs. 230 Cr, the company needs to demonstrate very similar growth, margin expansion and capital efficiency as Mold-Tek did over the last 10 years.

I am tempted to say that the market is pricing in the same high growth as Mold-Tek for RPPL, but that may not be entirely true. Right now, Indian micro and small cap scape seems to be in euphoria. People are playing the momentum game (I don’t know how to time the markets; I have a very long term investing horizon) so the market pricing currently does not seem rational. When the frenzy fades away and normalcy returns, and RPPL is available at sane valuations, then I may take a small stake subject to how some of the above points unfold in the future.

P.S: This is not a recommendation.

For any questions or comments, feel free to email me at gautamrastogi.investandrise@gmail.com or PM me on linkedin.