Dhunseri Petrochem and Tea Limited BSE Code: 523736 NSE Id: DPTL

Equity diluted by 200% , however the company value rose 10 times.

CMP(BSE): Rs. 173.20

CMP(NSE): Rs. 173.50

Industry: Packaging, Tea and IT

Dhunseri Petrochem & Tea Limited (DPTL) is the flagship company of the Dhunseri group. It is a result of merger of two manufacturing companies present under the Dhunseri group. One company was Dhunseri Tea and Industries Limited (DTIL) which was engaged in tea production and marketing as well as IT infrastructure development. It is among the top ten tea companies in India, with almost 3% of the total tea production in India. The other company was South Asian Petrochem Limited (SAPL) which is into manufacturing of PET resin and is one of the largest PET resin manufacturers in South Asia. Early in FY 11, the 2 companies merged to form DPTL. The main objective behind the merger of SAPL in DTIL was to generate a large, recurring and reasonably predictable cash flow leading to sustainable reinvestment. This will help them multiply its revenue size in one stroke.

Synergistic Benefits:

• Before the merger, DTIL was a 105.84 crore organisation. After its merger with SAPL, it went on to become a 1203.23 crore company.
• Before the merger, DTIL was in tea business. After the merger it is into 2 business and soon they are moving into a new business through development of IT infrastructure, which will give them an annuity income.
• Initially, DTIL used to market its product in just India. However after the merger, DPTL markets its product in 30 countries.

DPTL's PET resin plant is spread across 35 acres in Haldia, West Bengal. Its present capacity is 200000 TPA. In 2012, after the commissioning of the new plant, the cumulative plant capacity would be 410000 TPA. DPTL also has 11 tea estates in Assam. In addition to this, DPTL is also planning to set up a greenfield, state-of-the-art PET resin plant with a capacity of 420000 TPA in Egypt, which is expected to be commissioned by 2012.This will quadraple the current PET resin capacity to 830000 TPA within three years. The result would be a four-fold growth in topline in the next 3 years following the commissioning of the Egypt PET resin project and 100% growth in Haldia plant in the next 2 years. This will result in huge value creation for the shareholders. Optimistic about the value creation by DPTL, the promoters already hold 62.61% of the expanded equity.

Value Creation:

• The Jaipur Packet Factory and the investment division of Dhunseri Tea & Industries Ltd were spun off and merged with DI Marketing Limited. The main aim behind this was to focus on its three major business lines - PET resin, tea and IT infrastructure development.
• The consolidation will help DPTL multiply its revenues in one stroke. In addition to this it will enable them to combine their predictable cash flows from PET resin with those from the cyclical tea business and their largely predictable commercial annuity business.
• Initially SAPL was a 100% export-oriented unit (EOU). After the merger it will cater to the growing domestic demand with an option to export.
• A 8MW coal-fired captive power plant in Haldia was commisioned in early FY11. This will help them in energy management.

DPTL's Divisions

(1) PET Resin Division:

DPTL's PET resin plant product finds its application in the manufacture of PET bottles used in the packaging of mineral water, carbonated soft drinks, edible oil, cosmetics, etc. Its brand is known as ASPET. The global PET resin demand is growing at 7% CAGR. The PET resin industry holds out bright prospects because of population growth, widening applications and replacement of the container/glass bottles. DPTL is the second largest producer of the PET resin in the country.

India is one of the more attractive geographies PET resin consumption of owing to large population, annual population growth, growing incomes, rising consumption, around 9% GDP growth and a gradual replacement of container glass by a transparent polymer like PET. In India, the demand has grown by 15% YoY and is now expected to grow at 20% YoY over the next five years.

(2) Tea Division:

Tea is India's staple beverage. India is the second largest tea producer in the world (after China), accounting for over 25% of the total global production. Due to adverse weather conditions last year, there has been a major shortfall in tea production. As a result of this, India's tea exports rose by 20% in the first five months of the current year to 71.2 million kgs. The demand for tea is expected to increase further. The consumption in India is growing at 2.5- 3% across 2002-2009. However at the same time the incremental production is not growing at the same rate. It grew at a CAGR of 2.4%. This tight demand-supply scenario would keep the tea prices strong.

DPTL's tea division produces 10 million kgs of CTC and orthodox tea. It is a market leader in the packet tea segment in Rajasthan. Its brands are LAL GHORA and KALA GHORA. Its entire production is recognized as superior quality Assam tea. DTIL previously merged with its own group company Tezpore Tea Company Limited in 2007-2008. As a result, the production grew from 7.55 mn kgs to 10.4 mn kgs in 2009-2010. It has also invested in irrigation infrastructure resulting in 100% irrigation coverage of its gardens due to which its gardens have an average yield of 2265 kg per hectare compared to the industry average of 1900 kgs per hectare.

(3) IT-SEZ Division:

DPTL has set up a IT-focused commercial infrastructure at Bantala in Kolkata with the prospect of stable annuity revenue. Bantala is considered to be a preferred destination for IT-focused companies. The first phase of this project will be complete by early 2012.

Before merger, DTIL had an equity of 11.71 crores. During merger, for each 10 SAPL share, one DPTL share was credited to SAPL's shareholders a/c. If you consider this, then the equity of the resultant company DPTL increased by another 23.314 crore. This resulted in almost 200% dilution of the initial equity base of the DTIL, bringing the total equity base of DPTL to approximately 35.03 crores. Equity dilution is not viewed positive by some investors. However if you look at the synergistic value, it rose by 10.36 times from 105.84 crore organisation to a 1203.23 crore company. Thus inspite of equity dilution by over 2 times, the value rose by almost 10 times.

Now with the PET resin capacity at 200000 TPA all set to quadraple to 830000 TPA within 3 years, means there would be qudraple increase in the current sales just from the PET resin division. In addition to this, there will be steady rental income flowing in from its IT-SEZ division within 2-3 years. Apart from this, the tea industry is going to witness good growth in the coming years. All this put together, means a multifold increase in the sales of DPTL in the coming 3 years.

At the CMP, the stock is available at par with the book value. Its current market cap is almost half of its sales. It has a total debt of 397.56 crore which is less than its reserves of 571.54 crore. Its debt equity ratio is about 0.68 which is lower than the generally acceptable ratio of 2. In addition to this, its earnings are sufficient to cover its interest payment upto 6 times which keeps DPTL well within the safety margin. It is a dividend paying company with the dividend yield coming upto 2.33%. Its EPS for the year FY10 comes out to be approximately Rs.25 per share on the expanded equity. Thus its PE works out to be approx 6.5. It looks attractive to me based on its future multifold earnings capacity.

Buying at current levels and on further on dips would make investment in this stock very attractive. It appears as a strong long term investment to me.

Happy Investing.