Saral Gyan Hidden Gem - Nov 2014

UNEXPLORED MULTIBAGGER SMALL CAP STOCKS

EQUITY RESEARCH REPORT

CONTROL PRINT LTD.

BSE CODE: 522295

Industry: Containers & Packaging CMP: Rs. 243.90 (30/11/2014)

Market Cap: 2402 (INR in Millions) Target Price: Rs. 510.00 Date: November 30, 2014 Time Period: 12 – 24 months

Saral Gyan Capital Services

www.saralgyan.in

An Independent Equity Research Firm

http://www.saralgyan.in/

HIDDEN GEMS – NOVEMBER 2014

- 2 - SARAL GYAN CAPITAL SERVICES

TABLE OF CONTENT

S.No Content Page No.

1. Company Background 03

2. Recent Developments 09

3. Financial Performance 10

4. Peer Group Comparison 12

5. Key Concerns / Risks 12

6. Saral Gyan Recommendation 13

7. Disclaimer 15



1. Company Background Control Print Limited (CPL) is an ISO 9001:2008 certified company based in Mumbai (Maharashtra), provides industrial grade coding and marking solutions to various industries such as pharmaceuticals, personal care, food and beverages, metal, agrochemical and extrusion products, such as

pipes and wires. The company specializes in providing solutions for printing variable information such as batch numbers, manufacturing and expiry dates, maximum retail price, serial number, special markings, logos, company/brand name, and barcodes. Control Print has now over 2 decades of experience in the Coding and Marking Industry and has partnered with leading global players technologically. The company had entered into a joint venture with Markem Corporation, U.S., to manufacture and market its products in India. Markem Corporation is a renowned coding and marking company having worldwide operations and is the undisputed world leader in Hot Ink Roll Technology for coding equipments. Along with Markem Corporation, Marconi Data Systems, USA, Bv Korthofah, the Netherlands and Ostling Metal Marking System GMBH, Germany are also among the global partners of CPL. During FY12, Company has acquired "Liberty Chemicals Private Limited" as its wholly owned subsidiary. The company manufactures and trades the printing machines required for the above applications, provides consumables such as ink and spares and also provides annual maintenance contract (AMC) services for the same. The company manufactures the printing machines under licences from various companies such as KBA-Metronic AG (Germany) for continuous inkjet (CIJ) printers under the alpha JET brand, and Sisma (Italy) for large character inkjet printer. The company has two manufacturing and assembling facilities, in Vasai (Maharashtra) and Nala garh (Himachal Pradesh). The company also trades laser printers, which it directly imports from Macsa ID, SA (Spain). Company has also set up a laboratory-cum-demonstration unit at Marol, Andheri. Earlier, CPL had technical tie up with the world-leader Avery Dennison, US, a Fortune-500 company.



Company’s Product Range:

Videojet Range of Small Character Ink Jet Printers Marsh Range of Large Character Ink Jet Printers Kortho Hot Quickcoders Conprint Range of Wet Ink Contact Coders Ostling Range of Metal Marking Systems

These solutions work on-line at high speed and offer the most economical running cost.

Milestone Achieved



Technology Partners: 1. KBA-Metronic Aktiengesellschaft is a medium-size technology company which specializes in the development, design, production, marketing and service of printing and coding systems. Metronic AG is also a leader in patented innovation. The company was founded in 1972. It is a subsidiary of Euro 2.7 billion Koenig & Bauer AG (KBA), the world’s third largest print equipment manufacturer, and is located in Veitshöchheim in the Lower Franconia region of Germany. The innovative product portfolio from KBA-Metronic AG offers customers around the world a choice of practical and highly flexible complete solutions. Excellent product quality and the excellent standard of our extensive services make KBA-Metronic AG a partner which industrial customers can depend on. The entire company has been certified to DIN EN ISO 9001:2000. 2. Macsa has an impressive history with more than 90 years of experience, and to know its history, one must go back to 1908 when the company Framun located in Manresa (Barcelona) set up the manufacture of rubber stamps. A few years later, this company started to distribute machinery and consumables for rubber stamp manufacturers all over Spain Due to the growing demand for industrial coding and marking, a line which has always been part of Framun's range of products, in 1983 Macsa was created as a completely independent company to focus on finding solutions for the increasingly sophisticated and complex problems posed by laser industrial coding and marking customers. The need to satisfy the end consumer, along with the international regulations and the latest technological advances in distribution and logistics, created the need for all products that are packaged, especially in the food sector, to contain an increasing amount of clearly written variable information Thus Macsa, has for almost a century been a fore runner in innovation in laser technology. Currently with the most superior technology, Masca is the market leader in this market.



Manufacturing Facilities: Control Print Limited has two modern manufacturing centers located at Vasai, on the outskirts of Mumbai, and Nalagarh, Himachal Pradesh. Aesthetically designed and fully equipped, these facilities are complete with all the necessary support tools, services and amenities required to ensure the highest quality of products and services consistently. In addition to manufacturing capabilities each center has comprehensive service training facilities for external as well as internal customers. Vasai – Spanning over 8000sq ft, the Vasai centre is a hub for assembly and manufacture of the entire Control Print product range. The entire range of Control Print inks is also manufactured at this facility. Nalagarh – Company’s additional facility at Nalagarh commenced production in 2008. This new facility was a step towards fortifying company’s expansion plans enabling a large increase in overall manufacturing and assembly capacity for all foreseeable future requirements. Spanning over 20,000 sq ft this facility is capable of assembly and manufacture of not only our entire product range but also for manufacturing of components and entire sub-assemblies required for company’s products enabling further improvements in quality control and cost efficiencies. There is also an additional fluids facility capable of manufacturing the entire range of solvents and inkrolls

Guwahati – Control Print currently has its modern production facilities located at Vasai and Nalagarh, while the manufacturing unit at Guwahati is expected to be commissioned soon.

The necessary statutory approvals for commencement of construction have been received early this year and the construction work for setting up manufacturing Unit at Guwahati, Assam is almost completed. As per the management, the plant is expected to commence production by end of this year. The proposed unit shall be entitled to tax benefits under Income Tax Act.



Service Network:

With Company’s extensive nationwide coverage with more than 120 well trained sales and service engineers, 9 offices, and 60 back end staff, Control Print provides the highest levels of pre and post-sales support for a consistent, reliable, high quality customer experience. Company also offers after sales services, which includes sale of services through annual maintenance contracts.



Requirement of Coding & Marking: i) Legal Requirements Providing Product Information to customers; Satisfying legal requirements by printing information such as MRP, Batch Numbers, Expiry Dates, etc.; Printing specifications, ISI logo, and Company logos ii) Inventory Control Reduction in wastage of packaging material; Reducing inventory and stocking by printing on the last minute; Printing on the production line; Using standardized pouches printing ingredients and other graphics to avoid wastage due to change in ingredients or customer destination iii) Traceability Quality Control; Tracking products by date of manufacture, batch numbers, shift numbers, and real time-date; Online coding enables recall of the minimum amount; Variable bar-coding enables tracking of products from one market to another; Quality control tool to check reliability. iv) Operational Efficiency Supply Chain Management; Debottlenecking; Tracking inventory through the supply chain by bar-coding, thus reduces cost; Variable bar-coding enables tracking of products from one market to another; Ensuring the most efficient supply chain by printing variable bar-codes onto shipper cartons enabling tracking of inventory by product. v) Branding, Customer Perception Customer Quality Perception, Improving the perception of a product by printing logos, graphics, and information on the product; Printing on any surface eg. pipe, iron sheet, plywood etc. vi) Counterfeit Prevention Counterfeit/Duplication and unauthorized diversion prevention; Legal liability and warranty protection; Protecting brand reputation by printing with invisible, fluorescent, and other specialty inks, dual serializers, variable bar-codes, encrypted bar-codes; Printing with invisible/fluorescent inks for counterfeit prevention; Ensuring that products are not diverted from one market to another, stolen during the production process itself with invisible codes and variable bar-coding. vii) Promotional Printing variable information and logos as a marketing promotion tool; Printing images and graphics directly on food products with food grade inks to attract children; Printing serial numbers along with secret check numbers on products for promotions with prizes; Printing images and graphics directly on some product types in order to differentiate a product from competition



2. Recent Developments

I) Expansion of manufacturing capacity with new unit at Guwahati, Assam

Control Print currently has its modern production facilities located at Vasai and Nalagarh, while the manufacturing unit at Guwahati is expected to be commissioned in the Financial Year 2014-2015.

The necessary statutory approvals for commencement of construction have been received early this year and the construction work for setting up manufacturing Unit at Guwahati, Assam is almost completed. As per the management, the plant is expected to commence production by end of this year. The proposed unit shall be entitled to tax benefits under Income Tax Act. II) Exploring Opportunities in Overseas Market Company is setting up a Branch Office at Sri Lanka to explore the overseas market and opportunities and to expand business activities and operations. The Management has taken requisite steps for obtaining necessary approvals from appropriate authorities in Sri Lanka and has submitted the required documents to incorporate the Branch under their Laws. However, certain statutory approvals are awaited. III) SAP ERP and CRM implementation As per the annual report, Company has taken another important initiative i.e. implementation of SAP – Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) software and the same was expected to go live during 2nd quarter of this financial year. SAP and CRM implementation will facilitate company to streamline its business processes and operations and would be beneficial in long run in managing the business process effectively and efficiently. This will help company to improve its cash flows from operations.



3. Financial Performance Control Print standalone net profit rises 36.94% in the September 2014 quarter Net profit of Control Print rose 36.94% to Rs 51.9 million in the quarter ended September 2014 as against Rs 37.9 million during the previous quarter ended September 2013. Sales rose 20.31% to Rs 285.7 million in the quarter ended September 2014 as against Rs 237.4 million during the previous quarter ended September 2013 Control Print net profit rises 39.15% in the June 2014 quarter Net profit of Control Print rose 39.15% to Rs 49.4 million in the quarter ended June 2014 as against Rs 35.5 million during the previous quarter ended June 2013. Sales rose 34.59% to Rs 267.5 million in the quarter ended June 2014 as against Rs 198.6 million during the previous quarter ended June 2013

1 2 3 4 5 6

Net Sales 198.68 237.38 229.03 245.49 267.52 285.73

Net Profit 35.48 37.87 38.87 28.89 49.44 51.85

198.68

237.38 229.03

245.49

267.52 285.73

35.48 37.87 38.87 28.89

49.44 51.85

0

50

100

150

200

250

300

350

Rs i

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Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14

Last 6 Quarters Net Sales & Profit



Current & Expected Earnings Quarterly Ended Profit & Loss Account

Expected Earnings for 3rd and 4th Qtr FY 2014-15: With the government regulations that make it mandatory for packaging information to be printed on consumer goods, the demand for these products is growing rapidly. With multinational companies entering the Indian market, automation / expansion of Indian industries is expected to augur well for Control Print. As per our estimates, company can achieve total revenue of Rs. 1170 million and net profit of Rs. 207.4 million with EPS of Rs. 21.5 for FY 2014-15.

Particulars (Rs in Millions)

Dec 2013

Mar 2014

Jun 2014

Sep 2014

Dec 2014 E

Mar 2015 E

Audited / UnAudited UA UA UA UA UA UA

Net Sales 229.03 245.49 267.52 285.73 297.89 319.47

Total Expenditure 171.71 199.08 203.17 220.15 228.65 241.19

PBIDT (Excl OI) 57.32 46.41 64.35 65.58 69.24 78.28

Other Income 0.64 5.04 0.51 5.24 1.75 2.75

Operating Profit 57.96 51.45 64.86 70.82 70.99 81.03

Interest 2.34 2.22 1.64 3.86 3.88 4.21

Exceptional Items 0 0.81 6.99 6.99 0 0

PBDT 55.62 50.04 70.21 73.95 74.87 76.82

Depreciation 3.18 3.09 5.11 4.67 4.85 5.10

Profit Before Tax 52.44 46.95 65.1 69.28 70.02 71.72

Tax 13.53 17.26 15.56 17.34 17.51 17.93

Provisions & contingencies 0 0 0 0 0 0

Profit After Tax 38.91 29.69 49.54 51.95 52.51 53.79

Extraordinary Items 0.04 -0.8 -0.1 -0.1 -0.1 -0.1

Prior Period Expenses 0 0 0 0 0 0

Other Adjustments 0 0 0 0 0 0

Net Profit 38.87 28.89 49.44 51.85 52.41 53.69

Equity Capital 90.73 90.73 94.48 94.48 98.48 98.48

Face Value (IN RS) 10 10 10 10 10 10

Reserves

Calculated EPS 4.29 3.27 5.24 5.5 5.32 5.45

Calculated EPS (Annualised) 17.15 13.09 20.97 21.99 21.29 21.81

No of Public Share Holdings 4619895 4619895 4615936 4614610 NA NA

% of Public Share Holding 50.92 50.92 48.85 48.84 NA NA



4. Peer Group Comparison

PEER GROUP Control Print Manugraph India Shilp Gravures

CMP 243.90 43.60 42.65

52 W H/L 56.10/277.00 44.90/23.50 53.30/29.00

Market Cap 2401.99 1326.10 262.29

Results (in Million) Sep-14 Sep-14 Sep-14

Sales 285.73 626.60 143.89

PAT 51.95 19.80 7.54

Equity 98.48 60.80 61.50

EPS 17.27 -2.54 6.42

P/E 14.12 0.00 6.65

We have compared Control Print with its close peers in the printing industry. The company commands better valuations than its close peers

5. Key Concerns / Risks The Company is still dependent on imports for raw materials and finished goods and

also has to make royalty payments and is therefore exposed to foreign exchange fluctuation risk. Depreciation of rupee against the dollar and euro can impact the profitability of the company.

Since the last few years the promoters have been increasing stake in the Company by issuing convertible warrants to themselves. Recently, board of Directors of the Company have approved conversion of 4,00,000 (four lakh) Warrants (issued on January 27, 2014 at a price of Rs. 53.23 including premium of Rs. 43.23 per share) into equity shares of the company which resulted in increase of total paid of the capital of the company to Rs. 9,84,82,480/- divided into 98,48,248 equity shares of the face value of Rs. 10/- each. Though promoters are increasing stake in the company, issuing warrants and converting to equity shares dilutes the equity capital and finally EPS which is a concern for us. Being a debt free company, we believe promoters must increase stake via open market purchase route in interest of minority shareholders.



6. Saral Gyan Recommendation

Overall coding and marking Industry growth is closely co-related to packaging industry growth and the manufacturing sector growth as a whole. The Indian Coding & Marking industry has reached a level of maturity and acceptance across applications and is dominated value-wise by 4 players with Control Print being amongst them. Being a manufacturer of majority of the Items required for Coding and Marking industry and having a leadership edge in technological terms, Control Print has an advantage over other players in the industry and can increase market share and installed base.

Looking at financial performance of the company, we can observe that company’s EBITDA margins have improved from 5% to 22% in last 5 years (FY 09-10 to FY 13-14) with significant important in performance ratios like ROA, ROE and ROCE. Moreover, company enjoys debt free status with surplus cash. With new manufacturing facility at Guwahati, we expect company will continue to deliver revenue and profitability growth above 20% going forward and maintain its high operating margins.

Important Ratios Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014

Margin Ratios

Core EBITDA Margin(%) 5.46 8.38 13.61 18.85 21.87

EBIT Margin(%) 6.64 15.24 18.40 18.90 21.66

Pre Tax Margin(%) 4.88 13.13 16.40 18.55 20.85

PAT Margin (%) 4.53 10.06 12.52 15.35 15.20

Performance Ratios

ROA(%) 3.48 8.43 11.14 14.39 13.36

ROE(%) 4.82 11.96 14.92 18.97 18.29

ROCE(%) 6.15 15.19 19.74 22.15 24.39

Financial Stability Ratios

Total Debt/Equity(x) 0.19 0.19 0.05 0.04 0.06

With government focus to accelerate manufacturing Industry with recent initiatives

like “Make in India” campaign, company like Control Print will be the direct beneficiary. As manufacturing becomes increasingly computerised, coded information can guide products through distribution channels and thereby reduce costs. Moreover, to comply with ISO & UL certification, the user companies must have an effective product identification system in place. This provides good business opportunity for coding companies like Control Print.

Control Print enjoys strong brand and established market position in industrial printer segment. Association with various global leaders in all the respective Coding & Marking technologies gives technological edge to the company. During the last two years, Company have seen good growth in non-inkjet technology namely Thermal Coders Transfer Overprints, Thermal Ink Codes and Laser coders. Now,



company is planning to improve its product portfolio and market presence in these segments with upgraded models.

In FY 2014, Control Print generated sales worth 2.27 crores from exports. Exports currently contribute only 2.4% to total sales of the company. However, considering the exports growth seen in past years and increase in manufacturing capacity with new plant at Guwahati, we expect significant increase in revenues from exports. Also, cost benefits of manufacturing in India and technical collaboration with leading global players can help company to capitalize on export opportunities going forward.

YEAR FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Export Sales (In Crores) 0.51 0.76 0.82 1.11 1.64 2.27

Growth % 0.00 49.02% 7.89% 35.37% 47.75% 38.41%

Control Print has paid uninterrupted dividend from 2002 to 2008. However, later in

2009 there was decline in profits because of higher operating expenses incurred by the company due to new manufacturing plant and slower rise in demand. Hence, dividend was not paid by the company for 3 years (from FY09 to FY11). As profitability and cash flows improved later, company has resumed paying dividend since last 3 years and dividend payout is in the range of 15% to 20%. Dividend yield at current market price is 1.03%.

YEAR FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Dividend / Share (In Rs) 0.00 0.00 0.00 2.00 2.00 2.50

Dividend Payout Ratio 0.0% 0.0% 0.0% 20.2% 14.1% 16.0%

As per our estimates, Control Print can deliver bottom line of 207.4 million for full financial year 2014 – 15, annualized EPS of Rs. 21.5 with forward P/E ratio of 11.3X and superior EBITDA margins (~21%) for FY 2014-15, which makes stock an attractive bet at current market price with limited downside risk and good upside potential for medium to long term investors.

On equity of Rs. 98.48 million, the estimated annualized EPS for FY 14-15 works out to Rs. 21.5 and the Book Value per share is Rs. 98.4. At current market price of Rs. 243.90, stock price to book value is 2.48.

Considering recent expansion, strong operating margins with debt free status and high growth opportunities in the business, Saral Gyan team recommends “Buy” on Control Print Ltd at price of Rs. 243.90 for target of Rs. 510 over a period of 12 to 24 months.

Buying Strategy:

70% at current market price of 243.90 30% at price range of 190-210 (in case of correction in stock price in near term)

Portfolio Allocation: 4% of your equity portfolio.



7. Disclaimer Important Notice: Saral Gyan Capital Services is an Independent Equity Research Company. © SARAL GYAN CAPITAL SERVICES

This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.

The information contained herein is from publicly available data or other sources believed to be

reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Saral Gyan Capital Services (www.saralgyan.in) or any of its affiliates shall not be in any

way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is

not intended to be and must not alone be taken as the basis for an investment decision.

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Saral Gyan Hidden Gem - Nov 2014