Tariq Glass Industries Limited

Industrials: Paper, Packaging & Industries

TGL PA
April19, 2016

Research Entity Pakistan -028

Rating

Overweight

Target Price
Current Price

PKR 120 (96% Upside)

PKR 61.30
www.jamapunji.pk

Underweight

Overweight

Neutral

Key Themes & Implications

Incremental production and sales from tableware and
float segments along with potential power saving from
FO power generation to ramp up earnings going
forward

Tariq Glass Industries Limited

Back in Business

We resume coverage on Tariq Glass Industries Limited (TGL)

with Dec-16 PT of PKR120/sh offering an upside of 96% from last
closing. TGL is currently trading at an undemanding FY17/18 PE
of 6.01x/6.41x.

The company has been able to secure a sizable market share in

float segment (~50%) and is set to strengthen its market share in
the tableware segment as well on the back of enhanced
production capacity and expanding portfolio of value added
products.

Going forward, we expect demand for float segment to remain

buoyant on the back of economic tailwinds with heightened
construction activity to remain the primary demand driver.

Incorporating higher volumetric growth amidst stable margins,

we expect the companys topline and bottom line to grow at a 5year CAGR of 12% and 14% respectively.

In addition, the company is installing a ~10.5MW FO based

power plant to mitigate the risk of power outages coupled with
reduce power costs, which is a major portion of COGs (i.e. 15% of
COGS on average during last two years). The in-house power
generation would be more than sufficient to not only meet the
current power requirement for both segments (i.e. ~6MW) but
also meet future power requirement of ~8.5MW.

Share Information
Market Cap (PKR/US$)

4.50bn / 0.04bn

52-Week Range

51.64 - 84.09

Daily Avg. Volume

0.11mn

Shares Outs.

73.5mn

Free Float

40%

Performance

1M

3M

12M

Absolute

5.4%

-4.3%

12.6%

Rel. to Index

3.4%

-14.5%

11.0%

Major Shareholder
Directors
Omar Glass Industries Limited
(Associated Company)

40.8%
10.5%

Valuation
FY15A
11.03
1.47
6.25
0%

P/E (x)
P/B (x)
EV/EBITDA (x)
Dividend Yield

FY16E
10.81
1.30
5.48
0%

FY17F
6.01
1.07
3.74
0%

FY18F
6.41
0.91
3.53
0%

Performance
TGL

KSE-100 INDEX

180
160
140
120
100

Apr-16

Feb-16

Dec-15

Oct-15

Aug-15

Jun-15

Apr-15

80

Source: Elixir Research, Company Accounts, PSX, CIQ

Company Profile
Tariq Glass Industries Limited (the Company) was
incorporated in Pakistan in 1978 and converted into a
Public Limited Company in the year 1980. The
Company is listed on Karachi, Lahore and Islamabad
stock exchanges. The Company is principally
engaged in the manufacture and sale of glass
containers, tableware and float glass. The registered
office of the Company is situated at 128-J, Model
Town, Lahore.

Disclosures
Please refer to the important disclosures at the back of this report.

Investment Case: Our strong conviction on the company emanates from (i)
improved production capacity in high margin segment (i.e. tableware capacity to
further augmented by 12% post completion of refurbishment period) (ii)
improving economic and construction activity which shall bolster demand for
float segment (volumetric sales to grow at a 6 year CGAR of 4%), (iii) installation
of FO based power plant to deliver two pronged benefit of reduction in power cost
& streamline production process (not incorporated in our base case, expected
installation commencement from 2QFY17) & (v) improving gas situation in the
country (i.e. on account of RLNG) to allow higher capacity utilization (~11%
higher utilization in FY21 from FY16) in both segments. Incorporating higher
volumetric growth amidst stable margins, we expect the companys topline and
bottom line to grow at a 5-year CAGR of 12% and 14% respectively.
Valuations: TGL thus far had failed to fully capitalize on lower oil prices due to
production constraints on account of refurbishment of its tableware capacity.
However going forward we expect the company to post significant jump in
profitability in FY17 (80%) owing to production ramp up from capacity
enhancement. The stock trades at an attractive FY17 forward PER and PBR of
6.01x and 1.07x, respectively. We have valued TGL using DCF method with WACC
of 10.8% and terminal growth rate of 2.0% in our assumptions. TGL offers a
robust upside of 96% to our Dec-16 PT of PKR120/sh. BUY!
Key Risks: Key downside risks to our investment case include (i) further
penetration of low price and inferior quality tableware products from local and
imported (Chinese) players, limiting margins growth in tableware segment (ii)
higher than expected increase in gas, FO and HSD prices and (iii) lower than
expected surge in construction activity, primary driver of float sales.

Elixir Research Department

Syed Manib Imam
T +92 21 35694622, E: smimam@elixirsec.com

Tariq Glass Industries Limited

Industrials: Paper, Packaging & Industries
TGL PA
April19, 2016

TGL Tableware: Furnace Refurbishment to result in profitability growth

As per latest stock filing by the company, second tableware furnace which went offline for
refurbishment and expansion in first week of Dec15, will be returning for initial testing phase
from 20th April, 2016. The initial testing of furnace firing would take approximately 15 days
before the commencement of commercial operations which is scheduled in second week of
May-2016. Recall that tableware furnace capacity was already increased by 14% (30tpd) last
year, after a major refurbishment on one of the tableware furnaces (i.e. increasing capacity to
250tpd) in May15. With commissioning of its second tableware furnace in May16, the total
furnace capacity would increase by 12% (30tpd) to 280tpd. With increased glass availability
post tableware capacity expansion, company plans to manufacture new types of jugs, light
weight tempered plates and bowls useable in microwave ovens of international standards. In
this regard, state of the art machinery has already been procured with its commissioning
expected in 4QFY16. Moreover, owing to intense competition in tableware segment from local
and imported players, we have normalize the gross margins going forward and stabilize at 26%
which is still higher than last ten years average of 21%. While the inclusion of new product
lines to support the margins along with partially mitigating the risk of losing market share. In
wake of oversupplied market situation, we believe that TGLs price power would stay limited
where the management strategy would be to focus on enhancing volumes and market share.
Time Line of Tableware Furnace Rebuilt Period

110

18.3

93.3

140

140

140

140

FY17
onwards
140

Furnace 2

110

110

110

110

110

91.7

70

140

Total Capacity

220

128.3

110

203.3

250

231.7

140

210

280

(TPD)
Furnace 1

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

Offline

Online

Furnace 1

3rd week of Oct'14

May'15

Total Offline Period

six months

Furnace 2

Mid of Dec'15

May'16

four and half months

ten and half months

Tableware: Higher Volumetric Sales and Utilization Going Forward

Tableware: Margins Attrition due to Oversupplied Market Situation

Source: Elixir Research, Company Accounts

Source: Elixir Research, Company Accounts

Volumetric growth Energy costs constitute a lions share (i.e. ~39% on average during last
three years) in total production costs for TGL. However despite reduction in domestic HSD
and FO prices in the backdrop of rout in international oil prices, TGLs utilization dropped
by 3% to 74% in FY15 which is likely to remain low in FY16. This was mainly owing to lower
available capacity amid tableware furnace refurbishment and expansion phase. Having said
that, we believe companys volumetric sales would grow by a 5 year CGAR of 12% for the next
five year amid higher available capacity (~27% higher from pre-refurbishment period of
FY14A) and utilization (11% in FY21 from FY16).
Disclosures
Please refer to the important disclosures at the back of this report.

Tariq Glass Industries Limited

Industrials: Paper, Packaging & Industries
TGL PA
April19, 2016

along with lower fuel cost However going forward company would be able to fully
capitalize on lower FO and HSD prices, (i.e. down 52%YoY & 23%YoY in 3QFY16 to
PKR23,373/ton and PKR83/liter respectively) due to expected commencement of enhance
capacities from May2016 onwards. Moreover, our conviction on higher utilization is further
bolstered by improving gas situation in the country on account of imported RLNG.
to strengthen tableware gross profits: Going forward, we expect tableware segments
contribution to bottom line to increase by ~17% in FY21 to 74% from current 57% while PAT
emanating from said segment would grow at a 5 year CGAR of 20% to PKR583.05mn (EPS
7.99/sh) in FY21 from PKR234.37mn (PKR3.21/sh) in FY16E.

TGL Float: Set to capitalize on growing construction activities

TGL float glass has been successful in capturing and sustaining its market share in float glass
industry. According to our market survey, TGL and Ghani Glass Limited (GHGL) are the only
two local players in float glass market and they enjoy equal market share, while imports
constitute a small share (~15 to 20%) in float glass industry owing to its higher price
compared to local products (~49% higher). TGL has managed to gain equal market share
relative to a previously dominant position of GHGLs in float glass owing to its premium
quality. However, GHGL has responded by improving its quality at par with TGL and based
on our market survey both sell almost identical products in float segment at similar price.
Going forward we believe economic tailwinds emanating from CPEC led stimulus are going
to bode well for construction activity in general and float glass in particular. Moreover,
expanding the value added portfolio in float category like colored and reflective glasses,
which approximately sells at a 20% to 30% premium to normal float glass would further
augment volumes and margins for this category. Amidst Companys aim to capture higher
market share, we have incorporated normalize our gross margin assumption at 17% from
FY18 onwards. We remain bullish on this segment and flag upside risk to our margin
assumption on back of economic tailwinds.
Float: Utilization to Increase In-line with Uptick in Construction Activities

Float: Margins Decline in order to Increase Volumetric Sales and Market

Share

Source: Elixir Research, Company Accounts

Source: Elixir Research, Company Accounts

Float Glass Industry: Huge Price Differential Between Local and Imported float Glass
Local Float Glass
Imported Float Glass Price
Thickness (mm)
Retail Price/sq. ft
Retail Price/ton
Retail Price/sq. ft
Retail Price/ton
2
26
56,085
30
65,238
3
39
55,972
51
73,819
4
46
49,863
72
78,109
5
55
47,705
95
82,399
6
75
54,181
120
86,689
8
100
54,199
135
73,169
10
131
56,816
175
75,786
12
155
56,006
230
83,105
15
191
55,195
313
90,424
19
238
54,384
428
97,743
54,041
80,648
Average Rate
Premium over local
Product
49%
Source: Market Survey, Elixir Research

Disclosures
Please refer to the important disclosures at the back of this report.

Tariq Glass Industries Limited

Industrials: Paper, Packaging & Industries
TGL PA
April19, 2016

Power Cost to Decline after Installation of 10.5MW FO Base Power Plant

In order to ensure uninterrupted and cheap ( in prevailing oil price scenario) power supply,
the company has already placed an order for a 10.50MW FO base power plant. As per our
discussion with the management, the installation would commence in April-16 while
commencement of operation is expected by Jul/Aug 2016. Post refurbishment of tableware
furnace, the companys total power requirement would stand at 7.4MW after assuming
tableware and float utilization level of 74% and 80% respectively. Even at higher utilization
level for both segments, i.e. 80% (tableware) and 86% (float) in FY21, the said power plant
would be able to satisfy increased power requirement of ~8.7MW from the in-house capacity.
We however have not incorporated the power plant in our estimates owing to fluid timeline
of the project. That said, the project poses an upside potential to our investment case. We
estimate that the power saving emanating from said project could have a potential EPS
impact of PKR3 to 4/sh.

Changing Energy Mix: Tilting toward cheaper energy source

Glass production is an energy intensive process (39% of costs on average during last three
years), requiring ~19.44mmbtu/ton (tableware) and ~11.41mmbtu/ton (float) cumulatively
for fuel and power. Currently, the company receives on average 40-45% of gas requirement
while the gap is bridged through a mix of FO, HSD and LPG. Since furnace firing requires a
larger amount of heat, company allocates the entire available gas for furnace firing, while as
for power the company relies on grid electricity for almost ~50% of total power requirement
with the rest is met primarily by HSD based power generation. Going forward, we believe
that the current energy mix of 49%/35%/15% of Gas/ FO/HSD would tilt towards cheaper
energy source i.e., Gas and FO owing to improved gas availability (i.e. imported RLNG) and
in-house FO based generation capacity.
Fuel & Power Energy Requirement

Fuel

Power

Total

Table wear Energy Requirement

mmbtu/ton glass

14.76

4.68

19.44

Float Glass Energy Requirement

mmbtu/ton glass

9.24

2.17

11.41

Source: Elixir Research

FY16E

FY21F

Source: Elixir Research, Company Accounts

Source: Elixir Research, Company Accounts

Disclosures
Please refer to the important disclosures at the back of this report.

Tariq Glass Industries Limited

Industrials: Paper, Packaging & Industries
TGL PA
April19, 2016

Historical and Future Price Trend of Energy Mix

Source: Elixir Research, Company Accounts

Investment perspective
The company has successfully prepaid its long term syndicated term finance facility of
~PKR659mn which is expected to result in incremental EPS of ~PKR0.7/sh and reduce
overall gearing in FY16 to an estimated 0.82x. Moreover we highlight that aggressive
deleveraging could open up potential for increased payout going forward. The company is
currently trading at an attractive FY17 PER of 6.01x and offers a potent upside of 96% to our
Dec-16 PT of PKR120/sh. BUY!
TGL Valuation Snapshot
PKR Mn
Assumptions:
Cost of Equity
Cost of Debt
Tax rate
Target Debt-Equity
WACC
Terminal Growth

FY17F

FY18F

FY19F

FY20F

FY21F

737
0.5
700

912
1.5
782

1062
2.5
821

1090
3.5
760

1085
4.5
683
7871

13.5%
8.7%
32.0%
35.0%
10.8%
2.0%

FCFF
Discount Factor
Discounted FCFF
Terminal Value
Value
11,617
Add: Cash
110
Less: Debt
2,890
Less: Dividend
Dec'16 Equity Value
8,837
No of Shares (Mn)
73
Value per share
120
Source: Company Accounts & Elixir Research

Key Risks: Key downside risks to our investment case include (i) further penetration of low
price and inferior quality tableware products from local and imported (Chinese) players,
limiting margins growth in tableware segment (ii) higher than expected increase in gas, FO
and HSD prices and (iii) lower than expected surge in construction activity, primary driver
of float sales.

Disclosures
Please refer to the important disclosures at the back of this report.

Tariq Glass Industries Limited

Industrials: Paper, Packaging & Industries
TGL PA
April19, 2016

Summary of Financial Statements

Income Statement (PKR Mn)

FY15A
8,040

FY16E
8,387

FY17F
11,129

FY18F
12,340

FY19F
13,202

FY20F
13,862

FY21F
14,741

Cost of Goods Sold

6,426

6,583

8,662

9,817

10,460

10,997

11,685

Gross Profit

1,614

1,804

2,467

2,523

2,741

2,865

3,056

827

923

1,119

1,295

1,444

1,583

1,760

1,247

1,340

1,811

1,696

1,770

1,759

1,779

Depreciation and Amortization

453

452

456

461

465

470

475

Operating Profit

794

889

1,355

1,235

1,305

1,289

1,304

Other Income

13

Other Expenses

18

24

26

28

30

32

34

Net Profit Before Taxes

362

544

1,102

1,017

1,122

1,119

1,140

Taxes
Net Profit

(46)

127

353

315

337

336

342

408.22

416.59

749.47

701.90

785.62

783.50

798.02

5.59

5.71

10.27

9.62

10.76

10.73

10.93

Revenue

S.G.&.A. Costs
EBITDA

EPS (PKR)
Source: Company Accounts & Elixir Research
Balance Sheet (PKR Mn)

FY15A

FY16E

FY17F

FY18F

FY19F

FY20F

FY21F

Cash and Cash Equivalents

175

110

403

183

555

1,154

1,637

Current Receivables

756

789

1,006

1,082

1,121

1,139

1,171

Inventories

1,261

1,292

1,685

1,883

1,977

2,049

2,145

Total Current Assets

3,237

3,386

4,325

4,416

4,960

5,687

6,339

PPA + CWiP
Total Non-Current Assets

4,233
4,285

4,006
4,058

3,775
3,826

3,538
3,590

3,297
3,349

3,052

2,801

3,103

2,853

Total Assets

7,522

7,443

8,151

8,006

8,309

8,791

9,191

684

700

949

1,103

1,204

1,296

1,409

Short Term Borrowing

1,900

2,050

1,750

1,550

1,250

1,250

1,250

Current portion of Long term Borrowing

Total Current Liabilities

345
2,997

69
2,887

801
3,568

8
2,729

8
2,530

4
2,618

0
2,727

Long term Debt

1,128

742

20

12

Total Non-Current Liabilities

1,469

1,083

360

352

344

311
3,038
734.58

Payables

Total Liabilities

4,466

3,970

3,929

3,081

2,874

311
2,929

Paid up Capital

734.58

734.58

734.58

734.58

734.58

734.58

Share premium

410.12

410.12

410.12

410.12

410.12

410.12

410.12

1,421.94

1,838.53

2,588.00

3,289.90

3,800.05

4,197.90

4,518.44

135.01

135.01

135.01

135.01

135.01

135.01

135.01

355.00
3,056.65

355.00
3,473.24

355.00
4,222.71

355.00
4,924.61

355.00
5,434.76

355.00

355.00

7,522

7,443

8,151

8,006

8,309

5,832.60
8,762

6,153.14
9,191

Retained Earnings/ Reserves

Equity portion of Shareholder Loan
Surplus on revaluation of land
Total Equity
Total Liabilities and Shareholder's Equity
Source: Company Accounts & Elixir Research
Cash Flow Statement (PKR Mn)

FY15A

FY16E

FY17F

FY18F

FY19F

FY20F

FY21F

Net Income

408

417

749

702

786

783

798

Add: Depreciation and Amortization

460

459

464

468

473

478

482

Less: Increase in Current Asset

115

213

647

310

172

129

168

Add: Increase in Current Liabilities

-137

17

249

153

101

92

113

Less: Increase in Other Asset

Add: Increase in Other Liabilities

44

Less: Capital Expenditure

232

232

232

232

232

232

232

Add: Other Changes in Equity

-84

Cash Flow Before Debt Repayments and Dividends

344

447

584

781

955

992

993

Add: Interest after Tax

272

214

154

131

107

97

92

FCFF

616

662

737

912

1,062

1,090

1,085

Less: Interest after Tax

272

214

154

131

107

97

92

Less: Net Debt Repayments

286

512

290

1,001

308

33

FCFE

58

-65

293

-220

647

985

960

Less: Dividends

13

275

386

477

Net Cash Flow

45

-65

293

-220

372

599

483

Add: Opening Cash & ST Investments

130

175

110

403

183

555

1,154

Closing Cash & ST Investments

Source: Company Accounts & Elixir Research

175

110

403

183

555

1,154

1,637

Disclosures
Please refer to the important disclosures at the back of this report.

Tariq Glass Industries Limited

Industrials: Paper, Packaging & Industries
TGL PA
April19, 2016

Key Financial Ratios and Multiples

Growth

FY15A

FY16E

FY17F

FY18F

FY19F

FY20F

FY21F

Revenue Growth

4%

4%

33%

11%

7%

5%

6%

Gross Profit Growth

43%

12%

37%

2%

9%

4%

7%

EBITDA Growth

49%

7%

35%

-6%

4%

-1%

1%

Operating Profit Growth

108%

12%

53%

-9%

6%

-1%

1%

N/A

2%

80%

-6%

12%

0%

2%

Net Profit Growth

Margin

FY15A

FY16E

FY17F

FY18F

FY19F

FY20F

FY21F

Gross Margin - Container & Tableware

27%

30%

28%

26%

26%

26%

26%

Gross Margin - Float

15%

19%

18%

17%

17%

17%

17%

Gross Profit Margin

20%

22%

22%

20%

21%

21%

21%

EBITDA Margin

16%

16%

16%

14%

13%

13%

12%

Operating Margin

10%

11%

12%

10%

10%

9%

9%

Pretax Profit Margin

5%

6%

10%

8%

9%

8%

8%

Net Profit Margin

5%

5%

7%

6%

6%

6%

5%

P/E (x)

FY15A
11.03

FY16E
10.81

FY17F
6.01

FY18F
6.41

FY19F
5.73

FY20F
5.75

FY21F
5.64

P/B (x)

1.47

1.30

1.07

0.91

0.83

0.77

0.73

EV/EBITDA (x)
Source: Company Accounts & Elixir Research

6.25

5.48

3.74

3.53

3.00

2.67

2.35

FY15A
213
52
161

FY16E
251
70
182

FY17F
274
92
182

FY18F
274
92
182

FY19F
274
92
182

FY20F
274
92
182

FY21F
274
92
182

Production
Tableware
Float

158
37
121

184
48
136

208
68
140

222
73
149

226
74
152

226
74
152

230
74
156

Utilization
Tableware
Float

74%
71%
75%

73%
69%
75%

76%
74%
77%

81%
79%
82%

83%
80%
84%

83%
80%
84%

84%
80%
86%

Sales Assumed
Tableware
Float
Source: Company Accounts & Elixir Research

158
37
121

184
48
136

208
68
140

222
73
149

226
74
152

226
74
152

230
74
156

FY15A

FY16E

FY17F
330

FY18F
330

FY19F
330

FY20F
330

FY21F
330

Capacity
Tableware
Float

646
159
487

762
212
550

830
280
550

830
280
550

830
280
550

830
280
550

830
280
550

Production
Tableware
Float

478
112
366

559
146
413

631
207
424

672
221
451

686
224
462

686
224
462

697
224
473

Utilization
Tableware
Float

74%
71%
75%

73%
69%
75%

76%
74%
77%

81%
79%
82%

83%
80%
84%

83%
80%
84%

84%
80%
86%

Sales Assumed
Tableware
Float
Source: Company Accounts & Elixir Research

478
112
366

559
146
413

631
207
424

672
221
451

686
224
462

686
224
462

697
224
473

Valuation Measures

Key Operational Data

Tons per Annum (KTPA)
Capacity
Tableware
Float

Tons per Day (TPD)

Day

Disclosures
Please refer to the important disclosures at the back of this report.

Tariq Glass Industries Limited

Industrials: Paper, Packaging & Industries
TGL PA
April19, 2016

Chief Executive Officer

Contact

Email

Fawaz Valiaani

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Tariq Glass Industries Limited

Industrials: Paper, Packaging & Industries
TGL PA
April19, 2016

Disclaimer and Disclosures for Equity Research

Disclaimer
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Disclosures
1. Explanation of Elixir Securities Pakistan (Private) Limited Rating System
Elixir uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage.
Overweight: Our Target Price is more than 10% above the current share price, and we expect the share price to reach the target on
a 1 year time horizon.
Neutral: We expect the share price to settle at a level between 10% below the current share price and 10% above the current share
price on 1 year time horizon.
Underweight: Our Target Price is less than 10% below the current share price, and we expect the share price to reach the target on 1
year time horizon.

2. Definitions
Time Horizon: Our analysts make recommendations on a 1 year time horizon. In other words, they expect a given stock to reach their
target price within that time.
Fair Value: We estimate fair value per share for every stock we cover. This is normally based on widely accepted methods appropriate
to the stock or sector under consideration e.g. DCF (discounted cash flow) or SOTP (Sum of the Parts) analysis.
Target Price: This maybe identical to estimated fair value per share, but is not necessarily the same. There may be very good reasons
why a share price is unlikely to reach fair value within our time horizon. In such a case we set a target price which differs from estimated
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Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors,
or if a companys profits or operating performance exceed or fall short of our expectations.

3. Risks
The following risks may potentially impact our valuations/forecasts:
Interest Rate Risk, Exchange Rate Risk, and Regulatory Risk.

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