SBI is Yes Bank’s Savior, Again!

Heard of that tale of a Sage and a Scorpion? A sage used to go to a river bank each day to offer his prayers and take a bath. One day, a scorpion bit him while he was entering the river. He felt that painful sting, but at the same time saw that the scorpion was drowning. The sage couldn’t resist seeing a living creature die in front of his eyes. So, he lifted the scorpion in his hand and tried putting it on the shore. But, the scorpion bit him again! Once again the scorpion was drowning and the sage helped it, but scorpion stung again and again.

A man was observing this series of events. He asked the sage, “Why do you keep helping the scorpion when it stings you every time?” The sage replied “It’s about character. If the scorpion maintains its character and keeps stinging, I’m a sage, and it’s my character to help others come what may.” Now, we definitely won’t say that Yes Bank is a scorpion and SBI is a sage but, you would be able to relate. Yes Bank is once again getting investment from SBI for its FPO. Read on to find out more about this development.

What’s up with the FPO?

Yes Bank is all set for its FPO on July 15. The base price has also been set. But, the thing that matters the most here is SBI’s intervention. The State Bank of India is all set to infuse Rs. 1760 crores in this Follow-on Public Offering. Yes Bank is envisioning to raise 15,000 crores from this FPO. The interesting part is that if all this goes through as planned, the stake of SBI in Yes Bank would be reduced considerably.

You would surely remember the Month of March when Yes Bank was nearing a collapse. SBI came acted like an angel for Yes Bank and saved it by infusing more than 6000 crores to acquire slightly more than 48% stake in the private lender. Even the private banks followed suite and acquired stake in Yes Bank. But, did the things improve then? Absolutely not. The ledger of the bank has been stressed like ever and the moratorium added to its woes.

One important question – Why does SBI save failing banks?

Remember the story that we told in the beginning. Although, SBI is not a saint by itself, it is forced to be a savior by either government or RBI or both. We live in an economy that is not a capitalist one and therefore, the PSU bears the responsibility to save a failing bank even if that has repercussions for itself. For example, the capital that SBI infused earlier and is infusing now, could have been easily used to benefit the shareholders. But, it is being used to save a failing bank.

In the developed economies, failing banks are not saved in this way. This is the reason their economies grow fast and become huge. The same capital is used to develop infrastructure instead of using it to rescue a financial institution that’s collapsing. Although, neither of these options i.e. saving the bank or letting it collapse is completely right or wrong.

Both ways have their set of reactions. Coming back to the FPO, there’s no guarantee that after a successful FPO, Yes Bank would return to the growth track. In fact, it may be better if SBI increases its stake in Yes Bank and takes proper ownership. But, to know what exactly would happen we’ll have to wait for a few days.

Packaging Industry

India is one of the world’s fastest-growing economies in which the packaging industry is among the high growth industries growing at 22-25% per year. The packaging is an important ingredient for manufacturing, logistics, marketing, and even disposal. It is the 5th largest sector in the Indian economy growing consistently and expanding day by day.

This growth is mainly driven by the development of pharmaceutical, food processing, manufacturing industry, FMCG, healthcare sector, and ancillary in the emerging economies. The cost of processing and packaging in India is much lower (40%) than European markets and given the availability of skilled labour it is attracting more investments from foreign players.

The Indian packaging industry can be broadly categorized into industrial and consumer packaging which can further be sub-classified as rigid and flexible packaging. Rigid packaging can be segmented on the basis of size, type, material, etc. Materials used include plastic, metal, glass, paper and boards, and others.

Almost every product that is produced uses packaging at some point in its life cycle. The flexible packaging market is dominated by plastic products because of its properties. About 49% of the material used in packaging is made of plastic resulting in increasing demand for plastic at a rate of 20-25% valued at 6.8 million tonnes. Around 65% of plastic waste is recycled and reused in India.

The demand for rigid packaging in industrial packaging is high as it helps in the safe transit of industrial products, but many companies are resisting a shift to new packaging form because of their existing infrastructure. Flexible packaging, on the other hand, is changing the dynamics of the Indian packaging market.

It is gaining traction and demand is increasing because of various factors such as the low weight of packaging, the ease in disposing of the packaging material, and compactness. However, the market growth in this segment will be slower than the growth of the market in the pharmaceuticals and consumer electronics segment.

Packaging Industry is highly fragmented with several players occupying the market share however large packaging manufacturers account for around 70% of the total market. It is expected to grow at a CAGR of 18% during FY20-24. Around 64% of growth will originate from rigid packaging whereas the shift towards the use of flexible packaging will further drive the growth.

Packaging has revolutionized the way products are being used. It is essential for many sectors especially the retail sector wherein it can be used as a tool for identification, branding, and attractive presentation of a product. A customer judges a product initially by the first impression delivered by its look and design. This first product experience and the ease of using it plays an important role in overall customer experience.

The packaging is responsible for preventing product damage, waste, and deterioration by preserving the health and hygiene value of certain products and eventually increasing the shelf life of perishable goods. The food packaging industry is one growth area that has seen the maximum number of innovations in terms of packaging and branding.

New technologies in food packaging include aseptic packaging, retort packaging, and biodegradable packaging to enhance the life of the product. Consumers want their food products to be hygienic, safe and at the same time to look attractive and due to ongoing COVID-19 pandemic, the importance of these factors has increased to a large extent which may result in improved top-line of many firms. The growth in the e-commerce sector is driving the demand for retail packaging which has grown to 65 million monthly unique visitors.

Changing lifestyle patterns, growth of consumer society, and increasing health awareness have driven the recent growth in the industry. Moreover, the advancement of technology and increasing per capita spending increasing the demand for the best quality products.

Many organized players have a dedicated research and development department which continuously looks after providing innovative and user-friendly packaging to the consumer. This development has led to healthy competition in the industry. Local manufacturers have access to state-of-the-art machinery ensuring the packaging is of the highest standards. Packaging helps in effective supply chain management of a firm by increasing transportation efficiency resulting in cost optimization.

In the future, the companies having the capacity to satisfy customer needs with superior product quality, high reliability in supplies, modern manufacturing systems will benefit more in a price-sensitive market like India. To pick a stock in the Packaging industry, one should consider the following financial aspects:

EBITDA/Sales Ratio

As the industry is highly fragmented and firms offer a large product suite, the operating profit margin should be at least 10%. The raw material turnover ratio should be at least 11 (3Yr-Average).
The better the stock fits in the aforementioned criterion, the better option it would be for investment. It’s quite simple, first, the criterion needs to be right to select the right stock. The data regarding the company’s revenue, expenses, and financial ratios are available on ticker.finology.in