UFLEX STOCK HAS EXCELLENT POTENTIAL FOR SMART UPSIDE
By now all experts concur that post coronavirus, the world economy will not be the same and will take at least four-six quarters to recover. The over $14 trillion Chinese economy—second largest in the world—is also set to be completely altered, with some experts saying the setback could be permanent. For decades, China has been powering global manufacturing through its integrated supply chains on the back of large amounts of debt. Troubles are mounting for China since its years of profligacy on borrowed money has now resulted in its debt pile becoming extremely large at a time when its economy is contracting.
As per Institute of International Finance, China’s total domestic debt hit 317% of its GDP in first quarter of 2020, up from 300% last year, registering a largest quarterly increase. What’s worse, this data under-reports the true picture of China’s indebtedness, since a lot of debt is taken by local governments through financing vehicles that are not reflected in balance sheets. Since 2008, the annual growth in China’s domestic debt has been 20%, which has outpaced its GDP growth. Add to it the political culture of central Chinese leadership being favourably disposed towards local governments that have shown “development” backed by an ever increasing debt burden.
And China is set to take on more debt as it tries to beat the Covid-19 induced slowdown to increase its spending. With Beijing announcing advance quota of local government special purpose bonds to the tune of 1 trillion yuan to fund infrastructure projects, it is now almost a given that debt at the local level—which is non-transparent and often violates banking rules—is set to balloon further. The move will ensure local government debt will more than double as compared to last year from 1.9 trillion yuan in 2019 to almost 3 trillion yuan this year.
A banking crisis and systemic collapse of the financial sector are now looming large amidst growing concerns that many of the debts taken at household level and at local government level are at a very high risk of default. This could hit China’s statedominated financial system hard and unravel the nontransparent financial dealings that have been the hallmark of its growth model. In fact, the extent of regulatory lapses can be gauged from the fact that Ministry of Finance has been forced to call out certain regional governments for illegal fundraising in multiple audit reports. Obviously, the pandemic will slow regional economies and will drive down revenues of local governments, which will limit their ability to repay/refinance previous large amounts of debt, leading to large scale defaults.
One round of bailout by the central government took place in 2019 as smaller Chinese banks were witnessing tremendous uncertainty. There are now expectations that many more Chinese financial institutions will need bailouts by the central government.
Earlier this month, MIE Holdings, a listed oil and gas company, failed to make a $17 million interest payment on its $248 million bond, indicating the pain that lies ahead for Chinese companies. The pain will ultimately be felt by the government, which has asked its banks to extend borrowing to small businesses since this will add more bad debts to the financial system going forward due to a poor economic scenario.
The world’s most indebted country is shovelling more money via debt to fund projects to bring back growth. 2020 will decide whether the Chinese growth model will unravel and lead to its collapse. For now, bond markets and investors around the world are on tenterhooks. Gaurie Dwivedi is a senior journalist covering economy, policy and politics.
Uflex is India’s largest multinational flexible packaging materials and solutions company with over 30 years experience in the polymer technology business. The company has a packaging product manufacturing capacity of 135000 TPA across plants located in Noida, Jammu and Sanand in the country. It has world class manufacturing facilities of packaging films in Dubai, Egypt, Mexico, Poland and USA with a capacity of 337500 TPA engaged in providing flexible packaging solutions to blue-chip customers like Coca Cola, Glaxosmithkline, Amul, Nestle, L’oreal, Pepsico, P&G, ITC, etc. The India packaging industry has been posting excellent growth on the back of a rising population, increasing income levels, changing lifestyles, increased media penetration through internet and television and a growing economy. Not surprisingly, it is one of the strongest growing sectors in the country with more than 49% of the paper produced in the country being used for packaging purposes.
The rapid growth of the market is primarily driven by the pharmaceuticals and foods and beverages industries. Large investments by MNC’S in the food processing, personal care, and pharmaceuticals industries are creating scope for expansion of the packaging industry particularly companies like Uflex which have manufacturing facilities across the globe. The rise of the Indian middle class, rapid expansion of organised retail, growth of exports, and India’s rising e-commerce sector are further facilitating growth. Packaged food is the fastest-growing segment in the Indian packaging industry due to demand for plastic packaging, as it ensures food quality, safety, and long shelf life. Though the grocery market is a traditional retail industry, the food delivery and services market is fostering growth in the country with players like Bigbasket, Grofers, Zomato, Swiggy, etc registering rapid increase in sales. The industries where plastic bottles and jars are mostly used in the country include food and beverage, cosmetics and personal care, and pharmaceuticals industries. Polyethylene terephthalate (PET) and HDPE are the preferred materials for the manufacturing of bottles and jars in India. There are some applications, where PVC is still being used to manufacture bottles, jars, and vials. However, due to the increasing environmental concerns, the manufacturers are trying to shift to PET and HDPE. The Uflex stock had always been ruling around the Rs 275 levels for most part of 2019 and had crashed in March during the Covid outbreak to Rs 120 levels. Since then, the Uflex stock has improved to Rs 185 levels and analysts and fund managers are betting on the stock to touch the Rs 240 levels in the next two quarters. Investors can buy the Uflex stock on fundamental basis at the current market price of Rs 185 for a smart upside in their investment portfolio.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.
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