2. Risk Factors

  Before making a decision to invest in the shares of the Company,
  investors should prudently consider the information about risk factors
  described in this section and all information contained herein. Apart
  from the said risk factors, there are still other unpredictable risks
  that may adversely impact the Company’s operating results.

The key risk factors are:

2.1 Industry Cycle

  The industry cycle of PET film hinges on the spread between the PET
  film price and the prices of PTA and MEG which are major raw
  materials. At the time of tight supply, the PET film and raw material
  price spread will widen to a greater extent, thus encouraging
  manufacturers to increase production by expanding their capacity. On
  the contrary, if PET film supply is larger than market demand, the
  film price will drop, hence narrowing the spread between the film and
  raw material prices. This cyclical nature will inevitably affect every
  producer’s revenues and profits. To illustrate such cyclical impact,
  the movement of profit before tax/sales of PTL (standalone), is shown
  in comparison with that of the prices of PET film and raw materials,
  as below:

  Comparison of profit before tax/sales of the PTL with prices of PET
  film and raw materials

  []

  []

Source: Company information

  The cyclical behavior can be seen in the above data of the last 5-6
  years has direct impact on the operating results of PET film producers
  and the Polyplex group.

  To mitigate such risk, the Company has sought to undertake the
  following:

-   With high productivity levels and cost control measures, Polyplex
    believes it is one of the lowest cost producers of polyester film in
    the world which will help it deliver better financial results than
    the other constituents of the industry. [Please see Section 3 on
    Business Operations]

-   Increase its product portfolio by introducing new products like
    Extrusion Coating Film (already commenced production in April 2008),
    CPP Film (underway and expected to start up by Q3 of 2009-10) and
    the Silicone Coating Line approved by the Board in May 2009.

-   Accessing customers operating across countries in the flexible
    packaging and industrial segments by presenting alternative sourcing
    options from India, Turkey and Thailand and thereby mitigating their
    risks. This enables a more stable pricing regime.

-   Increased focus on product development through R&D or technology
    acquisitions besides creating a strong technical services team are
    likely to be additional differentiators between Polyplex and its
    competition

2.2 Risks relating to uncertainty in prices of the product and raw
material

  The basic raw material for production of PET film is PET resin, which
  is in turn produced from Purified Terephthalate Acid (PTA) and Mono
  Ethylene Glycol (MEG).

  Since the cost of resin is the single largest component of the total
  production cost, the fluctuation in the resin price may hurt the
  Company’s operating margins depending upon the ability of the Company
  to pass the increase in costs to its customers. As selling prices are
  usually negotiated on a monthly / quarterly basis, in a balanced
  demand supply situation, PTL is usually able to adjust the selling
  prices following any changes in the PET resin cost and other operating
  costs.

  Comparison between average raw material cost and average selling price
  of the Company for the past 6 years is given below.

+---------------------------------+----------------+-------------------+
|                                 | Raw material   | Product selling   |
|                                 | cost           | price*            |
|                                 |                |                   |
|                                 | (Bt. per kg.)  | (Bt. per kg.)     |
+---------------------------------+----------------+-------------------+
| Year 2003-04 (Apr 1, 03 – Mar   | 37.07          | 73.68             |
| 31, 04)                         |                |                   |
+---------------------------------+----------------+-------------------+
| Year 2004-05 (Apr 1, 04 – Mar   | 46.98          | 84.67             |
| 31, 05)                         |                |                   |
+---------------------------------+----------------+-------------------+
| Year 2005-06 (Apr 1, 05 – Mar   | 39.33          | 74.09             |
| 31, 06)                         |                |                   |
+---------------------------------+----------------+-------------------+
| Year 2006-07 (Apr 1, 06 – Mar   | 40.68          | 64.43             |
| 31, 07)                         |                |                   |
+---------------------------------+----------------+-------------------+
| Year 2007-08 (Apr 1, 07 – Mar   | 38.49          | 64.87             |
| 31, 08)                         |                |                   |
+---------------------------------+----------------+-------------------+
| Year 2008-09 (Apr 1, 08 – Mar   | 35.11          | 66.84             |
| 31,09)                          |                |                   |
+---------------------------------+----------------+-------------------+

  * Average Net realization per Kg of Plain film

  As seen from the above table, PTL has had to reduce the Selling prices
  in line with the reduction in raw material cots, at the same time, the
  company has been able to pass on the increase in raw material costs to
  the customers in most cases, except for 2006-07, where PTL witnessed a
  fall in the selling price despite higher raw material costs due to
  increased global production capacities resulting in increased
  competition. Also raw material prices witnessed a sudden spike in the
  first 2 quarters of the financial year 2006-07 and the company was
  able to partially adjust the selling prices only towards the second
  half of the year. In the FY 2008-09, although the raw material costs
  have reduced, there has been an increase in the Selling price, mainly
  due to sharp decline in raw material costs in Q2 2008-09 and the time
  lag in adjustment of the selling price for this reduction.

  Analysis of historical data shows high correlation between PTA/MEG –
  polyester film prices. The spread between two intermediates would vary
  depending upon the demand-supply situation of the commodity. Also
  sudden and sharp movements in raw material prices may affect the
  correlation for some time.

  The chart below shows the past trend in the pricing of PET film and
  PTA and MEG:

  []

  Source: Industry information

  The above industry data of the Far East demonstrates that variations
  in the raw material prices by and large tend to get passed on to the
  end-customers. The demand-supply balance of PET films which could vary
  across regions could impact margins. The spread between the raw
  material and PET films, especially over the last few years, has moved
  in a band. PTL’s contracts with some customers provide for a
  quarterly/periodic review in pricing which enables it to adjust for
  any raw material cost movement.

  The Company monitors world and local input price trends carefully and
  determines its procurement plans accordingly.

2.3 Risk associated with reliance on only a few raw material suppliers

  In the past, PTL had been procuring PTA and MEG (which are the key
  inputs for captive production of Pet resin) almost entirely from one
  supplier each. For PTA, the company was buying from a large local
  supplier and importing MEG from a reputed Middle Eastern producer out
  of its storage tanks in Singapore.

  However, PTA and MEG are well traded commodities and available from a
  variety of sources. From the year 2006-07, the company has switched to
  local supply sources for both the raw materials and is now meeting
  100% of its requirement domestically. The company has entered into
  long term / yearly contract for the supply of the raw material to
  ensure its availability. These contracts also have a supply guarantee
  clause to ensure that the risk of buying 100% from a single source and
  also a single plant operation is mitigated.

2.4 Risk from competition from existing manufacturers and entry of new
players

  PTL mainly focuses on export sales. With consistently rising demand
  for PET film, competition comes from such world leading manufacturers
  as Dupont-Teijin, Toray, Mitsubishi, all of which are well-established
  companies with long experience in this industry, as well as medium to
  small producers and new entrants with strong capital to accommodate
  investment in PET film plants and machinery.

  Compared with the above large players, PTL has a lower cost of
  production and focuses on producing thin film which is PET film of
  high growth potential to serve packaging, industrial and electrical
  applications. For those who are new entrants, they need to improve and
  develop their production competence to ensure competitively low cost
  against the existing players, the process of which will certainly take
  some time. Besides, they need to build up their customer base which
  can happen gradually through supply of consistently good quality
  products. Thus, PTL is confident that it will readily be able to
  compete against both world leading producers and newcomers. While the
  financials of the company and group would reflect the cyclical trend
  of the industry, it would be able to demonstrate superior
  profitability in any market situation due to its competitive edge as
  reflected in lower costs, good quality, higher productivity, value
  added product mix and sales reach.

-   The Company has strategically embarked on various expansion projects
    in Turkey and Thailand in the recent past and also has few other
    expansion projects in the pipeline which will further strengthen its
    competitiveness (Refer Section 3 –Business Overview for details on
    Projects commenced during the year and Section 6 –Future projects
    for new projects in the pipeline) The company has been continuously
    evaluating other growth options in PET film / value added products /
    related areas like CPP / BOPP/ Silicone Coated Films at all
    locations in Turkey/Thailand/India and has also been evaluating
    possibilities for any acquisitions to further expand its
    manufacturing base and also to improve its cost structure, product
    offering and market reach / penetration.

2.5 Risk from trade barrier measures

  Trade barrier measures taken by various countries are broadly of two
  major types:

a)  Anti-dumping (AD): An anti-dumping duty can be imposed on imports if
    the ex-factory prices of such imported products are proved to be
    lower than the local selling prices of the similar products in the
    countries of the exporters. For the past years, the countries
    adopting this measure are the EU and the US against such countries
    as India and South Korea.

b)  Anti-subsidy: A countervailing duty (CVD) can be imposed if the
    government or any government agency provides any benefits or
    privileges specifically to any company or exporter of such country.

  Such tax measures will cause import duty on the goods produced and
  exported from the targeted countries imposed at such a high rate that
  such goods will carry higher prices and hence have difficulty to
  compete with the products of the rivals. For manufacturers having a
  regional manufacturing base in such locations, such trade defense
  measures can be an opportunity if anti dumping duties are levied
  against imports from the Asian low cost producers.

  The company is undertaking all the safeguards to insulate against the
  risk arising out of anti-dumping duties and other protective barriers
  imposed by the importing countries. A geographically well-diversified
  sales portfolio will help mitigate the adverse fall-out of such an
  action, if any.

  Last year, in the US Anti Dumping petition against producers of PET
  film from Thailand, China, Brazil and Middle East, there was a
  negative injury ruling by the International Trade Commission (ITC)
  against Thailand and consequentially, there will be no duty against
  Thailand imports into the US market.

  As an outcome of the Anti-Dumping Investigation by Brazil in the year
  2007, against Thailand besides India, an Anti Dumping duty of about 28
  cents/Kg on imports from Thailand to Brazil and about 9 cents/Kg of
  Anti Dumping and Countervailing Duty on imports from India to Brazil
  had been imposed. However, the impact of this on the Company is
  minimal, as the sales to Brazil are almost negligible.

2.6 Risks from future projects

2.6.1 CPP Film project in Thailand

  The Company is currently in the process of setting up a project for
  manufacture of CPP film which will be a related product
  diversification for the company and help in diversifying its product
  risk. The technology for manufacture of CPP film is fairly established
  and the project would be similar to PET film, where sufficient
  know-how is already available with the company. Besides that, we also
  have an experienced projects team which has had a very good track
  record in the past, of starting projects on schedule and within
  budgeted project costs. The company also has customer synergies. The
  same set of customers may have a requirement for PET as well as CPP
  film, so we can make a broad base offering to the customers in the
  packaging converting industry and become a preferred single supplier
  for all their product needs. We can leverage on our existing sales and
  distribution network to further develop our customer base for CPP
  film. As far as the market risk is concerned, we are targeting a
  relatively small share of about 7% in the South East Asian market,
  which is fragmented with about 3-4 main players holding > 40% market
  share in the region and as such, gaining 7% market share is not such a
  big risk. The other smaller players have older and smaller lines which
  have productivity and quality issues. PTL is going for a wider line
  which will help in higher productivity, higher speed and better
  quality of products.

  The financial closure for the Project had been done in 2008 and so,
  the funding risk on this Project has also been taken care of.

  On the whole, the company is of the opinion that the risk associated
  with this project is not as high, since the Investment size is also
  relatively small.

  2.6.2 Thin PET Film expansion project

In May 2008, the Board had approved in principle, an Investment of USD
70 million in a Polyester Film, Polyester Chips and Metallized Film line
in Thailand.

However, pursuant to the global economic crisis and the aggressive
de-stocking along the supply chain which impacted the company’s sales
volumes/profitability in second half of last FY, it has been decided to
keep this project on hold until the actual impact on the industry, its
growth and the demand- supply is assessed. The Company would like to
ensure that the timing of the Project implementation is planned properly
so that the growth in markets can be rightly captured.

However, the key risks, associated with this Project, apart from the
planned timing of the implementation discussed above, arise mainly from
Market, project execution, operation and maintenance of the plant and
Project financing.

The entire market scenario (demand-supply) is being reassessed for
evaluating the potential impact on account of the global slowdown. The
company is identifying existing key markets where there may be a
potential to increase market share, while also exploring options to
develop new markets where there is a strong growth potential. Since Thin
PET film is an already existing product for the company, market
development activities will be taken up in full swing so as to ramp up
the production to full capacity in the shortest possible time

As far as the Project execution is concerned, the company does not
foresee any major concern as it has an experienced Projects team which
has implemented similar projects in the past smoothly in scheduled
project time and well within the budgeted project cost. The team of
competent managers will put in their best efforts to ensure that the
plant is running at high productivity levels.

The company currently has 4 local banks in its portfolio of banks that
have supported expansion projects in Thailand and in Turkey. The company
is confident of gaining the support of these banks in financing the new
expansion projects as well. The company proposes to borrow up to 65-75%
of the Project cost and will make a choice of 1 or more banks depending
on the terms and conditions offered by each of the banks.

  2.6.3 Silicone Coating Project

In May’09, the Board has approved an investment in a Silicone Coating
line. The location of this Project will be either Thailand or Turkey,
and will be finalized in the next 3-4 months. Although this will be a
new product for PTL, the risks associated with this Project are known to
Polyplex, since PTL’s parent company in India (PCL) had set up a similar
Project in 2007 and has since then, been manufacturing and successfully
selling this product at much higher value additions than normal
polyester films. The decision to invest in this Project is due to the
satisfactory and successful market response to the earlier line in
India. Polyplex sees a high growth potential in this segment and also
believes that this will help in further diversifying its product
portfolio.

The major risks associated with this Project are as below:

-   Market Risk: Since Polyplex has a global reach and an extensive
    marketing and distribution network, the Company does not forsee any
    major risk in developing the markets for this new product. Moreover,
    the market research data and the market experience already available
    with the parent company can also be leveraged upon to ramp up the
    sales once the Project is implemented.

-   Competition Risk: The Company believes that its cost structure would
    be globally very competitive and will be one of the major advantages
    to gain an edge over some of the existing producers in Europe and
    USA.

-   Project Implementation risk: Implementation of the Project within
    the Budgeted cost and timeline is another critical aspect for the
    success of any Project. Based on past experiences, it can be very
    well said that the experienced Projects team at Polyplex can ensure
    successful implementation of new projects on time and within
    Budgeted costs.

-   Funding Risk: The size of the Investment is not very big and the
    Company plans to borrow debt to the extent of USD 13-14 million or
    its equivalent, which is about 65-70% of the Total Project cost.
    Once the location of the Project is finalized, the Company will
    approach the banks for the financing and is confident that there
    should be no major issues in raising the Long Term debt.

-   Currency Risk: The borrowing for the Project funding would be
    planned based on the future inflows from the Project Operations, so
    that a natural hedge can be created to the extent possible. So, the
    currency of borrowing would be most likely in Euro, if it is in
    Turkey or in USD, if it is in Thailand.

Apart from all the Project specific risks and their mitigation plans as
discussed above, the Company would also like to mention here that the
overall Project risk of any new Project is covered by taking appropriate
Insurance policies to cover various risks such as Erection and
Construction all risks, Marine risks, Loss of Profit coverage due to
delay in Project Start-up.

2.7 Risk from dependence on the parent company

  Polyplex Corporation Ltd. (PCL), through direct and indirect
  shareholding, currently controls 70% of the shareholding in PTL.

  In the initial 2-3 years of its incorporation, PTL’s core management
  team consisted of persons who were previously employed by PCL and they
  played a vital role in successfully establishing PTL’s plant ahead of
  the schedule and at a lower-than-estimated cost, together with
  ensuring high productivity levels resulting in the Company’s ability
  to produce quality products at a competitive cost. However, after
  about 4-5 years of running, once operations were fully stabilized, the
  company successfully implemented a program for reducing the dependence
  on expatriates by increasing the proportion of local Thai staff in
  operating/managerial positions and has been managing the production
  and operations efficiently thereafter.

  The Company’s present management team is composed of experienced key
  personnel in production, marketing, distribution and
  accounting/finance. It has thus been able to run the business on its
  own without reliance on the parent company. It is only in the research
  and development area where the parent company provides know-how free
  of charge seeing it as a subsidiary company.

  PTL’s business operation is independent from PCL in such undertaking
  as public offering of equity, borrowing of loans, and other
  investments in the future, for instance. The parent company need not
  request any approval from any government bodies except for report of
  significant events to two stock exchanges where it is listed, namely
  Mumbai Stock Exchange and National Stock Exchange.

  The Company is confident that there will be no conflict of business
  interest between PCL and PTL on account of the following:

-   It is Polyplex’s policy in business operation that there is an
    equitable distribution of business between the various manufacturing
    units aligned to efficient servicing of customers.

-   The investment in PTL is in a significant proportion against PCL’s
    assets, hence the success of PTL being critical for PCL.

  (Details of marketing and investment policies between PTL and PCL in
  Section 4)

0.  2.8 Risk from sponsor group holding about 70% of total shares

  Currently, PTL’s major shareholders are PCL (As of March 31, 2009 the
  promotor Mr. Sanjiv Saraf and related parties control 46.93% in PCL),
  holding 16.50%, and Polyplex (Asia) Pte. Ltd. (“PAPL”) which is wholly
  owned by PCL, holding 53.50%, thus in aggregate holding 70% of PTL
  paid-up common shares of Bt. 800 million. Thus, in matters that
  require a three-fourths majority vote of shareholders, the minority
  shareholders can successfully oppose corporate actions undertaken or
  supported by the majority shareholders. However, the parent company
  will continue to play a vital role in determining the Company’s policy
  on business administration and operation.

  However, PTL has set up a three-member Audit Committee to provide for
  an audit of the operations and the management. Besides, PCL is listed
  on the Stock Exchanges in India and abides by the Corporate Governance
  regulations prevailing for listed companies in India.

0.  2.9 Foreign exchange risk

  Most of PTL’s products, i.e. about 80-85%, are for exports, which are
  mostly denominated in US dollars and Euro. As against this, raw
  material (PTA & MEG) prices are also linked to the US dollar, although
  their payments are done in Baht and there are Long term loan related
  interest payments/loan repayments in USD and Euro. The company as at
  Mar 31^(st) ’09 had Euro loans of about 10.83 million and USD loans of
  about 22.7 million. There are only some expenses which are in Thai
  Baht, i.e. packing materials, salaries, utilities and other
  administrative expenses which have to be settled by income from
  domestic sales and from the surplus income from USD/Euro exports.
  Thus, broadly speaking, PTL has a net surplus US dollar and Euro
  position on the trade front, which can be hedged somewhat against
  repayment of its long-term loans. To the extent possible, the company
  has been trying to create a natural hedge to mitigate the risk from
  currency fluctuations. In some cases, the company has also taken
  tactical hedge through forward covers from time to time as a short
  term measure to mitigate risk.

  The company will borrow additional amounts to the extent of USD 10.25
  million for the CPP project (Loan agreements already signed) and will
  also tie up another USD 13-14 million equivalent long term loan for
  the Silicone Coating Project. This funding would be planned based on
  the future inflows from the Project Operations (most likely to be
  Euro, if it’s in Turkey and USD, if it’s in Thailand), so that a
  natural hedge can be created to the extent possible

0.  2.10 Interest rate risk

  As of March 31, 2009, the outstanding long term was Euro 10.83
  million, USD 22.7 million and Baht 119.5 million, whereas outstanding
  short term loans was NIL. The USD loans have floating LIBOR based
  interest rates and the Euro loans have floating EURIBOR based rates.
  The Baht term loan is at a Fixed rate. The floating interest rate may
  put the Company at a risk of rising financial cost if the interest
  rates move up. The company has been constantly monitoring the interest
  rates and has taken interest rate swaps for converting the liability
  into fixed rates, if considered beneficial.

2.11 Risk from overlap of products and markets

  The product portfolio of PCL, PTL and PE is quite similar. In order to
  mitigate the risk of overlap of products and markets, PCL, PTL and PE
  have agreed on a clear cut policy on market segmentation. Under the
  policy, markets have been assigned to all the 3 group companies on the
  basis of logistics (cost and delivery terms), varying product range,
  preferential duty access in certain markets, availability of material
  etc (Section 4). Even for the new expansion in a Silicone Coating
  line, being planned in Thailand or in Turkey, the Company will work
  out an appropriate strategy with the parent company in India, so as to
  have clearly defined market segmentation so that there is no
  overlapping of markets in this product.

  The Polyplex group also has a policy on future investments in
  polyester film / related areas between the Company and its parent
  company. Investments in India/SAARC region would be decided and made
  by PCL and its other subsidiaries( excluding PTL) while investments In
  Thailand / ASEAN region as well as other countries would be in all
  likelihood be made by PTL or the subsidiaries in which the Company has
  a major stake (detailed in Section 3).

12. Credit risks

  Credit risk of customers is another significant risk for any business.
  The Company manages the risk by adopting appropriate credit control
  policies and procedures. All the sales, which are on credit are
  secured either through a Letter of credit issued by the customer or by
  taking appropriate credit insurance coverage for both domestic and
  export sales.

  In the current economic scenario, the Company is taking extra caution
  in selection of any new customers and granting of credit.

2.13 Risk from Global economic crisis

  The economy of every country and almost every major industry has been
  impacted to some extent due to the overall global economic slowdown.
  In comparison with most other industries, it maybe said that the
  impact on the PET thin film industry has not been so significant
  although there was a temporary contraction in demand due to the
  aggressive de-stocking in November’08 to Jan’09. But since most of the
  products are being used in the packaging of consumer staples (food
  items, soaps, detergents etc), it may be said that the products are
  recession resistant and the same is also reflected in the return of
  sales volumes to normal levels since mid February 2009.

  As one of the measures to counter such risks, the decision to invest
  in the setting up of the Trading Company in China, approved by the
  Board in February 2009 has been a strategic initiative to establish
  the Company’s presence in China, which is one of the fastest growing
  markets in this industry. This would enable the Company to have a
  presence in almost all the major markets of the globe.

  Apart from this, the Company continues to keep its focus on business
  Innovation/new product development/ product diversification which
  would further enable it to counter the impact of the global economic
  crisis to some extent.