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. Whenever the demand supply balance favors the suppliers,
  the PET film and raw material price spread usually widens, thereby
  encouraging the manufacturers to increase production by expanding
  their capacities. 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. The FY
  2012-13 witnessed a situation of significant oversupply, thereby
  resulting in margins contracting to historically low levels.

  To illustrate the cyclical impact of the PET thin film industry, the
  movement of profit before tax/sales of PTL (Consolidated), is shown in
  comparison with that of the prices of PET film and raw materials, as
  below:

  Comparison of profit before tax as a % to sales, of PTL on a
  consolidated basis, with prices of PET film and raw materials
  (Consolidated - Average for PTL-Thailand and PE-Turkey)

  []

  []

Source: Company information

  The cyclical behavior can be seen in the above historic data, which
  has direct impact on the operating results of PET film producers as
  well as Polyplex.

  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 lower cost producers of polyester film in
    the world which will help it deliver better financial results than
    the other constituents of the industry.

-   Diversify its product portfolio by introducing new products like
    Extrusion Coated Film (second Extrusion Coated film line expected to
    start commercial operations in H1 of FY 2013-14), Cast Polypropylene
    Film, the Silicone Coating Line, Thick PET Film (expected to
    commence commercial production in H1 of FY 2013-14) to mitigate the
    risk of over dependency on a single product and single industry.

-   Polyplex is also investing a PET Bottle Grade resin project in
    Turkey, under a newly formed company, in which PTL indirectly holds
    a 67% stake, and balance 33% is held by its parent company in
    Singapore – Polyplex (Asia) Pte Ltd (PAPL).

-   Accessing customers operating across the globe in the flexible
    packaging and industrial segments by presenting alternative sourcing
    options from its existing manufacturing locations in India, Turkey
    and Thailand and from the new manufacturing location in USA where
    the PET thin film line has recently commenced commercial operations
    in April 2013 and its warehousing & distribution set up in Europe
    and China, thereby mitigating the risk of over dependency on few
    customers.

-   Diversified manufacturing and distribution base helps to mitigate
    the risk of volatile markets. For Eg: South East Asian markets are
    quite volatile in nature, whereas developed markets of US, Europe,
    Japan etc are less volatile. Polyplex tries to mitigate such risks
    by having a diversified sales portfolio.

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

-   The project for Offline Coater under implementation at Polyplex
    Europa (PE), Turkey will help in further enhancing our product
    offering to customers and reduce the exposure to commodity films’
    segments.

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 of Polyester film, 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.

  The above graph of historic Selling price and Raw material price
  movement demonstrates the correlation between the raw material cost
  and the selling prices. In most of the years the movement in the
  selling prices have been following the trend of the raw material cost
  except for years where other factors influenced the prices like
  2006-07 (down cycle in PET film industry due to imbalance in supply
  demand situation), 2008-09 when the world economies went through a
  turmoil and in 2010-11 where due to shortage in supply of PET films,
  the selling prices increased at extraordinarily high levels.

  During the FY 2012-13, the Polyester film industry witnessed an
  excessive over supply situation, brought about by all the additional
  supplies which came into the market in 2011 and 2012, following the
  extraordinary high margin levels witnessed in year 2010-11. There was
  tremendous pressure on the selling prices, due to which the margins of
  all PET film manufacturers were squeezed to historically low levels.

  In our estimate, the over supply situation is expected to continue for
  some more time, and once demand growth catches up with supplies, the
  markets should witness a more balanced scenario and the margins should
  rebound to normal levels.

  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, in Far East/ US and Europe:

  []

  []

[] Source: Industry information

  The above industry data 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

  The 2 major raw materials for the company, PTA and MEG are well traded
  commodities, available from a variety of sources in this region.
  However, the company is meeting its requirement domestically, by
  procuring each of these raw materials 100% from a single local
  supplier, thereby enjoying certain distinct advantages of shorter lead
  time/lower raw material inventory carrying levels etc. 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. And as
  far as the pricing is concerned, since it is linked to certain
  standard international benchmark rates there is high degree of
  transparency.

  For the Extrusion Coated film production, apart from PET film which is
  transferred from the Company’s in house production and also imported
  from the Parent company in India at Arm’s length pricing, the major
  raw materials are BOPP base film and Coating chemicals such as LDPE
  and EVA. All these are sourced from various manufacturers / traders
  from within Thailand as well as imports from within the region. For
  the second Thermal lamination line which is expected to start
  operations in H1 2013-14, the company plans to continue to source its
  requirement from existing suppliers, while it will also continue to
  explore other options available within this region.

  The major raw materials for the Cast Polypropylene film production are
  Homo Polymer and Co-Polymer. Homopolymer is being procured locally
  while Co-Polymer is being imported.

  For the Silicone Coating line, the main raw material is PET film which
  is transferred from the Company’s in house production and also
  imported from the Parent company in India at Arm’s length pricing.
  Silicone and other chemicals are being imported from USA and Europe
  from leading suppliers.

  For Thick PET Film line, the major raw material is PET Resin which
  will be produced in-house post start up of the new resin line in H1 of
  2013-14. The major raw material for PET resin is PTA and MEG,
  availability of which is not a major concern, as already explained
  above. PTA will be sourced 100% locally, but from a different
  supplier, than the one supplying PTA for existing line. This would
  help to diversify the risk of over dependency on a single supplier.
  The MEG will be sourced from the same supplier who is supplying for
  the existing line. The company has entered into annual contracts and
  also have supply assurance clause to ensure that the risk of sourcing
  100% of its requirement from a single source is mitigated. And as far
  as the pricing is concerned, since it is linked to certain standard
  international benchmark rates there is high degree of transparency.

  For Blown PP film line, the main raw material is PP resins
  (Homopolymer, Co-Polymer and PP Color master batches). We plan to
  source our requirement from local supplies as well as imports from
  within this region. The company already has experience of sourcing
  similar resins (Homopolymer and Copolymer) for the CPP Film line and
  would leverage on the relationship with existing suppliers, to
  negotiate favorable terms of supply for its new requirement for the
  Blown PP film line.

2.4 Risk from environmental regulatory measures

All the production lines of PTL, except for the Polyester resin line, do
not require any environmental impact assessment (EIA). For its Polyester
Resin line, the Company has the required clearance from the regulatory
authorities and utmost care is taken to ensure compliance to the same.

For the Silicone Coating line or the Thick Film & PET Resin line under
implementation, PTL was not required to get any EIA approval.

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

  With consistently rising demand and healthy growth potential, the PET
  film industry attracts new capacity investments from existing large
  manufacturers who 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. In this industry, it is quite commonly seen that
  capacity additions happen in bulk, following a period of attractive
  margins and profits and this disrupts the demand-supply balance for a
  temporary period of time, until demand growth catches up with new
  supplies. In certain cases, as witnessed in the last year, the
  oversupply is so excessive that the down cycle lasts for a prolonged
  period of 2-3 years. Despite the cyclical nature of this industry, it
  continues to remain an attractive industry with strong fundamentals
  and a steady demand growth.

  Compared to other players, Polyplex’s low cost of production,
  established quality, geographically diversified manufacturing
  presence, wide range of products and global market reach are some of
  key factors which make Polyplex one of the leading players in this
  industry. It remains confident of being able to compete against both
  world leading producers as well as newcomers.

  The Company has strategically embarked on various expansion projects
  in Turkey, USA and Thailand over the last few years, including the 2
  main projects - PET Thick film line in Thailand ( under
  implementation) and the PET thin film line investment in USA (
  Recently started commercial operations in April 2013). This along with
  the other expansion projects in the pipeline in Thailand and Turkey
  will further strengthen its competitiveness (Refer Section 3 –Business
  Overview for details on Projects commenced during the year and Section
  5 –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 existing locations in Turkey/Thailand/US, while also
  continuously evaluating growth options in other new locations/new
  product lines. The company 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.

2.6 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 few years, the countries
    adopting this measure are the European Union member countries and
    the US against such countries as India, China, Brazil 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 like ours will help mitigate the adverse fall-out of
  such an action, if any. And by having a local manufacturing presence
  in USA and Europe, it can take advantage of such trade barriers levied
  by these countries against imports from Asian countries.

  In the year 2008, 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 is 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, an Anti Dumping duty of about 28 cents/Kg on
  imports from Thailand to Brazil had been imposed. However, the impact
  of this on the Company is minimal, as the sales to Brazil are almost
  negligible.

  As an outcome of the Anti-Dumping investigation initiated by the
  Government of Brazil in December 2010, against UAE, Mexico and Turkey,
  in respect of PET film imports into Brazil, the government of Brazil
  imposed anti-dumping duty of USD 67.44 / MT on the Company’s
  subsidiary in Turkey (Polyplex Europa), which is however the minimum
  rate as compared to the rates announced for other countries as well as
  other producers in Turkey. Polyplex Europa’s exports to Brazil are not
  a very significant portion of their overall sales volumes and as such,
  the management does not expect any major impact from the anti-dumping
  margin imposed.

2.7 Risks from future projects

The major risks associated with any new Projects are as below:

-   Market Risk: Since Polyplex has a global reach and an extensive
    marketing and distribution network, the Company does not foresee any
    major risk in developing the markets new products. In the case of
    the PET Thick film, although this is a new product, the Company has
    already started establishing contacts with key customers in the
    target markets and remains confident of ramping up sales smoothly.

-   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/new entrants.

-   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 should be
    able to achieve successful implementation of new projects on time
    and within Budgeted costs except for un-foreseen circumstances.

-   Funding Risk: Long term Debt to the extent of 65-75% of the Project
    cost is generally borrowed by the Company and the balance is funded
    out of internal accruals. Based on the good relationship with
    existing banks, the Company is quite confident of raising the
    required financing for any new future Projects at competitive terms
    and conditions.

-   Currency Risk: For any new project, the currency of borrowing is
    decided, based on the projected operational cash flows of the
    project. The currency which has the maximum surplus in the
    operational cash flows is chosen to be the currency for the loan.
    This creates a natural hedge for the loan repayments, as and when
    the repayments start. The company also has internal FX guidelines to
    cover net exposure of Project costs, in various currencies by
    booking appropriate forward contracts, so that the risk on the
    initially estimated overall Project cost, on account of currency
    fluctuations is minimized. With the new borrowings made for the
    recent expansions in Thailand, the Forex loan portfolio of the
    Company has gone up to more than 100 Million USD (including
    equivalent of the Euro denominated loans), thereby exposing the
    Company to high amounts of unrealized Fx loss/gains on account of
    the restatement of such loans.

  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 etc.

2.8 Risk from dependence on the parent company

  Polyplex Corporation Ltd. (PCL), through direct and indirect
  shareholding, currently controls 51% of the paid up shares in the
  Company.

  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 operations
  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 and the implementation of new projects, where the
  parent company provides know-how and technical assistance to the
  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 reporting
  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 and its subsidiaries is higher as compared to
    PCL’s assets, hence the success of PTL being critical for PCL.

    0.  2.9 Risk from sponsor group holding about 51% of total shares

  Currently, PTL’s major shareholder is PCL (As of March 31, 2013 the
  promoter 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 34.50%, thus in aggregate holding 51% 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.  2.10 Foreign exchange risk

  Most of PTL’s products, i.e. about 75-85%, 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. On a standalone
  basis, the company as at March 31^(st) ’13 had Euro loans of about 23
  million and USD loans of about 70 million. There are some expenses
  which are in Thai Baht, i.e. locally procured raw materials, 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. On an ongoing basis,
  the company also takes forward covers, to cover the net surplus
  exposure in USD and Euro.

  Similarly, the Company’s subsidiary in Turkey has a net surplus in USD
  and Euro currencies whereas they have certain payments in the local
  currency, which is hedged from time to time by taking appropriate
  forward covers.

  The subsidiary in USA has USD revenues and USD payments, so there is a
  natural hedge. The project financing was also made in USD currency so
  that there is a natural hedge for loan repayment.

  The funding for new Projects of the company are also planned based on
  the future inflows from the Project Operations so that a natural hedge
  can be created to the extent possible. However, as explained above,
  the increased Forex loan portfolio of the Company of about USD 100
  Million (including equivalent of the Euro denominated loans), exposes
  the Company to high amounts of unrealized Fx loss/gains on account of
  the restatement of such loans, thereby resulting in instability in
  reported net profits of the Company.

0.  2.11 Interest rate risk

  As of March 31, 2013, the Company’s outstanding long term loans
  (consolidated basis) were Euro 57.5 million and USD 122.1 million,
  whereas outstanding short term loans were USD 22.5 million and Baht
  385 million. The USD loans amounting to USD 3.6 million (O/S as on
  March 31^(st) ’13) have already been swapped to fixed interest rate
  and the balance loans have floating LIBOR based interest rates. All
  the Euro loans have floating EURIBOR based rates. 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 will take interest rate swaps for
  converting the liability into fixed rates, if considered beneficial.

2.12 Risk from overlap of products and markets

  The product portfolio of PCL, PTL, PE and PUL is quite similar. In
  order to mitigate the risk from overlapping of products and markets,
  Polyplex has also evolved an equitable policy for distribution of
  markets, between its Indian, Thailand, Turkey and USA operations based
  on the several factors like product range, delivered cost to customer,
  supply lead times and preferential duty access. Based on the same, PTL
  would mainly serve South East Asia, Asia Pacific, China, and Australia
  & New Zealand. PCL would serve South Asia. Turkey will serve, Europe,
  America, Middle East, Africa and CIS/Russian markets. The US
  manufacturing entity would mainly serve North American and South
  American markets.

  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 the Company) 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. The above is subject to availability of
  Investible cash / ability to borrow debt by the existing / preferred
  Company as per the policy.

2.13 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. Most of 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. The Company also takes
  extra caution in selection of any new customers and granting of
  credit.