I G Petro­chem­i­cals Ltd

Money Times - - Stock Buzz -

(BSE Code: 500199) (CMP: Rs.710.40) (FV: Rs.10) By Dil­dar Singh Makani

Com­pany back­ground: In­cor­po­rated in 1988 and pro­moted by the renowned Dhanuka group, Mumbai-based I G Petro­chem­i­cals Ltd (IGPL) is an es­tab­lished mar­ket leader and the low­est cost pro­ducer of Phthalic An­hy­dride (PAN) with strong recog­ni­tion and plant fa­cil­i­ties of in­ter­na­tional stan­dards. Equipped with one of the largest ca­pac­i­ties at a sin­gle lo­ca­tion, IGPL caters to the lo­cal as well as in­ter­na­tional markets.

Prod­uct: PAN is used in the man­u­fac­ture of plas­ti­ciz­ers, which are most es­sen­tial in mak­ing PVC prod­ucts, shoe soles, ca­bles, pipes and hoses, leather cloth, films for pack­ag­ing and other prod­ucts. It is also used to man­u­fac­ture alkyd resins used in paints and in the pro­duc­tion of un­sat­u­rated polyester resins for build­ing ma­te­ri­als, plas­tic prod­ucts, tex­tile in­dus­tries and print­ing ink.

Plants: IGPL has three state-of-the-art man­u­fac­tur­ing fa­cil­i­ties in tech­ni­cal col­lab­o­ra­tion with Ger­many-based Lurgi. Its plants are lo­cated at MIDC, Taloja in Ma­ha­rash­tra.

Fi­nan­cial Pa­ram­e­ters: For FY17, IGPL’s achieved a turnover of Rs.1040.29 crore with PAT of Rs.101.56 crore fetch­ing an EPS of Rs.32.98 v/s Rs.19.6 in FY16 and Rs.2.89 in FY15. The fig­ures for the first two quar­ters also look very ex­cit­ing and point to­wards much higher earn­ings.

With in­creas­ing cash liq­uid­ity (due to ris­ing prof­its), in­ter­est ex­penses have fallen from Rs.38.17 crore in FY15 to Rs.22.67 crore in FY16 and fur­ther to Rs.18.05 crore in FY17. This in­di­cates IGPL’s fi­nan­cial strength and is in­dica­tive of the lesser use of debt.

With an eq­uity cap­i­tal of Rs.30.79 crore and re­serves of Rs.362.58 crore, IGPL’s share book value works out to Rs.127.74.

Credit Rat­ings: IGPL con­tin­ues to get bet­ter credit rat­ings of A+ and A1+ for its long-term and short-term fi­nan­cial re­quire­ments, which re­flects a sta­ble out­look. These high rat­ings en­able it to ac­cess debt at lower in­ter­est rates, as and when the need arises. Cur­rent year work­ing: The de­mand for PAN in the Asia Pa­cific re­gion is ex­pected to grow at ~7% for the next 2-3 years. Dur­ing Q1FY18, it posted PAT of Rs.38.86 crore and an EPS of Rs.12.69. Dur­ing Q2FY18, it posted PAT of Rs.33.41 crore v/s Rs.20.23 crore in Q2FY17. Its prof­itabil­ity im­proved de­spite the fact that one of its plants re­mained shut due to de­bot­tle­neck­ing process and change of cat­a­lyst. The EPS for H1FY18 works out to Rs.23.61. We ex­pect H2FY18 earn­ings to im­prove sig­nif­i­cantly and in all prob­a­bil­ity IGPL is likely to notch an EPS of ~Rs.55 for FY18.

Re­cent Ac­qui­si­tion: IGPL re­cently ac­quired the Maleic An­hy­dride (MA) busi­ness of Mysore Petro Chem­i­cals Ltd (MPCL) on a ‘slump sale’ ba­sis for Rs.74.48 crore payable over 5 years. MA is a chem­i­cal in­ter­me­di­ary used in ev­ery field of

in­dus­trial chem­istry. MPCL is the only man­u­fac­turer of MA in In­dia while IGPL is a lead­ing man­u­fac­turer of its raw ma­te­rial - wash wa­ter. Both the plants of IGPL and MPCL are at a com­mon lo­ca­tion in Taloja. There­fore, this ac­qui­si­tion is likely to yield greater syn­ergy ben­e­fits for IGPL along with en­hanced pres­ence in the do­mes­tic mar­ket. The ben­e­fits of this ac­qui­si­tion will be re­flected dur­ing the cur­rent fi­nan­cial year.

On-go­ing ex­pan­sion: In 2015, IGPL had en­tered into a JV with Dubai Nat­u­ral Oil Com­pany to set up 45,000 TPA MA unit, which is likely to be op­er­a­tional in FY19. This in­te­gra­tion will boost IGPL’s top-line as well as bot­tom-line. The man­age­ment re­cently ap­proved the ex­pan­sion of its 53,000 TPA PA plant and to foray into down­stream prod­ucts. The ex­panded ca­pac­i­ties will be com­mis­sioned in FY19.

A multi­bag­ger in the off­ing:

While the IGPL stock had a stel­lar run in the last few quar­ters, its val­u­a­tion still looks at­trac­tive and there is room for a fur­ther rise. IGPL is on the right track by in­vest­ing in green­field and brown­field ex­pan­sions in or­der to boost growth and mar­gins that stand to sup­port earn­ings.

As against the per capita plas­tic use of 108-140 kg in de­vel­oped coun­tries like USA,

Europe and Ja­pan, In­dia’s per capita plas­tic con­sump­tion is just 10 kgs. The gov­ern­ment aims to push this to 20 kg by the end of 2020, which is still very low com­pared to the global av­er­age per capita plas­tic con­sump­tion of 45 kg.

IGPL is the largest man­u­fac­turer of PAN con­trol­ling 47% of In­dia’s pro­duc­tion ca­pac­ity fol­lowed by Thiru­mali Chem­i­cals

(~40%). The ben­e­fits of cap­tive power and prox­im­ity to ports help IGPL to keep its costs low and make it the low­est cost pro­ducer which en­joys 11.3% op­er­at­ing mar­gin as against 10.7% op­er­at­ing mar­gin of Thiru­malai Chem­i­cals.

The size of the In­dian PAN mar­ket is ~3.5 lakh tonnes, of which ~85,000 tonnes of do­mes­tic re­quire­ments are met through im­ports. Grad­u­ally, the share of im­ports is ex­pected to come down as IGPL ex­pands ca­pac­ity.

Share­hold­ing pat­tern: The pro­mot­ers hold 72.22% of the eq­uity cap­i­tal, which leaves 27.78% stake with the in­vest­ing pub­lic. None of the pro­moter hold­ing is pledged, which is a pos­i­tive. For­eign Port­fo­lio In­vestors (FPIs), Mu­tual Funds (MFs) and banks col­lec­tively hold ~1.33% stake while ~2.22% stake is held by bod­ies cor­po­rate and ~1.7% stake by NRIs. This ef­fec­tively means that the float­ing stock is lim­ited to 22.53%. Cur­rently, there is no war­rant pend­ing, which im­plies that there won’t be any di­lu­tion in the near fu­ture.

Div­i­dend and Bonus: IGPL has con­sis­tently in­creased its div­i­dend pay-out over the last three years. For FY17, it paid 30% div­i­dend. IGPL is at an in­flec­tion point. Its eq­uity is small com­pared to its sales and prof­itabil­ity. The man­age­ment is quite lib­eral. It is a seller’s mar­ket as far as IGPL is con­cerned. With the huge on-go­ing ex­pan­sion plans, IGPL’s fu­ture looks bright and its prof­itabil­ity is set to take a big jump. Also, there is a dis­tinct pos­si­bil­ity of a healthy rise in div­i­dend rate.

If the prof­its of the cur­rent year are added to the al­ready bulging re­serves, IGPL’s share book value at the end of this year may hover around Rs.182-184. There­fore, chances of a Bonus is­sue in fu­ture can­not be ruled out.

Price Pro­jec­tions: Com­mod­ity prices are on the rise and IGPL’s vol­umes are grow­ing on ac­count of the ris­ing de­mand. The in­dus­try en­joys a P/E of ~27x. On a con­ser­va­tive FY18E EPS of Rs.55, the stock could touch Rs.1320 within a year. If the for­ward earn­ings for FY19 are vi­su­alised, we cer­tainly see greener pas­tures. While mak­ing these pro­jec­tions, the ex­pected in­come from the on­go­ing ex­pan­sions has been ig­nored as the com­mis­sion­ing of such projects will ma­te­ri­al­ize only in the next fi­nan­cial year. There­fore, this stock is a scream­ing buy. More so, be­cause the com­pany’s work­ing in the next 2-3 years is ex­pected to be ex­em­plary.

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