I G Petrochemicals Ltd
(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.