Bhansali En­gi­neer­ing Poly­mers Ltd: A multi­bag­ger

Money Times - - Value Pick -

(BSE Code: 500052) (CMP: Rs.130.50) (FV: Re.1) By Sachin Oak

The mar­kets are con­sol­i­dat­ing af­ter the sec­ond leg of the rally from 10K to 10.5K. With bet­ter than ex­pected Q2 re­sults and GST is­sues be­ing ironed out, this con­sol­i­da­tion will help fuel the next leg of the rally. There­fore, this is the per­fect time to ac­cu­mu­late some value picks and sit tight to watch them zoom in the next rally. One such stock is Bhansali En­gi­neer­ing Poly­mers Ltd (BEPL).

Com­pany back­ground: In­cor­po­rated in 1984, BEPL (mar­ket cap: Rs.2165.07 crore) is a ver­ti­cally in­te­grated petro­chem­i­cal com­pany that man­u­fac­tures ABS (Acry­loni­trile Bu­ta­di­ene Styrene), which acts as a raw ma­te­rial for com­pa­nies deal­ing in au­to­mo­biles, home ap­pli­ances, telecom­mu­ni­ca­tions, lug­gage, bus body and var­i­ous other in­dus­tries. It is one of the two big­gest man­u­fac­tur­ers of ABS poly­mer. It has en­hanced its plant ca­pac­ity from 7.5 KTPA to 80 KTPA. It has 2 plants at Sat­noor (M.P.) and Abu Road (Ra­jasthan). It man­u­fac­tures 1,200+ colours and 200 dif­fer­ent grades of en­gi­neer­ing plas­tic.

ABS prices had ap­pre­ci­ated in the last quar­ter on ac­count of higher oil prices, el­e­vated prices for acry­loni­trile and higher end mar­ket de­mand. On year-to-date terms, Asian ABS prices have risen ~40%, the pri­mary rea­son be­ing higher de­mand for ABS in China for au­to­mo­bile in­te­ri­ors. Fur­ther, raw ma­te­ri­als prices, par­tic­u­larly acry­loni­trile, have also risen which in turn has led ABS resin pro­duc­ers to hike the prices. Higher acry­loni­trile prices have been guided by plant shut­downs in China along with Hur­ri­cane Har­vey dis­rup­tion in USA. Prices for Styrene, an­other raw ma­te­rial for ABS, have al­ready dropped re­cently to the lev­els seen in mid-July.

This even­tu­ally will boost the mar­gins of ABS resin man­u­fac­tur­ers in the near-term.

BEPL plans to en­hance its man­u­fac­tur­ing ca­pac­ity four­fold by FY22 in two stages, which will help in cap­tur­ing the im­port-de­pen­dent do­mes­tic mar­ket (in­dus­try do­mes­tic ca­pac­ity 60% of de­mand). In the near-term, it aims to en­hance its ca­pac­ity to 1,37,000 tonnes from 80,000 tonnes cur­rently funded through in­ter­nal ac­cru­als. Fur­ther, its mega plan for 2,00,000 TPA ca­pac­ity is also un­der­way, which is likely to be com­mis­sioned by FY22.

The ABS man­u­fac­tur­ing busi­ness has a high en­try bar­rier not only be­cause of the in­vest­ments, but also due to the R&D re­quired for su­pe­rior func­tional qual­i­ties and cus­tomi­sa­tion.

High de­gree of cus­tomi­sa­tion leads to long-term con­tracts.

LG Chem, one of the largest ABS pro­duc­ers glob­ally, sources

ABS vari­ants from BEPL to meet its re­quire­ment in In­dia. Monomers and other raw ma­te­ri­als used for ABS are oil de­riv­a­tives and sub­ject to fluc­tu­a­tion in in­ter­na­tional oil prices. Key raw ma­te­ri­als for ABS i.e. styrene and acry­loni­trile are im­ported. Thus, in­ter­na­tional sup­ply and de­mand dy­nam­ics drive the prices of these ma­te­ri­als. (Source: Mon­ey­con­trol.com).

Per­for­mance Re­view: BEPL’s sales grew 17% QoQ and 60% YoY. PAT jumped 42% QoQ and al­most 3x YoY, ad­justed for both GST re­cov­er­ies and ex­cise duty. Higher turnover re­flected higher pric­ing trend for ABS and the el­e­vated ca­pac­ity uti­liza­tion wit­nessed re­cently. EBITDA mar­gins im­proved se­quen­tially on ac­count of lower raw ma­te­rial costs off­set­ting higher pur­chase of stocks.

Busi­ness out­look: Cur­rently, the de­mand for ABS in In­dia is 2,75,000 tonnes and is ex­pected to grow at ~15% CAGR in the medium-term. BEPL and Ineos Sty­ro­lu­tion have an ABS man­u­fac­tur­ing ca­pac­ity of 80,000 TPA each con­sti­tut­ing 58% of the do­mes­tic de­mand. The rest of the de­mand is catered to by im­ports which, in turn, are ma­jorly gen­eral pur­pose ABS (low mar­gin).

BEPL’s 50:50 tech­ni­cal JV with Nip­pon A&L Inc., Ja­pan (jointly owned by the glob­ally renowned Su­mit­omo Chem­i­cals Co. Ltd and Mit­sui Chem­i­cals Inc.) will en­able it to cater to the grow­ing de­mand for ABS resins, ASA resins, AES resins and other Spe­cial­ity poly­mers in sec­tors such as Au­to­mo­bile, Telecom­mu­ni­ca­tion, Elec­tri­cal and Elec­tronic goods.

Based on its near-term capex plans, BEPL is ex­pected to post rev­enue CAGR (FY17-19E) of 33%. Even though the man­age­ment is quite op­ti­mistic on the ca­pac­ity util­i­sa­tion front, 70% util­i­sa­tion (close to the global av­er­age) for the added ca­pac­ity in 2019 is fea­si­ble on ac­count of sup­ply deficit in the do­mes­tic mar­ket. BEPL is a debt-free com­pany. The man­age­ment has in­di­cated that it will not bor­row for capex or for work­ing cap­i­tal re­quire­ments go­ing for­ward. It does not plan to di­lute eq­uity ei­ther.

Con­clu­sion: The BEPL stock has ral­lied on the back of price hikes in ABS and Styrene and Chi­nese plant shut­downs. How­ever, we ex­pect it to rise fur­ther based on the man­age­ment’s con­fi­dence and fu­ture ex­pan­sion plans. We ex­pect BEPL to notch an EPS of Rs.4.5 in FY18. A P/E of 40x will take its share price to Rs.180 and be­yond Rs.200 with an EPS of Rs.5 and P/E of 45x. There­fore, we rec­om­mend this stock for a price tar­get of Rs.180 in the medium-term and Rs.200+ in the long-term.

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