Bhansali Engineering Polymers Ltd: A multibagger
(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.