Friday, June 1, 2018

BHANSALI ENGINEERING POLYMERS LIMITED - RECENT PRICE FALL-WHY- WHEN NORMALCY- 33RD ANNUAL REPORT FOR 2016-17 EXCERPTS



BHANSALI ENGINEERING POLYMERS LIMITED
33RD ANNUAL REPORT FOR 2016-17
EXCERPTS
RECENT PRICE FALL- SOME INSIGHTS

I have already reviewed the latest Q4 results of Bhansali Engineering in another Blog Post. The results were good – but there were some Q4 specific additional exceptional expenses which reduced Q4 Profits to some extent.

Here are the brief particulars of Q4.

Total income increased by 38% YoY and 17% QoQ.
Net profit increased by 87% YoY and -0.97%QoQ.
The share’s Market price has increased during the last one year from 38 Rs to 168, which is very impressive. It had gone up to Rs.210 also.
EPS FOR 4TH QTR IS 1.72 AND ON THIS THE PE RATIO IS AROUND 24.
Bhansali has completed the ABS expansion to 100 KTPA at Abu Road Unit by 31.03.18. It is a Zero Debt company now.
But, the real bad News is – the Fire Accident at Satnoor Unit, which put it out of use for one full month. Production and sales would have been affected and probably some raw material loss also might be there. Part of all this may be recovered from Insurance.
Now, to understand BEPL prior to Q4 further, let us look at the ANNUAL REPORT for 2016-17 and analyse the same. Here are the excerpts from the Annual Rweport-2016-17.

EXCERPTS :

OPERATIONS AND FUTURE PLAN:
(I)                OPERATIONS

F.Y. 2016-17 reflects a magnificent performance and depicts manifestation of the true potential of your esteemed company.
Company has adopted a strategic approach to re-position its products in highly profitable consuming segments.
Despite stiff competition from imports with relatively weak custom tariff protection, company could increase its gross margin by 27.80% and turnover by 18.48%.
Increase in sales has shown growth of 15.24% and correspondingly the production by 16.10%.
Upon completion of the expansion cum revamping project in the year 2015-16, the total ABS capacity stands at 80 KTPA whereas the exploitation thereof in 2016-17 has been 64.31% only. Ipso facto, improving upon the results achieved in 2016-17, is likely to be far more impressive in the F.Y. 2017-18 and definitely thereafter in the subsequent years owing to the following facts:
1. Growth in GDP post implementation of the GST will push the consumption of lifestyle goods especially in the two wheeler automotive segment, domestic appliances segment and other consumer durables. These first two market segments are the major consumption area of your company’s products.
2. Overall demand of ABS has substantially outstripped the present supply of 160 KTPA against the current consumption level of 275 KTPA in F.Y. 2016-17, this is likely to continue to grow at the rate of 15% CAGR for at least a decade ahead.
3. Overall ABS Global capacity utilization is around  70% and which makes the big capacity players to supply in the deficit zone mainly India and China.
4. Despite availability of market in India, global players find it difficult to meet demand of Indian market as quantity wise it is not attractive due to some reasons. Several giant global manufacturers of ABS sell their products in India to improve their respective capacity utilization. China imports huge quantity of general purpose ABS from Taiwan. India is a domestic market demand driven economy whereas China’s economy is driven by exports. This is principally the reason that has not attracted any third player in the Indian ABS market so far.
There is need for existing two ABS manufacturers to improve their respective capacity utilization and also expand their individual production capacity as quickly as possible to reduce import dependence.
5. Your company’s endeavor to attain optimum capacity utilization of 80 KTPA is deemed most expedient and the company is confident that by end of the current fiscal 2018, it will produce and sell 72 KTPA-optimal capacity utilization. Thereafter, it will ramp up its production and sales by exploiting the additional capacity being created at Abu Road for compounding to achieve an aggregate ABS manufacturing capacity of 137 KTPA by 31st December, 2018.
The consistent growth in ABS domestic demand unfolds an exciting opportunity to set up a global size port based ABS manufacturing unit for your company. Presently due to unique market situation company is able to not only sustain but earn handsome profit despite split location of manufacturing facilities at Satnoor, MP whereas bulk SAN and compounding production units are located at ABU Road, Rajasthan

(ii) Future Expansion:

Your company has decided to set up a port based green-field plant with a minimum capacity of 200 KTPA in the state of Gujarat, based on state of the art technology from Japan. The Japanese company is Nippon A&L. Infrastructure development work is progressing rapidly. The implementation programme has been firmed up to commence manufacturing of ABS here by 31st  March, 2022.  By then, the company will be able to exploit its capacity of the plant optimally. If required, your company  will be in a position to export specialty grades of the ABS, ASA and AES resins as well.
Implementation of the project takes into account, in terms of technology selection and logistic planning that it remains globally competitive. The project is based on ultra modern process technology. 

(b) Industry Structure & Development:

All  the end user products  push  the  demand  for  ABS  and other polymers in a big way. Therefore, in the last 5 years, year on year, import of ABS has been increasing as  Bhansali  Engineering  Polymers  Ltd  (BEPL)  and  Styrolution  are  unable  to  cope  up  with the market demand. BEPL has been striving hard to penetrate into two wheelers and refrigerator liner market segments  in  the  manner  that  it  does  not  have  to  produce  the  large  quantity  of  general  purpose  grades  in  natural  shade where competition is with cheap imports. This is precisely the reason that enabled BEPL to improve upon its price realization per unit sales volume and consequent thereupon, the gross margin.
PBT is at Rs. 55.88 Crore against Rs. 23.39 Crore last year, with a quantum jump of 138.91%.The current financial year holds a brighter promise as BEPL will be in a position to increase the sales quantity in tandem with the present production capacity, focusing on high margin business and refraining from competing  against  cheap  imports. 
company  has  also  drawn  up  a  plan  to  establish  a  green-field  port  based plant with minimum capacity of 200  KTPA to be implemented and commissioned by 31st  March 2022 in the light of the fact that quality of the company’s products has gained acceptance by the reputed customers like HMSI, Maruti, Whirlpool,  Samsung, LG, Toyota, Mahindra, Bajaj, Godrej and many more.
The  Company  is  modernizing  the  production  facility  at  Abu  Road  for  compounding  which  will  result  in  establishment  of  overall  ABS  production  capacity  at  137  KTPA  by  December,  2018  and  from  the current year onwards, Company is putting-in humongous effort to attain 90% plus capacity utilisation year after year.
Company’s consuming segment industries are in the high growth trajectory. Through the JV company viz. Bhansali Nippon A&L Pvt Ltd, the sales of ABS, AES and ASA specialty grades bearing high profit margin is being pushed hard successfully as customers are not interested to source these products from overseas.

(c)      Opportunities & Threats:

The consumption of ABS in India is voluminously larger  than  the  capacity  of  the  domestic  manufacturers  viz.  BEPL  and  Styrolution; Hence  these two companies have not been so far able to match the domestic demand. Hence this high demand and low supply can be exploited by BEPL through its ongoing expansion etc.
Moreover both  the  ABS  manufacturers  in  India  have  to  import  their  basic  raw  materials  of  more  than  85%  viz.  Styrene  and  Acrylonitrile monomers along with several Additives & Pigments.
This may be construed as a principal threat due to fluctuation of prices and availability in the International market. The prices of monomers is volatile on account of availability and price behavioral pattern of the petroleum and petrochemical building- block materials viz. crude oil, ethylene, naphtha, benzene, Propylene-oxide, etc.
Risk and Concerns:
ABS business in India is exposed to the risk of Foreign exchange fluctuations as the key raw materials i.e. Styrene and Acrylonitrile monomers are import dependent, since there is no indigenous producer for these  Monomers.  The  only  raw  material  which  is  indigenously  available  is  Butadiene  monomer  which  constitutes weight wise only 15% out of the total raw material composition.
Segment/ Product-Wise Performance:
During  2016-17,  total sales amounted to Rs.704.09 Crore as against Rs.594.25 Crore during last fiscal registering a growth of 18.48%, however the Profit After Tax (PAT) amounted to Rs.34.77 Crore in the F.Y. 2016-17 as against  Rs.16.69 Crore in last fiscal witnessing an impressive growth of around 108.33% Profit after tax.

My assumptions and conclusions :

Most of the expansions are happening at Abu Road Unit and very little, if any, at Satnoor,MP. Abu Road seems to be primary and Satnoor Unit is secondary. The fire accident at Satnoor has taken 1 full month to repair and recommission that Unit. Considerable expenses would have been incurred in recommissioning that Unit. One month of loss of production, sales and some raw material loss also might be there. Much of this may be covered by Insurance, usually. All said, its impact will be limited to Q1 results only and may neutralize the effect of increased production at Abu Road to some extent. From Q2 onwards, this incident will become immaterial and inconsequential in judging the performance of Bhansali Engineering. So, the RECENT market price fall, to my mind, appears to be a purely TEMPORARY PHENOMENON. BEPL price may regain normalcy after declaration of results and some Management commentary on the fire accident and its effects.

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