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You are here : IndiaNotes >> Research & Analysis >> Companies >> Bhansali Engineering Polymers Ltd. >> Research

Pick of the Week: Buy Bhansali Engineering Polymers at CMP and add on dips to Rs64-66 band

HDFC Sec | 07 Aug, 2017  | Follow Author | Add to my Favourites 
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Bhansali Engineering Polymers (BEPL) was incorporated on 9 April 1984 under the name Bhansali Steels. The company changed its name to Bhansali Engineering Polymers on 4th Jan.1986 by setting up a project for the manufacture of Acrylonitrile Butadiene Styrene (ABS) resins. The company is mainly engaged in the manufacture of Acrylonitrile Butadiene Styrene (ABS) resins and Styrene Acrylonitrile (SAN) resins. The company’s products are used as raw materials for companies manufacturing automobiles, home appliances, telecommunications, luggage, bus body and various other applications. The company is having plant locations at two places - Satnoor, MP and Abu road, Rajasthan.


Investment Rationale:


- Growth in Indian middle class spending on home appliances and automobiles provides visibility to sales of ABS resins (a raw material for manufacturing these);


- BEPL has increased its capacity from 51 KTPA to 80 KTPA as of FY17 and plans to increase it further to 137 KTPA by end of Dec 2018 (to become India’s largest manufacturer of ABS). These expansions are to be funded out of internal accruals;


- It plans to run its plants at 90% utilization from FY18 year after year;


- Has long term plan for organic growth – to set up a port based greenfield plant of minimum 200 KTPA by March 2022;


- Rising trajectory of operating margins due to better product mix provides comfort for profit growth going forward.


Concerns:


- Volatile Crude oil prices can lead to higher raw material prices impacting its margins;


- Import dependent raw material and forex fluctuation risks thereon;


- Delay in commissioning of expanded capacities could lead to slower growth in top and bottom line;


- Competition from local MNC backed player and from imports.


View and Valuations:


BEPL is engaged in the manufacture of ABS resins which is a Highly Specialized Engineering Thermoplastics. Demand for ABS (which in turn is dependent on Automobiles and household appliances) is currently partly met by imports. Currently ABS is manufactured in India by two players BEPL and Ineos Styrolutions. It has embarked on expanding its capacity part of which has gone on stream and the other part will go on stream in Dec 2018. Its margins are on the up (Q1FY18 OPM 13.2% vs 11.0% in Q1FY17 and 7.5% in Q1FY16) due to better product mix aided by technical inputs from its JV partner Nippon A&L of Japan.


This provides visibility of growth in top and bottom line over the next few years. Its financial metrics are encouraging with low current D/E of 0 and high return ratios - RoE 22.0% in FY17.


We think that investors could buy the stock at the CMP and add on declines to Rs.64-66 (13.5x FY19E EPS) for sequential targets of Rs.84.5 (17.5x FY19E EPS) and Rs.96 (20.0x FY19E EPS) over 2-3 quarters. At the CMP the stock is trading at 15.4x FY19E EPS.


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