JBF Industries: Grown at CAGR of 37% in last five years
- Robust Business Model - Integrated Model with Presence across Polymerization Value Chain
- Strong Market Position in the Entire Polyester Chain
- Strategic Location
- Dependent for Raw Material Sourcing
- Huge Demand for PET Chips & BOPET
- Focus on More Value Added Products
- Exchange Rate Volatility
Robust business model – Backward Integration
Presence Across Value Chain - JBF Industries has over the period of time evolved from a polyester texturizer to a fully grown petrochemical company. Apart from producing textile chips and yarn, it also produces bottle grade chips and BOPET films - majorly used in the FMCG and consumer durables industry thus reducing the sector specific risk. The company’s current polymerization capacity stands at 1.04 MTPA along with downstream capacity of 360 KTPA.
Backward Integration - The Company has been facing supply shortage of PTA, the key raw material required for polymerization resulting in lower capacity utilization levels. Therefore JBF has embarked on setting up a green field PTA Project at Mangalore SEZ, India with capacity of 1.12MTPA. This would help the company to save on its logistics cost at UAE by $30-40/tonne, reduce the working capital requirement and also help scale up the capacity utilization levels thereby boosting the overall profitability of the company.
Expansion in Value added products – “to boost the margins”
BOPET Films - BOPET films currently having a delta of $1000-1200/tonne, have seen a high of $2223/tonne and a low of $556/tonne in the past. Though the current deltas of BOPET films are quite lower than the peak, they still fetch in highest margins amongst the company’s others products. Considering the higher margins, the company is planning to develop a 90,000 TPA plant at Bahrain International Investment Park, a free trade zone. It is likely to spend $200mn for this project at a debt:equity ratio of 70:30. This plant is likely to be fully commissioned by FY15. Higher deltas in this business are likely to boost the margins of the company.
Bottle Grade Chips - Bottle grade PET chips fetch in higher margins than the textile grade chips, also demand for bottle grade chips is likely to grow at ~20% vs ~8-9% of Textile grade chips and POY. Thus to tap the potential growth, the company is planning to develop a 390,000 MTPA PET chips plant with a CAPEX of $200mn at Debt:Equity ratio of 70:30. The plant will be located at Belgium, and most importantly will be a co-location plant next to British Petroleum’s (BP) PTA facility, thus ensuring continuous supply of PTA with logistical cost savings and lower working capital requirement.
Derivative losses: No more a major hangover
The Company had entered in a Derivative Contract for an ECB loan in JPY terms for an amount equivalent to USD20mn, cut off rate being 92.5/123. With the JPY appreciating way beyond the threshold of 92.5 since July 2010, the company has seen huge derivative losses, Rs1678 Mn in FY12 vs Rs841 Mn in FY11. Keeping in mind the mounting losses, the Company has repaid 80% of the Loan amount - 20% in July 2011 and 60% in July 2012. As per the management, keeping in mind the current levels of USD-JPY the derivative losses are likely to reduce from Rs150Mn/month to Rs30Mn/month. Thus the company is likely to report ~Rs800-1000Mn of derivative losses for FY13E vs Rs1678 Mn and just ~Rs100 Mn in FY14E. The repayment of 80% of the loan will therefore turn out to be EPS accretive for the company from FY13 onwards.
Stock Valuation and Recommendation
JBF Industries has successfully evolved itself from a pure textile Company to a fully grown petrochemical Company. Its revenue has grown at a CAGR of 37% in the last five years. In order to maintain the growth rate, it has expanded its capacities, product profile and geographical presence in a timely manner. The company is further increasing its capacity in the value-added product space like BOPET films and Bottle grade PET chips which would result into higher sales volume and margins. Backward Integration into the PTA production would further give a fillip to the margins and increase the utilization levels. JBF is currently trading at a P/E of 2.6x its FY14E EPS. Thus, considering persistent capacity addition, backward integration and waning risk of derivative loss Sushil FInance recommends a “BUY” with a target price of Rs180 based upon average multiple of last 6 years (3.5x FY14E EPS).
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