Largest player in the domestic PAN industry:
IG Petrochemicals is the largest manufacturer of phthalic anhydride (PAN), controlling ~48% of India’s production capacity. PAN is a chemical compound, which finds application in flexible plastics. The demand for PAN in the domestic market has improved supported by healthy demand from plastics, paints, auto, etc. In 2016-17, the prices of Orthoxylene (OX), the raw material for manufacturing PAN, fell at a sharper rate than prices of Phthalic Anhydride (PAN) on account of minimal capacity additions as well as improving utilization levels for PAN. Further, capacity expansions for OX in China, Taiwan and Singapore are expected to increase the global capacity by ~4%. Thus, on the back of improved PAN prices and subdued OX prices, the spreads between PAN and OX are expected to rise in the future. The scrapping of 2.5% import duty on OX will put further pressure on prices of OX in the domestic market.
Further, the company’s plant is strategically located which provides multiple advantages in both raw material sourcing and sales of PAN. The major source of raw material for manufacture of PAN comes from the same region where the company’s plant is located thereby creating compelling cost savings in transportation. On the demand side, more than 70% of PAN produced in India is used in western India; 90% of the company’s sales take place locally, which further saves transportation costs. Further the company has a judicious procurement strategy for Ortho-xylene (OX) – the singe raw material required for the manufacture of PAN. The Company has a tie-up with the largest petrochemicals company (Reliance Industries Ltd) in the country for almost 70% of its requirement of OX. This ensures steady and uninterrupted supply of raw material.
PAN demand to grow at a CAGR of ~7% over the next 4 years:
According to a report by CRISIL, domestic PAN demand is expected to grow at a CAGR of 7% over 2016-21 mainly driven by healthy growth in plasticizers, dyes and pigments, alkyd resins, etc. With IG Petrochemicals being the market leaders in the PAN market, the company should benefit from this increased demand over the next few years.
New products launch to provide more scope for margin improvement:
The company recently acquired the maleic anhydride (MA) business of Mysore Petro Chemicals Ltd (MPCL). MPCL is the only company engaged in the manufacture of maleic anhydride in India. The global maleic anhydride market is projected to be worth USD 5.08 billion by 2020, registering a CAGR of 6.8% between 2015 and 2020. More than 50% of maleic anhydride is used in the manufacture of UPR (unsaturated polyester resin), demand for which is increasing. Also, the rapid growth of the end use industries in emerging nations is one of the factors driving the growth of the market. The growing end-use industries such as automotive, construction & manufacturing, and marine are expected to drive the increasing demand for maleic anhydride in the emerging nations. Currently, India is a net importer of maleic anhydride which provides huge scope for maleic anhydride business. Moreover, MA is a high EBITDA margin business and can add significantly to the bottom-line going forward.
Financial performance to improve further:
The return ratios of the company have improved dramatically in the last 3 years; return on capital employed (ROCE) and return on equity (ROE) have improved from 9.9% and 1.2% in FY14 to 35.0% and 29.6% in FY17 respectively. The company has been reducing its debt over the last few years. Along with debt reduction, the company has strong operating cash flows to fund its expansion plans. With expected increase in PAN/OX spread, the return ratios will improve in the next few years.
According to a report by CRISIL, domestic PAN demand is expected to grow at a CAGR of 7% over 2016-21 mainly driven by healthy growth in plasticizers, dyes and pigments, alkyd resins, etc. Below are the major end-use segments:
Plasticisers: Plasticisers accounted for 41% of PAN consumption in India in 2015-16. It has major applications in the automobile, housing and construction sectors.
Dyes and Pigments: Dyes and pigments constituted about 20% of total demand for PAN in 2015-16. It is used to manufacture certain dyes like anthraquinone, phthalein, rhodamine, phthalocyanine, fluorescin, and xanthene dyes. Dyes and pigments have applications in sectors like paints, textiles, plastics, etc. Going forward, this segment is expected to grow on account of slowing imports due to stringent government regulations on environmental norms in foreign markets.
Alkyd resins: Alkyd resins accounted for about 19% of domestic PAN consumption in 2015-16. Alkyd resins are primarily used in the manufacture of oil based paints. This is expected to grow at a slow pace over 2020-21 on account of shift to water-based paints which are high margin and less hazardous from the health perspective.
UPR and others: Unsaturated polyester resins (UPRs) and others constituted about 20% of the total PAN consumption in 2015-16. UPRs are known for their commercial usage in fiberglass reinforced plastics (FRP) as well as in applications and products such as boat and ship building, manufacturing of wind blades, electrical windmills, automotive applications, etc.
IG Petrochemicals Limited, the flagship company of the Dhanuka Group, is the largest manufacturer of Phthalic Anhydride (PAN) in India with a market share of ~48%. It is one of the lowest cost producers of Phthalic Anhydride globally. PAN is a downstream product of Orthoxylene (OX), a basic Petrochemical. PAN is used as an intermediate for the production of Plasticizers, Unsaturated Polyester Resins, Alkyd Resins and Polyols. PAN is also used in a variety of applications in both consumer durables and non-consumer durables. Applications for PAN are increasing rapidly, driven by new research and innovation. While PAN contributes the bulk of revenue, the company also manufactures value‐added derivatives such as Maleic Anhydride (MAN), Diethyl Phthalate (DEP), and food acids. The company has 3 manufacturing facilities at a single location at Taloja in Maharashtra. The annual installed capacity is 1,69,250 MT.
|Profit Before Taxation & Exceptional Items||32.37||76.54||131.28||169.10||199.97|
|Exceptional Income / Expenses||-21.11||0.00||0.00||0.00||0.00|
|Profit After Tax||8.90||60.19||101.19||129.00||152.07|
|Share of Associates||0.00||0.00||0.00||0.00||0.00|
IG Petrochemicals has leadership position (largest) in terms of capacity and costs in the domestic PAN market. The company is well positioned to benefit from structural triggers in this industry, going forward. The launch of new products in the maleic anhydride (MA) business will aid in the margin expansion in the future. Though IG Petrochemicals is a commodity player, large entry barriers, margin improvement trend and large Indian market share could result in further rerating of the stock going forward. We expect revenues/PAT to grow at 14.6%/22.6% CAGR over the next 2 years (FY17-19E). We value IG Petrochemicals at 19.2x FY19E EPS of Rs. 49.38 and recommend a ‘Buy’ with a target price of Rs. 950 giving an upside of 101%.