IG Petrochemical ltd

The recent stock which I analysed was IG Petrochemical. They are manufacturing a chemical which is used in making plastics, paints and plastic pipes . As you guys know that there is huge opportunity in construction sector as well as in infrastructure ,this company would benefit a lot . This company is the lowest cost producer of that chemical which is used in those applications in India. They are within top three manufacturers of that chemical worldwide . The company competitive advantages would be low cost producer and 70% of their domestic sales are from western region of India . They have mentioned in their annual report that low cost producer is not going to be so easy for any company to achieve . because you need to invest huge amount in capacity j. Order to achieve this low cost in this commodity product .You might ask me that any big companies can come and start this business with huge investment. That might not be true . coz in this business the margins are low ,so there would not be any big competitors who invest heavy with low margins as well as without havinateood efficiency in this business. So entry in this business would be a difficult thing . You might also ask me there competitors might easily win them . well the thing is 70% of their sales are coming from western region ,they are having their factory on the exterior of western region and their suppliers is situated in Gujarat which is very near . the company had a largest capacity in India for this chemical and suppliers nearby ,these are the reasons they are able to produce their product at a very less rate . they are deriving their product from the oil . so there might be a temporary threat for their products since crude oil has been at 50% low but sooner or later they would be able to overtake this threat .

Feed backs are welcome

 

Thanks for sharing the information with us.Based on just the eps,p/e, mkt cap, book value which I saw in moneycontrol, it looks like a small to midcap chemical company. It got me interested and hence I have a few questions about the same which I would like to ask.
First of all since I have no knowledge about the company or what does it makes hence I am asking you for the information if you might have came across in your research.
1) No doubt plastics pipes and paints would be a huge opportunity since government is focusing on infrastructure development. But I would like to ask how much of that particular chemical is actually used in those applications. In short I want to ask you whats the exact demand. Suppose that chemical just constitutes 2% or 5% of the total product then one has to take a call based on that. For example, if I am the only producer of lets say Chemical A in the entire planet, but the demand in the entire world for my chemical A is just 100 crs, then even though I am the only producer but I would not be able to do more than 100 crs of business.
2) As you said this is a very low margin business hence there is less of competition. The only way to increase the profits would be to increase the sales. But based on the first point I asked, if the demand is low then it would have very much difficult in raising profits. Is there any other way in which they can raise their profits. Perhaps venturing into new products with better margins.
3) I disagree with your last point in relation with crude oil. As the company is deriving its product from crude then fall in crude prices would actually be of an advantage to the company as it would indicate fall in raw prices. But the thing is that these kind of industries are quite knowledgeable in a way that if there is fall in crude prices their customers might ask them to pass on the benefits. The company might pass on partial or complete benefits as is decided by its management.

 

I am not able to collect how much % it is used in the applications but as far I know ,it is a must need chemical in preparing paint and plastics . they have client such as Berger paint already .

Well regarding the crude they were not able to make high margins coz of crude fall,their clients made them to reduce the margins . that's what they have said in the annual report 2015.

 

So basically the margins remain the same they just pass the benefits to customers. A couple of things here, firstly as I said what is the exact demand of the product. Only if the demand is strong and rising they would be able to sustain with the low margin business. Secondly in case of rise in crude prices would they be able to pass on the increasing costs to customers or would they have to bear some of it. If it is the second case then it wouldn't be nice for the company.

 

Also do you know if they are expanding their products range or having any high margins products in the future which could raise their bottomline.

 

Right now they are just making this chemical ,they are not adding anything further as per their annual report says .

I feel rising demand would be more on the production side . Coz its used in cables too . fibre optical cables is the future for India in order to have internet growth .

As far I know the margins would remain the same . but the top line has a good future to grow with lots of applications is in need of this chemical. As applications grows their top line should grow .

Crude is not gonna stay here for sure. It's going to go upside for sure. The timeline would be difficult to say but its gonna go up . Their are chances for them to produce more or bring automation in order to reduce their expenses for their bottom line to grow.

 

Company does not have much exports right now. There are chances of them exporting to other countries since they are the lowest cost producer in India . right now I think their export revenue is just contributing 10% but if it go down to 30or 40% in next five to seven years the revenue would be more since its going to make.money in dollars . Right now when you compare with the international companies they say that this company is within top three chemical producer in the world .

 

But exactly what is that specific chemical and what is the demand for that particular chemical? If the demand is low or magins continue to remain very low then it wont be much point in considering

 

Chemical name is Phthalic Anhydrid . Cant find the exact demand coz its impossible to know the % its used in tjose application unless you are in those business.

Sorry for late reply, was out of town

 

It's ok. If you do find out any other information about the company do share here. Thanks.

 

Sure