Incorporated in 1988, IG Petrochemicals (IGPL) is the largest manufacturer of Phthalic Anhydride (PAN) in India commanding 55% domestic market share with a capacity of ~2,75,110 TPA (Last month commercialized recent capacity expansion of 53,000 TPA). Our faith in company growth stems from the fact that (A) Bottoming out PAN-Ox spreads provides comfortthat most negatives are factored in (B) Strong double digit volume growth of 10% CAGR from FY24E-26E (C) Forward integration into plasticizer business will improve margins going ahead (D) Diversification more into non-phthalic business de-risks itself from mere dependency on highly volatile PAN business. Despite reporting PAN-Ox spreads of $5-10/ton in Q3FY24, current spreads are quoting much higher because of upward movement in PAN prices. We feel the company has witnessed the worst ever PAN-Ox spreads & no new negative surprise is further expected. Recently, the company started commercialization on its PA5 capacity of 53,000 tonnes which will support stronger volume growth going ahead. Inching up of non-phthalic business revenue share by ~30% of revenues by FY27E (vs ~8.5% of 9MFY24 revenue) might provide some stability in the margins which remains a key factor of company’s further expansion in downstream derivatives of non-phthalic businesses. The company has announced new leg of business growth – a greenfield project of Advance Plasticizers of ~1 lakh tons capacity with a capex of Rs1.65bn. The company has also stated its intent to venture into new businesses like green chemicals, ethanol derivatives, CBG etc however specific details have not been shared. We feel most negatives have been factored in PAN-Ox spreads, new leg of capex gives visibility beyond FY26E, although demand uncertainty & declining MAN realization still remain a cause of concern but we feel it’s mostly transitory in nature. The concerns should subside in a couple of quarters, post which we see a blue sky scenario, hence, we maintain BUY rating on the stock
Valuation
▪ IGPL is a net cash company with strong foothold in domestic market focussing on forward integration, diversified clientele set, long decadal experience & growth focussed management.
▪ We expect IGPL to report CAGR of 10%/74%/131% at Revenue/EBITDA/PAT over FY24E-26E. Robust volume growth, improvement in PAN-Ox spreads & robust demand are the key triggers.
▪ The stock is trading at P/E of ~7.6x on FY26E EPS. We upgrade our multiple to 12x (earlier 11x) and arrive at target price of Rs 654 per share which offers upside of ~58% from current valuations.
Click here to download the research report on IG Petrochemicals Ltd by SMIFS Institutional Research
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