Things seem to be getting interesting here – one of the lowest cost producers (IG Petro) in a cyclical industry has now posted a loss at the EBITDA level. A further reduction in spreads would lead to shut-down of capacities in Taiwan, Korea & China.

Gross/EBITDA margins are at their lowest in recent history – main reason being…

Phthalic Anhydride-Orthoxylene (PAN-OX) spreads have almost come down to the company’s conversion cost of ~$85/ton. Further, Maleic Anhydride prices (where company earns an EBITDA margin of ~95%) are 10%-15% lower than PAN prices (compared to 10%-15% higher historically).

While domestic demand for PAN continues to grow (accounts for ~90% of the company’s revenue), geopolitical issues have temporarily impacted the key end-user industries (Pigments, Paints, Plasticizer, Specialty Chemicals). Rising Orthoxylene prices (key raw material – a derivative of crude oil), excess supply of Maleic Anhydride (MAN) are further reasons.

Virtual duopoly in the domestic market (IG Petro & Thirumalai), while KLJ has now backward integrated (used to import earlier). IG Petro is the second largest PAN manufacturer globally. This is predominantly a regional business and setting up a new plant takes 3-4 years (availability of raw material is a constraint).

Company has also forward integrated into Diethyl Phthalate (DEP) where EBITDA margins are relatively stable (in the range of 10%-15%).

The share of Non-PAN business in the company’s revenue has been steadily increasing.

Meanwhile the company’s new plant has just commenced production and is expected to add ~Rs. 500 crores to the topline. Another Rs. 200 crore capacity expansion in DEP is being planned, with potential for Rs.800 crores in revenue. Demand for DEP is growing at 10%-15% annually.

Both IG Petro and Thirumalai have increased capacity. They expect the capacities to be absorbed given the strong domestic demand and growing use of PAN. China has built up 2 MT of MAN capacity for use in downstream capacities which are coming up (expected – Jan 2025). In the interim, this excess supply is leading to depressed prices. Overall things should only get better from here?

While the pain may last for a while, can the company do an EBITDA of ~Rs. 350 crores once the situation normalizes? If we assume this, company’s Profit After Tax should be around Rs. 200 crores (Other Income offsetting interest expense and depreciation of around Rs. 70 crores).

Brief Context on Past Cycles

The tricky part seems to be – how does all this translate in terms of valuations/potential entry point? If this doesn’t work out, what could be the potential downside? And if it does, is the upside large enough to compensate for the waiting period and all the volatility?

A few open-ended questions in this context:

1. Price/Sales could be one way to look at it. However, with volatile sales, both due to fluctuating PAN prices as well as increase in volume from new plants, this on it’s own doesn’t provide the full picture?

2. Given that IG Petro is one of the lowest cost producers of this commodity with a net debt free balance sheet, a reasonable P/E or EV/EBITDA on normalized earnings could be assigned. What could be a reasonable multiple in such a case?

3. Decrease in institutional holding (FII+DII) or insider buying could be another important indicator?

Would love to get any thoughts.

Press release by the company will clarify why PAT collapsed

Lakshmi Machine Works Ltd. Q3 of the financial year 2023-24 earnings call

Textile Machinery Division:

• We hold an order book of Rs 4000 cr which has been lined up for execution. The ratio of domestic sales vs exports vs spares stands at around 65% to 21% to 14%

LMW Global Division:

• The order book on exports stands at close to Rs 60 cr under LMW Global

• There is tremendous potential within this business. There is no doubt about it. It is Airbus and Boeing, it is not just 5-6 years but they work even with a 10-year order book, depending on how they look at the manufacturing.

• Of course, when you talk about aerospace parts, spare parts, whatever components we make, if it is a non-defense sector, it goes to these machines in some way or form. While there is potential, we have to be aware that this is a global market and we are competing against a global supply chain and most of the supply chain is global.

• So, you are making a technical part for which everything comes from abroad. We do a conversion and again, ship it abroad. So, it is a very competitive business. While there is tremendous opportunity, it is a very competitive business and what we are doing is taking someone else’s market share. It is not that Boeing or Airbus are waiting for some of their parts to be made. You are getting integrated into their existing supply chain and trying to take some more business share from someone else. That is how you build the business

LMW China Division:

• The order book in LMW China is around Rs 41 cr

The machine tool division and the foundry division:

• Out of the entire turnover, around 12% is foundry turnover.

Advanced Technology Center business Division:

• We make components that go into, various aircraft manufacture. We make parts which are engine parts, and other parts which go into the body of the aircraft

• Our ATC business is split into two parts. We categorize them as
  i) metallics and
  ii) composites

Metallics

• The metallics business is catering to all the product sub-level components to the OEM players. Under this business, we have been able to establish a significant export business. Almost 90% of the total metallic business is towards exports, and only 10% is within the domestic industry. It does not cater to the local industry. We are only catering to 10% of the domestic market. The reason for that is that we can get long-term contracts. In these contracts, we are dealing with the export market, i.e., large private OEMs. Generally, they have an order book of about 5 years. This is what you can look for. So, with a 5-year order book, we can plan everything better within this particular business and we get better returns as well. So, the focus here is to increase our exports on the metallic side

Composites

• The composite side is something that we established around 4 years back. Predominantly, the composite business caters to the aerospace industry within India. We make parts for all the Government organizations within India. However, since we have a metallic business with an existing set of customers, we can use the same and increase our metallics, what we sell to them, on the composite side as well

• So, as of now, the challenge for us is to establish in terms of our ability to cater to the composite business to our existing customers on the metallic side. What we are saying is that we have been able to give a very clear focus which has helped us turn around during the 6-7 quarters. It has become profitable and of course, the reason, we should be very clear, the way this business works, you need to procure raw material which is specifically a very long lead-time material, and be ready for deliveries because they give us schedules for about 5 years

• So, in these 9 months, we have been able to cater to the demand including the increased demand. Especially in the last quarter, there has been an increased demand which we have been able to cater to. That is the reason we see the turnover has also gone up significantly compared to the previous year. So, we should say that this has stabilized to a significant extent.

• Today, our composite parts are going into rocket launches. We are proud to say that anything that is launched has a composite part from us.