The main reason why stock has reacted negatively in last 8-10 days after the Q2FY23 concall is due to the uncertainty regarding the ramp up and profitability of the XNB latex project. While Abhiraj was as candid as possible, I suggest members to read more on Topgloves (world’s largest manufacturer of gloves).
Topgloves always used to work on cost plus model (at least since its listing 21 years back). So margins were always range bound (±14-15%). During COVID they abandoned that formula and moved to market linked pricing since demand was very high and supply was not able to catch up. Due to that we saw operating margins moving beyond 50% (we have seen this happening in HEG and Graphite also). The fallout of this was that lot of players announced new capacities and expanding the existing ones.
Now with COVID easing out and with that demand normalizing, Togloves made a loss for the first time in last 21 years. This forced them to go back to cost plus pricing. Also, I believe if leader in the industry is under pain, lot of small players will get wiped out very fast. With that lot of new capacity that became operational in last few qtrs will shut down. Also a lot of planned capacity will be shelved. And with that normalization will be faster than earlier imagined.
Some analyst tracking these companies and sector in South East Asia expect industry to return to normalcy in 6-8 years. I believe in next 12 months, we will have the equilibrium.
Disclosure – invested for last 5-6 years.
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