I G Petrochemicals Ltd

a) Company Profile: The company commenced production in 1992. It manufactures Phthalic Anhydride (PAN), which is essential for manufacturing polyvinyl chloride products, shoe soles, cables, pipes, hoses, leather cloth and packaging films along with maleic anhydride (MA) and benzoic acid (BA). The company has a total installed capacity of 2,75,110 MTPA.

B) Investment Rationale: The following is the investment rationale for the company:

1. Largest PAN manufacturer: The company is India’s largest PAN manufacturer accounting for over 50% of the domestic production and the world’s second largest PAN producer. The company also produces maleic anhydride (MA) and benzoic acid (BA) through the wash water generated from PAN manufacturing. The extraction of MA and BA enables the company to generate incremental operational cash flows that improve its profitability at no additional cost. Moreover, IGPL is the only producer of MA in India with an existing annual capacity of 8,000-8,500mtpa and meets around 40% of the domestic demand as per management, while its BA capacity stands at 1,200mtpa.

2. Recently completed expansion: The company has recently completed its capacity expansion where it increased its PAN capacity by 53,000 MTPA at the end of Q4 FY24, leading to a total capacity of 2,75,110 MTPA. The company has its manufacturing facility in Taloja (Navi Mumbai) which is beneficial due to its proximity to the end-user industry as 70% of the PAN produced is consumed in western India. The company also benefits from low procurement costs due to its proximity to feedstock supplier Reliance Industries Limited and easy access to JNPT and Mumbai ports.

3. Government’s Anti-dumping duty: In August 2021, the government of India imposed an anti-dumping duty for a 5-year period on PAN imported from China, Indonesia, Korea, and Thailand. This duty ranges from USD 40-140/MT depending upon the producer and country of export. The domestic market catered to 10-15% of its demand through imports in FY24, which was lower than the 30% levels witnessed in FY19-20. Although the profitability is largely driven by PAN-OX spreads in the international markets, the duty imposition has increased the competitiveness of the domestic manufacturers.

4. Q1 FY25 results: The company’s Q1 FY25 revenue from operations grew 5.7% YoY, whereas EBITDA for the quarter stood at Rs 71 crores, a growth of 7.3%. The EBITDA margin stood at 12% versus 11.8% YoY. FY24 saw a sales decline of 11% due to a fall in volumes and realizations. However, with the commencement of the PA5, Ind-Ra expects the revenues to grow in higher double digits in the medium term. The company’s EBITDA margins declined to 5% in FY24 due to weaker PAN-OX spreads but is expected to stabilize going forward.

5. Modest working capital requirements: As of FY24 end, the company had cash and cash equivalents of Rs 233 crores. The company’s cashflow from operations were positive over FY15-24. Also, the company has moderate working capital requirements due to a comfortable credit period on purchases. The company makes local purchases primarily from Reliance Industries on a credit basis, with small quantities being imported.

C) Future outlook: The following is the future outlook provided by the management:

1. Signs of recovery: According to the management, the demand for end user industry has started showing signs of revival and chemical prices have started seeing a modest recovery. Currently, the demand for PAN is in the range of 5,00,000-5,50,000 MTPA and is expected to grow 5-6% annually. The margin between PAN-OX spread on a QoQ basis is ranging between $150-200, which indicates a price recovery of $50-100/ton sequentially. Also, in terms of volumes, the management has guided that Q2 FY25 will be 10-15% better than Q1 FY25 in terms of volumes sold, and Q3 FY25 volumes would be 10% better than Q2 FY25. It has guided for full year volumes of 2,10,000 tons versus 2,05,000 tons for FY24.

2. Contribution of the PA5 plant: Post the recent addition of the PA5 unit, the company’s capacity has been enhanced to 2,75,000 MTPA. Currently, its facilities are operating at 80-85% utilization with two plants undergoing maintenance shutdown due to which the company lost 10-15,000 of volumes on a quarterly basis. However, the PA5 unit is on its way to clock annual revenues of Rs 650 crores versus Rs 500 crores guided by the management. Due to this new plant, the company will have an operating cost saving of $20-$25. The utilization of this plant was 50-60% in Q1 FY25.

3. Upcoming capacity expansion: The company is setting up a 75,000 MTPA plasticizers capacity at a total project cost of Rs 186 crores which will be completed by Q3 FY26 end. Around 70% of the project would be funded through debt and the rest will be funded through internal accruals. The expansion shall help IGPL to diversify its product profile to capture the growing domestic demand in the downstream industries, while also leveraging its existing customer profile which the management expects to account for 70% of the turnover once the capacity ramps up. The plasticizer capacity will captively use 30,000-35,000 tons of PAN as a raw material post the set up. As per management, on the full capacity utilization, the plasticizer capacity is expected to contribute INR9,000 million-9,500 million in revenue for the full year. The company plans to move towards green energy also through setting up a compressed biogas plant at capex of around INR320 million. The plant is expected to be operational by end-FY26. It will be a fully automated plant and is expected to supply oil marketing companies. Ind-Ra believes increased product diversification would partially help reduce the volatility in profits.

4. Unsaturated Polymer Resin (UPR): Today, 95% of the Indian market uses PVC, CPVC, and UPVC pipes, which have a lifespan of 15-20 years. However, in interstate or big infrastructure projects like agriculture or water pipeline, UPR based pipes are better because they have a shelf life of 80-100 years, and they are corrosion free. Governments in Europe and America prefer UPR pipes but the same has started off late in India since the last 3-4 years. Companies like Tata Steel, which earns about Rs 2 lakh crore in revenues has recently crossed Rs 100 crore in sales from UPR pipes. Also, globally, UPR consumes 25% of phthalic. In India, it is still 5%.

5. Guidance for the future: For FY25 and FY26, the total capex would be Rs 200 crores, for which debt: equity ratio would be 50:50. The company guides for a long-term average EBITDA margin of 15% as it is based on PAN-OX spreads. With respect to revenues, the company aims to clock between Rs 2,300-2,500 crores in FY25. For FY25, the company is specifically guiding for 12-15% EBITDA margins.

D) Key monitorables: The following are the key monitorables for the company:

1. Debt levels: The company’s net debt/EBITDA increased to 3.65x in FY24 versus 0.71x in FY23 due to debt-laden expansion. Also, the interest coverage ratio declined to 3.5x in FY24 versus 13.3x in FY23 due to lower EBITDA levels. Although the PAN-OX spreads are expected to improve going forward, debt levels remain a key monitorable.

2. Raw material price risk: The company’s key raw material OX is a crude oil derivative and thus its price is mainly driven by crude prices. Therefore, high volatility in crude prices and PAN-OX spreads will continue to significantly impact IGPL’s EBITDA margins.

3. Product concentration risk: PAN contributed 93% to the company’s revenues in FY24, which poses a huge product concentration risk arising from a change in government regulations. However, the management intends to diversify its product portfolio by getting into other downstream derivatives and other specialty chemicals, and endeavors to have 30% of its revenue from non-phthalic products over the medium term.

4. Subdued MA prices: As per the decadal average, maleic acid has always traded at 20% premium to phthalic acid. But currently it is trading at a 10-12% discount.

5. Increasing freight rates: Freight rates have gone up by 15-20%. However, the company has the flexibility to charge the consumer any incremental rates. Also, exports is only 5-7% of the company’s sales.

6. Uncertainty regarding ADD: The management can’t comment on the government’s stance on ADD. But, as per them, it would not make a major difference as everyone sells at the international prices.

The stock trades at a TTM PE of 51x.