IG Petrochemicals Ltd Research Report

Maintained steady performance: Reiterate BUY

IG Petrochemicals Ltd (IGPL), for Q2FY19, reported a decent set of numbers. Revenue grew at 34.6% YoY to Rs 3,242mn (est Rs 2,752mn). EBITDA grew by 16.9% YoY to Rs 713mn (est Rs581mn) with 334bps YoY decline in margin from 25.3% in Q2FY18 to 22% in Q2FY19 ( est. 21.15)mainly due to depressed gross margins and higher other expenses.

During Q2FY19, production of PAN volume has shown a 10% decline on a sequential basis from 40,000 in Q1FY19 to 36,000 in Q2. Lower production volume was due to the production shutdown in one unit for 23 days to change catalyst. On a sequential basis, gross margin showed improvement on the back of favorable PAN/OX spread.

However, we noticed ~14% decline in PAN/OX spread on a sequential basis which could result in a contraction of gross margin in Q3FY19. IGPL Net profit grew by 20.4% to Rs405mn (est. Rs 308mn), the healthy growth was due to decent performance on the operational front.

Capacity ramp up coupled with healthy demand scenario to boost profitability in FY20

In order to meet growing demand and limited headroom for volume growth (capacity utilization 91%), IGPL has proposed to set up a new plant through Brownfield expansion (PA4) and increase its capacity by 53,000(TPA), taking its total capacity to 2,28,250 TPA. PA4 is expected to get commissioned in 2HFY20.

The company added 6,000TPA capacity (3.5% of total capacity) through debottlenecking during Q2FY18, which has provided scope for volume growth in FY19. We modeled 4% volume growth (earlier 7%) in PAN during FY19, due to the bottleneck of capacity and removal of antidumping duty on PAN. We expect to see double-digit volume growth lead by commissioning of capacity and healthy growth in the user industry.

Revised Estimate: Removal of Anti-dumping duty could slowdown volume/realization growth

We cut our PAN volume growth estimates for FY19/20 to 4%( vs 7%) and 10% (vs 12%) with the flat realization growth. Change in estimate is mainly due to a removal of anti-dumping duty on PAN which could further intensify competition and result in slower than expected volume growth for IGPL. Import data suggest a 41.7% increase in import of PAN during FY18 compared to 18.8% CAGR over FY12- 17. However, IGPL prices are largely in line with import prices making it competitive.

Valuation and Outlook

IGPL has a leadership position in terms of capacity and costs in the domestic PAN market. The company is well positioned to witness steady revenue and profitability growth going forward in the business through brownfield expansion and higher capacity utilization with domestic demand likely to remain robust. We expect Revenue/EBITDA/PAT to clock 9.3%/3%/15.9% CAGR during FY18-20E.

At the current market price (of Rs 432) the company is trading at 8.7x, it’s FY19E EPS of Rs 49.7 and 6.8x its FY20E EPS of Rs 63.7. Recent correction from the top provides a good entry opportunity in the stock. We maintain our positive view with ‘BUY’ rating by assigning 15x to its FY20E earnings to arrive at a revised target price of Rs 955.