IG PETROCHEMICALS Research Report By Axis Securities

Q1FY19: Strong Operating performance continues leading to profitable growth

IG Petrochemicals (IGPL) in Q1FY19 posted revenues of Rs. 351 Cr (# 19%/12% YoY/QoQ) due to steady production of Phthalic Anhydride (PA) led by strong demand in end user industries. EBITDA Margin expanded 60bps YoY to 24.1% in Q1FY19 led by increase in spreads due to higher demand of PA and Maleic Anhydride (MA), better recovery processes and operational efficiencies. Reported PAT was Rs 40.2 Cr in Q1FY19 (#2.9%/20.2% YoY/QoQ respectively). Due to impairment of Rs. 9.5 Cr by its subsidiary IGPL (FZE) in JV with DUGAS impacted PAT growth in Q1FY19.

Key triggers for earnings growth over FY19/FY20 are 1) IGPL’s capacity and cost leadership in domestic PA market, 2) encouraging downstream expansion to Specialty Plasticizers and 3) PA4 expansion. Correction in the stock price from its high’s provides a good entry point for long term investors as we retain our BUY rating on the stock.

While we maintain our Revenues/PAT estimates, we revise our TP to Rs. 672 valuing it at 10.5x FY20EEPS (earlier 12.5x). We retain our BUY.

Valuation & Outlook

· Outlook: We maintain our Revenue/EBITDA/PAT estimates for FY18-20 for IGPL at a CAGR of 10%/13%/ 16% owing to strong end-user industry demand in domestic market. Besides, IGPL continues to be a market leader in domestic PA industry (~50% market share), muted capacity expansion globally has led to IGPL to expand capacities, sticky clientele, healthy return ratios, expansion in value added products (downstream specialty plasticizers). However, the company missed on our PAT estimates in Q1FY19 on account of impairment by subsidiary IGPL (FZE) in JV DUGAS.

· Valuation: At CMP, IGPL trades at undemanding 7.5xFY20E P/E multiple given the strong growth over FY18-20E. However, we revise our Target Price to Rs. 672 valuing it at 10.5x (earlier12.5x) mainly due to delay in commercialization of PA4 expansion now from H2FY20E as guided by the management (vs. H1FY20E earlier).

A sharp correction from high’s of April 2018 provide a good entry point in the stock thereby making us believers in the stock. We maintain our BUY.

Key Highlights

· Revenue growth sustained in Q1FY19: The total capacity of PA and MA stands at 1.69 lakh MTPA and 6,920 MTPA respectively. In Q1FY19, IGPL’s volumes came in higher on a YoY basis aided by strong demand from end-user industries. The capacity utilization for both PA & MA was better in Q1FY19 vis-à-vis Q1FY18. During the quarter under review, exports revenues constituted ~17% for Phthalic Anhydride.