IG Petrochemicals Research Reports And Investors’ Presentation

Research report by Nirmal Bang

IGPL is a leading manufacturer of pthalic anhydride (PA) and maleic anhydride (MA) in India. PA is a downstream product of orthoxylene (OX), a basic petrochemical. PA is used as an intermediate for production of plasticisers, unsaturated polyester resin, alkyd resin and polyol. PA is a widely used chemical used in consumer durables and non-consumer durables. As a part of strategic initiative, IGPL acquired maleic anhydride (MA) business from Mysore Petrochemicals (MPL) as a going concern on slump sales basis for a lumpsum consideration of Rs744.8mn payable over five years. MA is a chemical intermediary widely used in the production of unsaturated polyester resin, coating, pharmaceuticals and surfactants. MA is also a precursor to compounds for water treatment detergents, insecticides and fungicides. IGPL is a domestic leader in PA with a market share of 50%. The company is among the top five players globally with total capacity of 1,69,110tpa. With the acquisition of MA business from MPL, IGPL has become the only manufacturer of MA in India and is among the leading manufacturers of wash water, the raw material for producing MA.

Domestic leadership in pthalic anhydride or PA:

Incorporated in 1988, IGPL steadily expanded its PA capacity from 45,000tpa in 1992 to 1,69,110tpa in 2017. Current consumption of PA in India stands at 0.35mtpa. IGPL and Thirumalai Chemicals are the only two manufacturers of PA in India with a combined capacity of ~0.27mtpa. The rest of domestic requirement is met through imports. Anti-dumping duty on PA from Taiwan, Korea, Russia, Japan and Israel stands at ~7.5%. Domestic PA market is growing at a healthy rate of 7%-8%per annum. PA is used in plasticisers (34%), CPC pigment (24%), alkyd resin (17%), unsaturated polyester resin (6%) and others (19%). With the government’s increased infrastructure thrust, rising demand for plasticisers, paints, etc because of increased consumption, and increased demand for PVC pipes because of the focus on rural water management the demand for PA increased continuously since the past three years. Imports have risen continuously in the past three years from 52,000tpa to 85,000tpa over FY15-FY17. The management believes that IGPL has a firm footing in domestic market. Looking at healthy domestic demand for PA, the company will be going for brownfield capacity expansion for PA from 0.17mpa to 0.23mtpa with a capex of Rs3,000mn. Expected incremental sales from this capacity expansion is Rs6,000mn per annum.

Sole manufacturer of maleic anhydride or MA in India:

The raw material used for manufacturing MA is en-butene (a gas derivative) which is not available in India. As a result, 100% of India’s consumption of MA (51,000tpa) is currently met through imports. IGPL acquired MA business of MPL as a going concern on slump basis for a consideration of ~Rs750mn on 1 April 2017. With the acquisition of MA business from MPL, IGPL has become the sole manufacturer of MA in India. IGPL uses wash water created from the manufacturing process of PA to recover MA and benzonic acid. Current capacity of MA is 4,500tpa. With less than 10% of market share in domestic market and being a sole manufacturer in India, IGPL believes there is enough opportunity to grow in MA business. Current MA capacity generates Rs350mn- Rs450mn of annual sales with EBITDA/PAT of Rs200mn/Rs120mn, respectively. The company intends to increase its MA capacity from 4,500tpa to 6,300tpa by 2019. Major applications of MA are in spandex (elastics), unsaturated polyester resin (UPR), food industry, insecticides, fungicides, water treatment, personal care products and lubricant oil additives.

Research report by PL

Structural play: IGPL is world’s third largest Phthalic Anhydride (PAN) player with a capacity of 169,110MT. PAN is a versatile industrial chemical with diversified usage across plastics, paints, autos, pigments etc. Healthy downstream demand, along with muted capacity addition globally, has put IGPL in a sweet spot. Closure of Asian Paints’ 29,796MT plant capacity, benign raw material prices and tight D-S has pushed PAN gross margins to Rs25/kg in Q1FY18, double of last decade average. Structural tailwind of demand-supply mismatch is likely to sustain in the medium term; we have factored in FY18-20E gross margins of ~Rs20/kg.

– Capacity addition to address domestic opportunity: India is one of the fastest growing PAN markets. With demand growing at around 8% and with limited capacity addition, imports are set to increase to 150,000MT in FY19E against ~39,000MT in FY12. To capitalise on increased demand opportunities, IGPL has lined up aggressive growth plans; IGPL plans to increase PAN capacity by 50,000MT at a capex of Rs3bn which will come on stream by Q1FY20. They also plan to add ~6,000MT PAN capacity by debottlenecking in FY18 and have already added 6,000MT of Maleic Anahydride (MA) post acquisition of Mysore Petrochemicals for Rs750mn. IGPL also plans to set up value-added downstream plasticiser capacity of 40,000MT at a capex of Rs1bn to be commissioned in FY19E.

– Multiple growth drivers: IGPL, with its market leading capacity, is well placed to capitalise on growth opportunities. Supported by healthy margin trend and increased capacities, we expect 26% earnings CAGR over FY17-20E. Well‐capitalised balance sheet and healthy ROEs of ~26% are other positives. We initiate coverage with a ‘BUY’ and PT of Rs709 based on 8x EV/E FY20E which translates to 13.3/10.8x P/E FY19/20E.

Research report by BP Equities

Well placed in domestic PAN Industry IG Petrochemicals is the largest manufacturer of phthalic anhydride (PAN), controlling 48% of India’s production capacity. PAN is a chemical compound, which finds its applications in flexible plastics. The advantages that the company has over its competitors are difficult for competitors to replicate and therefore, create high entry barriers for new players. The Company’s plant is strategically located which provides multiple advantages. On the supply side, the major source of raw material for manufacture of PAN comes from the same region, creating compelling cost savings in transportation. On the demand side, more than 70% PAN produced in India is used in western India. With 90% sales locally, the plant located at an ideal position enables the Company to be in close proximity to its customers. Complementing an ideal location is the judicious procurement strategy for Ortho-xylene (OX) – the singe raw material required for the manufacture of PAN. The Company has a tie-up with the largest petrochemicals company (Reliance Industries Ltd) in the country for almost 70% of its requirement of OX. These ensure steady and uninterrupted supply of raw material. We modeled 3% volume growth in PAN with 5% realization growth which will leads to 8.2% overall PAN growth over FY17-19E. Further, we expect incremental revenue from MA and DEP in FY18/19 respectively which will aid revenue CAGR of 12.4% over FY17-19E.

Investors’ presentation