CD Equisearch Pvt Ltd June 29, 2015 Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance Apcotex Industries Ltd (AIL) No. of shares (crore) 1.04 Mkt cap (Rs crs) 475 Current price (29/06/2015) 458 Price target (Rs) 539 52 week H/L (Rs.) 575/163 Book Value (Rs.) (fv:5) 96 P/BV (16e/17e) 4.0/3.3 P/E (16e/17e) 17.3/13.6 EPS growth (FY15/16e/17e) 88.0/11.5/26.9 ROE (FY15/FY16e/FY17e) 26.7/25.2/26.5 Beta 0.9 Daily volume (avg. quarterly) 7453 BSE Code 523694 NSE Code APCOTEXIND Bloomberg APCO IN Reuters APCI.BO Shareholding pattern % Promoters 57.6 MFs / Banks / FIs 0.0 Foreign 1.4 Non-Promoter Corp. 4.3 Public & others 36.7 Total 100.0 As on Mar 31, 2015 Recommendation ACCUMULATE Analyst KISHAN GUPTA, CFA, FRM Phone: + 91 (33) 4488 0043 E- mail: [email protected](Figires in Rs crs) FY13 FY14 FY15 FY16e FY17e Income from operations 273.40 297.03 355.09 394.74 471.07 Other Income -0.02 2.43 5.58 4.81 6.01 EBITDA (other income included) 23.50 27.55 47.05 53.17 64.43 Net Profit after EO item 12.80 13.13 24.69 27.52 34.91 EPS (Rs) 12.35 12.66 23.81 26.54 33.67 EPS growth (%) 11.7 2.6 88.0 11.5 26.9 Company Brief Apcotex Industries is one of India's leading producers of performance emulsion polymers (synthetic latexes and synthetic rubber). Synthetic latexes find use in whole host of industries - tyre; paints; textiles; construction; automotive components; paper- while its synthetic rubber finds use in footwear, automotive components, moulded items, v-belts, conveyer belts and hoses. Highlights Higher styrene butadiene's demand from Asia - Pacific, Latin America and Middle East and Africa (MEA) would boost order flows. According to Transparency Market Research, a US based research provider, high growth of coated paper market and increased off take from carpet manufacturing industry would support growth of styrene butadiene industry in Asia-Pacific region. Latin America is expected to be the fastest growing region globally buoyed by sturdy growth in paper processing industry in Brazil. But markets in Europe and North America (currently second and third largest market respectively) would hit the skids for the slump in coated paper market would spell doom. Several coated paper manufacturers have already shut shop due to the fall in demand. Drop in business in Germany and Finland, two large producers of papers in Europe, has reduced demand for the latex. With tepidness in domestic demand, Apcotex is pulling out all stops to grow its exports. It targets to book a quarter of its total revenues from it in the next few years (currently at 18%). Exports doubled last fiscal as it explored new markets and launched niche products. Apcotex demonstrates some pricing power not least because of its gut- wrenching market share in user industries: 40-43% for paper & paper boards; 65% for carpets; 40% for construction; 30-35% for tyres; 50% for rubber. High returns on capital somewhat manifest that. The stock is currently trading at 17.3xFY16e EPS of Rs 26.54 and 13.6x FY17e EPS of Rs 33.67. Despite robust growth potential and low financial leverage, external risks could fray gains. Most notably, sharp fall in crude oil prices could keep a tab on sales growth. We, therefore assign ‘accumulate’ rating on the stock with target of Rs 539 based on 16xFY17e earnings (peg ratio: 0.8), over a period of 6-9 months.
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CD Equisearch Pvt Ltd June 29, 2015
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Recommendation
Strong demand outlook for styrene butadiene latex, particularly in Asia - Pacific, bodes well for its suppliers globally.
According to a study by Transparency Market Research, a U.S.-based provider of syndicated research, customized
research, and consulting services, the global styrene butadiene latex market is estimated to grow a CAGR of 3.3% between
2015 and 2023. Higher demand for coated paper will buoy demand for latex in Asia - Pacific, region, which accounts for
45% of the global styrene butadiene latex industry. Other markets such as Latin America and the Middle East and Africa
(MEA) would also do reasonably well not least due to robust off take from the construction industry in these regions and
paper processing industry in Brazil.
Though leading European and North American markets of styrene butadiene latex would feel the heat of slowdown in
their coated paper market, Apcotex would yet steer clear for its shipments to these markets are awfully low. It is eying
more regions in its stronghold Middle East, North African and South East Asian regions and introducing more value add
products to stimulate exports. As a result, margins could further rise - operating margins rose to unsustainably high 14.2%
in fourth quarter of last fiscal. Apoctex reckons that its overall margins are more a function of product mix than of the cost
plus fixed-mark up.
Its roll out of acrylics products for paper, construction and carpet segments in last few years has been well received. More
such value added products would be unveiled over the next few years, which would further cement its market share in
these segments; current share at 40-43% for paper & paper boards; 65% for carpets; 40% for construction; 30-35% for tyres;
50% for rubber.
Capacity expansion of synthetic latex is not on anvil as its existing capacity of 55000 mt, which is currently operating at 70-
75% rate, would adequately cover next two years of presumed volume growth (utilization 80-90%). Even the existing
facility could churn out 60000-65000mt of latex depending on the product mix. Yet Apcotex could enhance capacity by
15000 mt at short notice by incurring capex of Rs 5-7 crs at its existing facility at Tajola, Maharahstra; although no such
expansion in on the cards yet.
High volumes estimated at 15-16% would more than make up for fall in realizations as income from operations would rise
by 11.5%. Though operating margins could rise marginally in current fiscal, increased volatility in crude oil prices dent
realization of finished products. No less significant would be shortage of key raw materials - styrene and butadiene - and
lag effect in fixing supply contracts with clients. Apcotex's synthetic rubber business has been struggling for few years now
because of shift in market preference for cheaper polymers.
The stock current trades at 17.3x FY16e EPS of Rs 26.54 and 13.6x FY17e EPS of Rs 33.67. Notwithstanding robust demand
for synthetic latexes, Apcotex's high market share in user industries (paper & paperboards: 40%; carpets: 65%) and low
financial leverage, external risks abound. Apcotex's puny business size helps little to quash concerns of volatility in
earnings due to high competition overseas. Sharp correction in crude oil prices could also impinge sales. Rerating of the
stock in last few months reflects Apcotex's improved growth prospects - earnings rose by some 88% last fiscal. But the base
effect is now visible. We, therefore assign ‘accumulate’ rating on the stock with target of Rs 539 based on 16xFY17e
earnings (peg ratio: 0.8), over a period of 6-9 months.
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