VALUE THE UNDERVALUED - Andhra Petrochemicals

BUY!!!

Petro Chemical Industry

Over a period of last three decades, there has been a tremendous increase in the size of the petrochemical producers’ family in the country. In early seventies, the first integrated petrochemical complex i.e. IPCL was established at Baroda with the setting up of economic size naphtha cracker and downstream polymer plants of international size. In the decade of 1980-90, a gas based petrochemical complex with a cracker of international size namely MGCC was planned at Nagothane. However, by the end of 2000, more and more complexes were commissioned by the private players in the country. By this time other large and medium units also came in a big way by capacity additions or existing capacity expansions in synthetic fibres, polymers, elastomers, building blocks (aromatics and olefins) etc.

Andhra Petrochemicals - An overview

Andhra Petro Company’s main business is manufacture and sale of oxo-alcohols. The Plant at Visakhapatnam has the capacity to produce 42,000 MTPA of oxo-alcohols. The market demand for oxo-alcohols is currently estimated at 143,000 MTPA, out of which Andhra Petro Company is able to meet 30%. Balance 70% is met through imports. The estimated annual growth in demand is 8 to 10%. To secure a greater share of the market and meet the growing demand Andhra Petro Company has initiated an Expansion and Modernisation programme to increase its production capacity to 73,000 MTPA. The expansion initiatives have been undertaken with the twin objectives of gaining wider market share, and improving the profitability and returns to the stockholders while strengthening its competitiveness. The enhanced capacity of the plant is expected to be operational in the 2nd half of 2009-10. Andhra Petro Company will during the Financial Year 2010-11 operate at 73,000 MTPA when Andhra Petro Company’s market share would be around 36%.

Future outlook
With the strengthening of the Rupee value, imports are becoming cheaper and the Company’s products may be exposed to competition from imports. Further, as per the agreement with HPCL, the price of Propylene, the main raw-material, is due for revision. To meet the situation Andhra Petro Company is implementing cost reduction measures in power utilisation and in other possible areas of operation.

PBIT has been readjusted after amortization of R & D expense.
On checking the notes to accounts of the company, it was seen that the firm had Miscellaneous Receipts so that amount equal to 0.1455cr in year 2006 - 2007 was not included in the operating income as it was not part of company’s operations.
Tax is calculated on PBIT at the rate of 35% which was calculated on the basis of average of the last 4 years tax rate.
After calculation of the FCFF for the firm, the valuation of the firm has been done .As this firm is going for an expansion plans for worth Rs. 3.2 billion .So this firm will most likely follow a 3 phase growth model.
Growth story has been estimated on the basis of trailing 12 months values and is found to follow a three phase model,
1. Supernormal growth of 17.97% for 5 years

2. Declining growth of 12% for 3 years

3.Stable growth of 7.5% which will be in accordance with that of the Indian economy

The firm is valued at Rs. 62.03 per share provided it maintains the current growth story, which it is most likely to. Hence, the stock at Rs. 36.8 per share currently looks quite undervalued.


Industry Structure and Developments

The year 2006-07 witnessed all-round improvement in the performance of the Company. Production of Oxo-Alcohols was 42,408 MTs and sales achieved were 42,808 MTs. Gross Income for the year rose to Rs.312.41 crores from Rs.227.58 crores in the previous year. The company has posted an all time high Profit (Before Tax) of Rs.54.84 crores. The improved performance and profitability are mainly due to better sales realization and reduction in cost of power. To secure savings in power cost, the company has installed and commissioned 2400 KVA uninterrupted power supply system and discontinued the continuous operation of D.G. Sets. The system was in operation for the period from September, 2006 to March, 2007 which resulted in reduction in power cost to the tune of Rs.8 crores per annum on annualized basis.With the strengthening of the Rupee value, imports are becoming cheaper and the Company’s products may be exposed to competition from imports. Further, as per the agreement with HPCL, the price of Propylene, the main raw-material, is due for revision. To meet the situation your Company is implementing cost reduction measures in power utilization and in other possible areas of operation.

The numbers look quite good. It is evident that on the onset of further growth opportunities, the company is making good returns. The financials look pretty strong. A 1000% increase in ROE and 600% growth in ROCE figures is a good sign for the investors of this firm, and the market is responding to this with good appreciation in the stock figures.

Let us look at the petrochemical market as a whole, in order to estimate the value this stock should be at to be in tandem with the market figures.

Valuation through Multiples

Comparing with the industry average of petro-chemical business, the company should be valued at 16x multiple of its present earnings or at 8x multiple of its book value, which gives it a price target of Rs 68-71 per share. The share is currently available at Rs 36.8 per share on BSE making it undervalued. We recommend a strong buy for the share with a medium term target of Rs 56 per share, and a long term target of Rs. 71 per share.