Engineering polymers in limelight

Bayer ABS and Bhansali Polymers to gain

Major applications of ABS and SAN are in refrigerator liners, automobile components, telecommunications, consumer electronics, household appliances, computer cabinets and cameras.

Polycarbonate is used to produce CDs, DVDs and CDRs. With user industries poised to witness growth in the coming months, engineering polymers will not be left behind. That is point No. 1.

The industry as a whole is poised to see growing demand on account of metal being replaced by engineering plastics in components of automobiles, consumer durables, office machines, telecommunications equipment, etc. That is point No. 2.

The sector is also going through a lot of acquisitions which have resulted in consolidation and concentration of supplies coupled with expansion projects. This should aid companies in straightening their balance sheets and improving profitability. That is point No 3.

The domestic demand for ABS, which is the main product, is growing at the rate of 15 per cent per annum which will be wholly met by the two companies.

The current demand in the domestic market is around 65,000 tonnes per annum. A total of 1,80,000 tonnes per annum of capacity will be lined up by 2005. With domestic demand touching about 86,000 tonnes, there will an excess capacity of 94,000 tonnes per annum. That creates a good export potential. That is point No. 4.

However, there is a caveat. Concerns for the industry stems from any turbulence that the international market may witness. Product prices in the international market may see a drop in the coming months.

Moreover, raw material prices are very volatile, especially that of styrene. This can hurt margins since styrene is the major element in ABS (around 62 per cent).

The other point is that neither of the two companies has any experience in international markets.

Currently, exports form only a minuscule portion of the companies' sales. Bayer ABS has only about 0.2 per cent of its turnover in exports while Bhansali has about 2 per cent in exports for FY03. So it remains to be seen how successful they will be in terms of exports.

Bayer ABS, the market leader in the domestic polymer segment, is planning to expand capacity to 80,000 tonnes per annum by 2006-07. Currently, the company has a capacity of 38,000 tonnes per annum.

On the whole there has been a slowdown in most of the sectors that consume ABS and SAN. But the company has been able to perform consistently on account of its credible quality and services.

It has an edge in terms of product superiority and, therefore, stands to gain with repeat orders from suppliers of original equipment manufacturers (OEM).

Strong technical support from parent Bayer AG has helped the company achieve a share of 65 per cent in the domestic market. Analysts expect a P/E of 4.6 for FY05.

"Bayer ABS has very strong technical capabilities which have been the driver for success," says Pradeep Chokani, senior vice president, Anand Rathi Securities.

The company achieved a net profit of Rs 23.18 crore in the year ended December 31, 2002, an increase of 62.4 per cent over the previous year. Turnover clocked an increase of 21.3 per cent to Rs 348.34 crore for the same period.

The company has also shown consistent improvement in performance over the past four quarters (see table). The stock price has recorded a 43 per cent jump in the past six months to Rs 130 levels. At Rs 130, the stock trades at a P/E of 9.8.

Bhansali Engineering has also been aggressive in its strategy to expand capacity. It recently acquired Greaves' ABS resin manufacturing facility and in 1999 had taken over an ABS plant from Polychem.

With these takeovers, the company is poised to expand its capacity from the current 30,000 tonnes per annum to 1,20,000 tonnes per annum by 2005, which will be an increase of 400 per cent. Currently, the company accounts for 35 per cent share in the domestic market.

But consider this: demand growing at 15 per cent per annum will translate to around 86,000 tonnes per annum. The excess capacity created in the domestic market will need to find a way out. "Bhansali's only way out would be exports," says Chokani.

The company is debt-free. It estimates the total cost of the expansion project at less than Rs 75 crore. But the amount seems really small compared to what Bayer had spent while setting up its plants (around Rs 400 crore).

"Engineering polymers is a heavily capex-driven industry. It remains to be seen what the company can do with Rs 75 crore," adds Chokani.

Bhansali will invest a total of about Rs 150 crore, including the acquisition and re-engineering costs, to upgrade its ABS resin plant.

On the brighter side, the cost of the plant to the company is competitive as any new plant of such scale would cost about Rs 800 crore.

The company's cost of production will also come down drastically from the current Rs 11 to just about Rs 4 per tonne.

The company has not been fully utilising its capacity, and its polychem plant is operational only now. Analysts are expecting the benefits from the expansion programme to show up by 2005. The company posted a net profit of Rs 2.07 crore for FY03 (nine months ended March 31, 2003) a decrease of 35 per cent over the same period the previous year.

Turnover, too, decreased by 28 per cent to Rs 85.17 crore for the same period, contrary to its only competitor. Quarterly figures, too, are disheartening.

Sales have almost halved in June 2003 quarter compared to March 2003 quarter. This can be attributed to a slowdown in the user industries. Quality in terms of technology is also an issue.

However, the stock price seems to have run up beyond its fundamentals. The price has gained far-fetched levels of Rs 164, an increase of 1085 in the past six months.

At Rs 164, the stock trades at a significantly high P/E of 105. Whether the expansion attempts benefit the price remains to be seen.