Seeking scale

PENNY WISE

Though JBF Industries is gung-ho about growth, the stock may not get a higher valuation given the commodity nature of its business.

While the polyester segment is plagued by shrinking profitability owing to competition and rising input costs, the largest manufacturer of polyester chips, JBF Industries is confident of tripling its turnover over the next three years.

The Rs 800 crore company, which is among the top five POY (partially oriented yarn) players, is expanding its capacities to ride out the tough market conditions. Based on analyst estimates, the stock is trading at 5 times its FY08 consolidated earnings. Still, analysts don't think the stock is cheap.

Expansion benefits

The company commissioned its 2,10,000 tonnes per annum (tpa) polyester chips plant in April 2006 to take the total capacity to 3.4 lakh tonnes and its market share to 55 per cent. This plant alone has a potential to post incremental revenues of Rs 800 crore at full capacity.

Further, its 90,000 tpa POY plant (out of which 28 per cent will be further converted into value-added fully drawn yarn) will be operational by September 2006 taking its total capacity to 1,50,000 tpa. In FY07, the company is expected to double its turnover and profits.

Analysts are positive about the company's prospects for the next one year since its expansion will narrow the demand-supply gap for polyester chips, of which there is a shortage of about 2 lakh tonnes per annum. With added capacity, the company will be able to meet 40 per cent of the total requirement of 45,000 tonnes per month of customers in and around Silvassa and Surat.

The company also benefits from the proximity of its plant in Silvassa to both customers (texturisers) and raw material suppliers such as Reliance. Further, apart from availability of sales tax benefits till 2011 in Silvassa, power costs, which form about 5 per cent of net sales, are also cheaper at Rs 2.7 per unit vis-`-vis Rs 4-5 in Maharashtra and Gujarat.

Commenting on the prospects of the sector, B C Arya, chairman, JBF Industries says, "Man-made textile industry will grow at a faster pace as cotton-based textiles alone cannot achieve India's total textile export target of $50 bn by 2010-11 and meet rising domestic demand as there are restrictions on the availability of land for growing cotton due to competition from other crops."

Going global

The company has formed a joint venture with the prince of Ra's al Khaymah (RAK), an emirate of UAE, to produce 2,16,000 tpa of bottle grade polyester chips (used for PET bottles in beverages and soft drinks) and 1,08,000 tpa of polyester films (used in packaging).

The subsidiary is expected to contribute over 30 per cent and 35 per cent in FY08 and FY09 respectively to its consolidated turnover and over 35 per cent and 40 per cent to its consolidated profits.

JBF will derive several advantages through this venture. Mainly, UAE is in the process of signing a FTA with EU and the US and there will be no anti-dumping duty on products exported. The agreement will take effect from January 1, 2007.

This will help the company exploit the growth potential in the US and EU, where both the user industries (packaging, PET bottles) are growing at 10-12 per cent. Besides, power costs in RAK are 50 per cent cheaper than in India. UAE also has easy access to Saudi Arabia and Kuwait, which are major sources of raw material.

Stable margins

Going forward, margin pressures should ease and input costs will come down on account of two reasons. One, the excise duty on major raw materials -purified terephthalic acid (PTA) and mono-ethylene glycol (MEG) has been cut recently to 8 per cent and 12 per cent respectively from 16 per cent.

Two, there is an oversupply of fibre intermediates "� purified terephthalic acid (PTA) and mono-ethylene glycol (MEG) "� in the domestic and international markets which should keep prices low. Approximately 11.5 lakh tpa and 4.3 lakh tpa of PTA and MEG will be added in the domestic market by the next two quarters.

Says Arya, "I expect PTA/MEG prices to decline from October onwards by about 4-5 per cent." Though final product prices also move in tandem with the raw material prices, the fall is expected to be lower at about 3-3.5 per cent.

Financial performance

The company has recovered from losses incurred in FY00-02. Its net sales and profits have moved at a CAGR of 22 per cent and 56 per cent in the last three years ending FY06. This is despite the spiralling raw material prices and pricing flexibility of cotton yarn players.

In Q1FY07, the company's sales and operating profit increased by 50 per cent and 27.4 per cent to Rs 289 crore and Rs 32.64 crore respectively. Net profit rose by 74 per cent to Rs 16.5 crore leading to improved margins.

Its competitor, Indo Rama Synthetics, which is more than double its size, has been reporting declining profitability since the December 2005 quarter.

However, analysts prefer Indo Rama from a long-term perspective as it has economies of scale and well-diversified value added products like polyester staple fibre, fully drawn yarn, drawn texturised yarn, apart from POY. 
 

PEER-TO-PEER
Rs crores	JBF Industries		Indo Rama
	Q1FY07	% chg	Q1FY07	% chg
Net sales	289.18	50.50	467.80	-11.00
Operating profit	32.64	27.40	29.55	18.30
OPM (%)	11.29	-204 bps	6.32	157 bps
Net profit	16.54	74.50	2.18	-78.00
NPM (%)	5.72	79 bps	0.47	-143 bps

Valuations

The stock trades at 9x and 6x for FY07E and FY08E respectively on a standalone basis. Sonal Shrivastav, analyst, Religare Securities feels that the company is fairly valued at four to five times since it is a commodity player.

Analysts prefer the company in the medium-term while their long-term pick in the synthetic sector after Reliance is Indo Rama. Citigroup Venture Capital has 25 per cent stake in JBF but its public shareholding is low at 13 per cent which makes the shares less liquid and thus volatile.