JBF Industries Ltd - Detailed Independent Equity Research report :Crisil

JBF Industries Ltd Moving a step ahead by going backward Fundamental Grade        3/5 (Good fundamentals) Valuation Grade         5/5 (CMP has strong upside) Industry         Chemicals                                                                                                    Date: July 10, 2012

Polyester chip manufacturer JBF Industries Ltd (JBF) is backward integrating to produce PTA (purified terephthalic acid) to ensure a steady supply of raw material for its chips plant. Post integration, it will benefit from lower raw material and freight costs along with lesser working capital requirement. This will make it cost competitive and improve its operating margin. We maintain our fundamental grade of 3/5, indicating that its fundamentals are goodrelative to other listed securities in India.

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Backward integrating into PTA to ensure assured raw material supply, better margins 

JBF is setting up a 1.25 mn tpa PTA plant in Mangalore SEZ, expected to commence operations by early 2015. The land has been allotted, financial closure has been achieved and the technology supplier has been finalised. PTA is one of the major raw materials for polyester and output from this plant will serve JBF’s overall PTA requirement of ~0.85 mn tonnes (FY16), and will lead to better margins and assured raw material supply

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India and UAE operations continue to perform well

The company expanded its chips capacity in India and UAE (subsidiary: JBF RAK LLC) by 43,500 tpa and 42,000 tpa, respectively, during FY12. In India it continues to focus on the de-risking strategy; after forward integrating into filament yarn (POY) it is now planning to shift portion of its fibre grade capacity to bottle grade capacity. In UAE, it also expanded its film capacity by 35,760 tpa. Hence, the share of specialty grade film will rise to 50% from 30%, thereby improving margins.

Polyester demand to grow at 7-8%, competition to remain intense

We expect demand for polyester to grow at a CAGR of 7-8% over FY12-FY17 on account of rise in per capita consumption of textiles and better competitiveness of polyester compared to cotton yarn. However, price competition cannot be ignored as the industry continues to operate at ~70% utilisation levels.

Key risks – execution of PTA plant and currency fluctuation

Timely execution of the PTA project is very critical for JBF given the tight supply situation in the domestic market. Further, it is a new area of operation and requires huge capital. Import of raw materials and the derivative position expose it to the risk of currency fluctuations.

Revenues to grow at 6%; margins to improve

We expect JBF’s revenues to grow at a CAGR of 6% to Rs 81 bn in FY14. EBITDA margin is expected to improve from the current levels to 10.9% on account of softening of raw material prices. Also, derivative losses will decline as 80% of the contract will expire in July 2012.

Valuation: Current market price has strong upside

We continue to use the discounted cash flow method to value JBF and maintain our fair value of Rs 194. At this value, the implied P/E multiples are 5.0x FY13E and 3.1x FY14E earnings. At the current market price of Rs 135, the assigned valuation grade is 5/5.