Strong performance continues… • Apcotex Industries (AIL) :: ICICI Securities, PDF link

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Strong performance continues…
• Apcotex Industries (AIL) reported strong quarterly results
consecutively with Q2FY15 revenues at | 90.5 crore, up 28.4% YoY.
The revenue growth was driven by sales volume growth due to high
capacity utilisation in both latex & rubber segments. Our discussion
with the management suggests the capacity utilisation for synthetic
latex for Q2FY15 is ~70-80% while for rubber it is 60-70%
• EBITDA for the quarter grew 59.3% YoY to | 10.3 crore. Margins also
expanded 221 bps YoY and 143 bps QoQ to 11.4%. Margin
expansion was driven by lower raw material as a percentage of sales
• Strong revenue growth, higher EBITDA margin & higher other
income led to PAT for the quarter increasing to | 7.1 crore against
| 2.5 crore in Q1FY14 and | 5.8 crore in Q1FY15
Strong consecutive quarterly performance boosts confidence
Being a dominant player with a solid client base, AIL’s strategy has been
to increase its latex capacity (capex CAGR of 16% in FY09-14). Even in
FY13, the company expanded its capacity by ~38%, going up from
40,000 tonnes to 55,000 tonnes. However, a tough economic environment
in FY14 led to sub-par capacity utilisation (latex - ~60% capacity
utilisation and rubber-~ 50% capacity utilisation). However, we saw a
revival in the operational performance in H1FY15, which is clearly
indicated by capacity utilisation figures. Revenue growth of 33% YoY in
H1FY15 is driven by increase in capacity utilisation for synthetic latex to
~70-80%.
Even in the synthetic rubber segment, the company continues to
outperform our estimates of flattish capacity utilisation (50%), by
exhibiting 60-70% utilisation in that segment. Higher utilisation was
witnessed in the rubber segment, as the company strategically uses some
of the assets under synthetic rubber segment to meet demand for
synthetic latex. Strong capacity utilisation and improved economic
scenario will call for capacity expansion to 65,000 tonnes in FY16E, in our
view. We have estimated the capacity increase will happen by the end of
H1FY16. We expect capacity utilisation rates of 80% for FY15E and FY16E
while increasing the estimates to 85% for FY17E. Hence, revenues are
expected to grow from | 297.8 crore in FY14 to | 473.8 crore in FY17E,
thereby witnessing 16.7% CAGR over FY14-17E.
Growth and consistency warrants valuation upgrade
AIL reported robust margins of 11.4% in Q2FY15. The positive outlook
from the management, higher capacity utilisation, positive operating
leverage and arrest in decline of the rubber segment give us confidence
to revise our estimates. Hence, we pencil in higher margins of 10.4%,
10.6% and 10.6% for FY15E, FY16E and FY17E, respectively. In line with
our previous stance, Q2FY15 reinforces our confidence on the business.
In lieu of the strong performance, the stock has appreciated sharply. We
believe AIL will continue its growth momentum. Accordingly, we have
revised our earning estimates for FY15E, FY16E & FY17E to | 22.7, | 26.7
and | 28.3, respectively. Coupled with the above, AIL’s low gearing ratio
of 0.5x, strong operating cash flow generation of | 37.9 crore (FY15-16E),
progressive dividend policy and improving return ratios (15.4% in FY14 to
24.7% in FY17E) provide a strong cushion to the business model. Hence,
we increase the valuation multiple to 19x. Applying to an average EPS of
| 27.5 (average of FY16E & FY17E EPS), we have a revised target price of
| 522/share.

LINK
http://content.icicidirect.com/mailimages/IDirect_ApcotexInds_Q2FY15.pdf