Saturday, March 8, 2008
Investment Idea: India Glycols
India Glycols is the first and only company in the world to produce Ethylene Oxide (EO) / Mono Ethylene Glycol (MEG) from renewable agro route based on molasses, which is a by-product of the sugar industry.
MEG is used in the manufacture of polyester resins, films fibres, and is an important raw material used in the production of coolants, antifreezers, aircraft ant-icers and solvents. Thus the client base of India Glycols covers almost entire India Inc, supplying MEG to more than 1,000 customers in various end-use industries such as Textile, Agrochemical, Oil & Gas, Personal Care, Pharmaceuticals, Brake Fluids, Detergent, Emulsion Polymerisation & paints etc.
Making MEG from ethanol is highly cost effective as against using crude, which is currently ruling at record high prices. Using crude is uneconomical and world over, companies are shifting to use of such renewable agro routes. Currently the price of ethanol has been fixed at Rs.21.50 per litre for the next three years (which is less than a dollar) and this is in no way even comparable to the over $100 per barrel of crude. So in this context, India Glycols, having the largest plant in India for making MEG from ethanol has a great advantage.
The company is now in the midst of enhancing its MEG capacity by 20% at an investment of Rs.25 crore resulting in a very attractive payback.
During the quarter, the company acquired a controlling stake in Shakumbari Sugar & Allied Industries at a consolidated price of Rs.47 crore, which has a crushing capacity of 3200 Tonnes Per Day(TCD) along with a modern distillery of 40 kilo litres per day(KLPD). With this acquisition, the company would be vertically integrated to captively produce additional ethanol requirements.
The company has also established its subsidiary in Singapore to augment its activities in South Eastern Asian region and other related areas. It is already exporting to South East Asia, Middle East, Europe, Australia and USA.
Apart from this, the company has also got into purifying Carbon Di-oxide (CO2), a by-product produced in the distillery, both at its Kashipur and Gorakhpur units which has application in food, beverage and other industrial usage. CO2 plants at both distilleries are to be commissioned in March 2008.
Indian Glycols has had a super third quarter ending. For Q3 ended 31st December 2007, the company, on a QoQ basis reported a 26% jump in net sales at Rs.449.98 crore, which on a YoY was up by 93%.
EBIDTA was up in Q3, on a Q0Q by 29% at Rs.113.53 crore which YoY was up by a whopping 219%. OPM improved from 15.27% in Q3 FY07 to 24.52% in Q2 FY08 and now in current Q3, it was at 25.23%.
The best probably jump has been in its net profit. For the current Q3 it was at Rs.67.50 crore, which on a QoQ indicated a jump of 40% but YoY, it has gone by an unbelievable over 6 times. NPM rose from a meager 4% in Q3 FY07 to 13.56% in Q2 FY08 and now in Q3 FY08 it stands at a healthy 15%.
On an equity of Rs.27.88 crore, the company, for Q3 FY08 posted an EPS of Rs.24.21. What this means is that the company will end this fiscal with an EPS of Rs.80, that’s a certainty. Also based on the present earnings, one can safely say that for FY09, the company will have an EPS of Rs.100, what with the additional capacity also expected to go on stream.
The cash EPS for Q3 was at Rs.31 and this means that we are looking at a certain cash EPS of around Rs.100 in FY08 and Rs.120 in FY09.
For a nine months ending 31st December 2007, though the company had forex gains of Rs.21.80 crore, the same would get added on in FY09 through improved performance and hence an EPS of Rs.100 for FY09 can be reasonably expected.
The stock is currently quoted at Rs.247, giving us a PE of just 3 on the EPS of Rs.80 estimated for this fiscal and if we look at the expected EPS of Rs.100 in FY09, the PE works to a measly 2.50 times. Now if that isn’t good enough, nothing else will be!
What makes India Glycol a great buy is the fact it has a unique business model which enables the company to produce petrochemicals and specialty chemicals from renewable agro route base and that too where the cost of the raw material is fixed and is available in abundant supply. Coupled with growing demand and higher margins through larger volumes, there is no way that this winner of a company can falter. The icing on the cake is that currently, looking at the future discounting, the company is quoted at a dirt-cheap price.
One can safely buy India Glycols at the current rate of Rs.247 for a sure 50% return over the next 12 months.
Source: sptulsian.com
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