FY11 FY12 FY13E FY14E

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1 Plant Visit Note Institutional Equities JBF Industries 10 October 2012 Reuters: JBFI.BO; Bloomberg: JBF IN We paid a visit to the plants of JBF Industries at Silvassa, Dadra & Nagar Haveli and also at Sarigam, Gujarat. The company has 608,000/279,020tpa chip/poy facilities at Sarigam/Silvassa units, respectively, contributing 61% to consolidated FY12 sales. We have retained our revenue/margin estimates but following higher depreciation/interest costs, we have cut net profit estimates by 15.7%/12.9% for FY13E/FY14E, respectively. As the company has embarked on an aggressive growth plan with a capex of US$1bn over FY12E-16E, we have changed our valuation method from PE-based to EV/EBITDA-based to factor in huge debt and roll forward target multiple to FY14 estimate (from FY13). Despite aggressive capex of US$1bn, we don t expect peak D/E to cross 2.5x (with gross debt of ~Rs65bn) in FY15E following strong operating cash flow and the D/E ratio may in fact taper off to 1.0x by FY18E. We retain our Buy rating on the stock with a revised TP of Rs199 (from Rs169) based on 4x FY14E EV/EBTDA. Key highlights are as follows: Chip/POY plants at Silvassa/Sarigam operated at 70%/75% of their capacity, respectively. Lower utilisation was on account of reduced availability of the main raw material i.e. purified terepthalic acid (PTA). The company procures PTA from Mitsubishi, Indian Oil Corporation (IOC) and Reliance Industries (RIL). As per the management, PTA plants of its suppliers were temporary closed/operated at a lower capacity due to technical problems. The management has stated that availability of PTA has improved currently following normalcy in operations at its PTA suppliers. The company s plants at Silvassa and Sarigam are located close to raw material (PTA) suppliers (RIL and IOC) as well as customers for its chip/poy who are within a 25km radius (key markets being Surat and Daman). This gives logistics advantage of ~Rs1-2/kg compared to its competitor Indo Rama Synthetics located at Nagpur, ~600km away. The company has also empowered local villagers to provide continuous transportation support for raw materials/finished products. Following the company s close proximity to raw material suppliers and customers, it maintains a very low inventory of around two-five days for PTA and days for mono ethylene glycol (MEG) (including inventory at ports). Similarly, it maintains finished goods inventory of only days. As the customers are located close by and the company delivers products within four hours, it helps in maintaining a lean inventory. JBF Industries enjoys lower power costs at its Sarigam unit, of ~Rs4.25/unit, while it procures gas from Gujarat State Petroleum Corporation (GSPC) for this unit at US$14/mmBtu (landed cost), resulting in energy costs of ~Rs5.8/unit. Following the logistics advantage and lower power as well as employee costs, the company enjoys higher margins compared to its competitors. BUY Sector: Petrochemicals CMP: Rs144 Target Price: Rs199 Upside: 38% Jignesh Kamani, CFA jignesh.kamani@nirmalbang.com Saiprasad Prabhu saiprasad.prabhu@nirmalbang.com Key Data Current Shares O/S (mn) 72.3 Mkt Cap (Rsbn/US$mn) 10.4/ Wk H / L (Rs) 152/89 Daily Vol. (3M NSE Avg.) 128,998 Price Performance (%) 1 M 6 M 1 Yr JBF Ind Nifty Index Source: Bloomberg Revenue 49,409 64,711 71,793 76,734 84,205 YoY (%) EBITDA 4,712 9,578 7,127 7,508 8,069 EBITDA margin (%) Forex gain/(loss) - (889) (2,939) (730) (162) Reported PAT 1,904 5,461 2,230 2,583 3,423 Adj PAT 1,917 5,461 1,460 2,583 3,423 EPS (Rs) YoY (%) (2.4) (73.8) RoE (%) RoCE (%) Dividend yield (%) P/B (x) P/E (x) EV/ EBITDA (x)

2 Picture: Chip plant at Sarigam Following investments made in balancing equipment, the company s chip plant would be fully fungible to produce either packing or textile chips by October After this, the company would significantly reduce the sales of textile chip as PET chip fetches a better margin. The company set up a 30,000tpa texturising facility with a capex of Rs500mn in 2QFY13, which would improve operating margin by Rs126mn (delta of Rs3.5/kg, RoCE of 20%). Change in our estimates We have retained our revenue and operating margin estimates for FY13E/FY14E. Following higher capex, debt on the company s books increased from Rs17,836mn in FY11 to Rs27,890mn so far in FY13. Following high debt/capex and the resultant high interest costs/depreciation, we have cut our net profit estimates by 15.7%/12.9% to Rs2,583mn/Rs3,423mn for FY13E/FY14E, respectively. Exhibit 1: Change in our earnings estimates Y/E March (Rsmn) Earlier assumptions New assumptions Change (%) FY13E FY14E FY13E FY14E FY13E FY14E Sales 76,734 84,205 76,734 84, EBITDA 7,508 8,069 7,508 8, EBITDA (%) Depreciation 1,699 1,726 1,980 2, Interest costs 1,932 1,956 2,220 2, APAT 3,064 3,929 2,583 3,423 (15.7) (12.9) Source: Nirmal Bang Institutional Equities Research Yarn plant at Silvassa Production of chip from liquid melt Yarn plant at Silvassa 2 JBF Industries

3 POY/FDY Unit POY Unit 3 JBF Industries

4 Financials (consolidated) Exhibit 2: Income statement Net sales 49,409 64,711 71,793 76,734 84,205 % growth Raw material costs 38,667 47,082 56,184 59,781 65,873 Staff costs ,059 1,192 1,331 Any other costs 4,761 6,537 6,742 7,484 8,070 Others Total expenditure 44,698 55,133 64,666 69,226 76,136 EBITDA 4,712 9,578 7,127 7,508 8,069 % growth (9.1) (25.6) EBITDA margin (%) Other income Extraordinary items (13) Interest costs 1,275 1,534 1,898 2,220 2,242 Forex losses (149) 889 2, Gross profit 3,841 7,377 3,550 5,023 6,139 % growth (51.9) Depreciation 1,173 1,314 1,525 1,980 2,034 Profit before tax 2,668 6,063 2,025 3,043 4,105 % growth (8.0) (66.6) Tax (205) Effective tax rate (%) (10.1) Net profit 2,128 5,461 2,230 2,583 3,423 % growth (12.8) (59.2) Minority interest PAT after minority interest 1,904 5,461 2,230 2,583 3,423 Extraordinary items (13) Reported net profit 1,917 5,461 1,460 2,583 3,423 % growth (2.4) (73.3) Exhibit 4: Balance Sheet Equity Preference shares Reserves 8,117 13,555 15,395 17,282 20,009 Networth 8,740 14,537 16,999 18,886 21,613 Minority interest 3, Short-term loans 3,312 8,241 14,123 14,323 14,523 Long-term loans 10,332 9,596 13,768 13,768 14,268 Total loans 13,644 17,836 27,890 28,090 28,790 Deferred tax liability 1,337 1,430 1,223 1,312 1,446 Liabilities 27,353 33,804 46,113 48,288 51,849 Gross block 24,318 26,831 35,081 37,074 38,110 Depreciation 4,372 5,613 7,341 9,321 11,355 Net block 19,946 21,218 27,740 27,753 26,755 Capital work-in-progress 1,081 1,677 1, Goodwill Long-term Investments ,836 9,672 Inventories 5,132 7,344 7,918 8,470 9,392 Debtors 4,674 6,955 7,149 7,556 8,384 Cash 999 2,350 3,987 1, Liquid Investments 1,282 1, Other current assets 3,023 4,212 7,484 7,802 8,144 Total current assets 15,110 22,107 27,166 26,195 27,088 Creditors 1,915 10,326 9,294 10,008 11,084 Other current liabilities 7,070 1,684 2,020 2,014 2,129 Total current liabilities 8,985 12,010 11,314 12,023 13,213 Net current assets 6,125 10,098 15,852 14,172 13,875 Total assets 27,216 33,804 46,113 48,288 51,849 Exhibit 3: Cash flow EBIT 3,539 8,264 5,602 5,528 6,035 (Inc.)/Dec in working capital (2,088) (2,620) (4,118) (606) (901) Cash flow from operations 1,451 5,644 1,484 4,922 5,134 Other income Depreciation 1,173 1,314 1,525 1,980 2,034 Deferred liabilities (207) Forex loss(-) 149 (889) (2,939) (730) (162) Interest paid (-) (1,275) (1,534) (1,898) (2,220) (2,242) Tax paid (-) (540) (602) 205 (460) (682) Dividend paid (-) (437) (666) (693) (696) (696) Minority interest ( P&L) (224) Extraordinary items Net cash from operations 688 3,582 (2,055) 3,349 3,994 Capital expenditure (-) (1,363) (3,182) (7,963) (1,035) (1,056) Net cash after capex (675) 400 (10,018) 2,314 2,937 Inc./(Dec.) in short-term borrowing 68 4,929 5, Inc./(dec.) in long-term borrowing 1,161 (736) 4, Inc./(Dec.) in preference capital Inc./(dec.) in borrowings 1,229 4,459 10, (Inc.)/Dec. in investments 4 (6) (3) (4,799) (4,836) Minority interest (365) (3,633) Equity issue/(buyback) 79 1, Cash from financial activities 948 2,089 10,706 (4,599) (4,136) Others (174) (1,137) 949 (0) (0) Opening cash ,350 3,987 1,701 Closing cash 999 2,350 3,987 1, Change in cash 100 1,352 1,636 (2,285) (1,199) Exhibit 5: Key ratios Y/E March FY10 FY11 FY12 FY13E FY14E Per share (Rs) EPS Book value Valuation (x) P/E P/BV EV/EBITDA EV/sales Return ratios (%) RoCE RoE Margin ratios (%) EBITDA margin PBIT margin PBT margin PAT margin Turnover ratios Asset turnover ratio (x) Avg inventory period (days) Avg collection period (days) Avg payment period (days) Solvency ratios (x) Debt-equity Interest coverage Growth (%) Sales EBITDA (9.1) (25.6) PAT (2.4) (73.3) JBF Industries

5 Rating track Date Rating Market price Target price (Rs) 24 August 2011 Buy November 2011 Buy November 2011 Buy February 2012 Buy February 2012 Buy May 2012 Buy August 2012 Buy October 2012 Buy JBF Industries

6 Disclaimer Stock Ratings Absolute Returns BUY > 15% HOLD 0-15% SELL < 0% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Access our reports on Bloomberg Type NBIE <GO> Team Details: Name Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com / 99 Hemindra Hazari Head of Research hemindra.hazari@nirmalbang.com / 18 Sales and Dealing: Neha Grover AVP Sales neha.grover@nirmalbang.com Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com , Sudhindar Rao Dealing Desk sudhindar.rao@nirmalbang.com , Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com /8101, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /8103, Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park Lower Parel (W), Mumbai Board No. : /1 Fax. : JBF Industries