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 12-15 days for mono ethylene glycol (MEG) (including inventory at ports). Similarly, it maintains finished goods inventory of only 15-20 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$14/mmBtu (landed cost), resulting in energy costs of ~Rs5.8/unit. Following the logistics advantage and lower power as well as employee costs, the company enjoys higher margins compared to its competitors. BUY Sector: Petrochemicals CMP: Rs144 Target Price: Rs199 Upside: 38% Jignesh Kamani, CFA jignesh.kamani@nirmalbang.com +91-22-3926 8239 Saiprasad Prabhu saiprasad.prabhu@nirmalbang.com +91-22-3926 8172 Key Data Current Shares O/S (mn) 72.3 Mkt Cap (Rsbn/US$mn) 10.4/197.5 52 Wk H / L (Rs) 152/89 Daily Vol. (3M NSE Avg.) 128,998 Price Performance (%) 1 M 6 M 1 Yr JBF Ind. 3.4 31.5 18.5 Nifty Index 6.8 9.0 16.7 Source: Bloomberg Revenue 49,409 64,711 71,793 76,734 84,205 YoY (%) 14.6 31.0 10.9 6.9 9.7 EBITDA 4,712 9,578 7,127 7,508 8,069 EBITDA margin (%) 9.5 14.8 9.9 9.8 9.6 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) 30.8 76.2 20.0 35.6 47.2 YoY (%) (2.4) 147.5 (73.8) 78.1 32.8 RoE (%) 23.9 46.9 9.3 14.4 16.9 RoCE (%) 12.6 23.4 11.2 9.7 10.9 Dividend yield (%) 4.2 5.6 5.6 5.6 5.6 P/B (x) 1.0 0.7 0.6 0.5 0.5 P/E (x) 4.7 1.9 7.2 4.0 3.0 EV/ EBITDA (x) 4.3 2.6 4.7 4.2 3.5
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 2012. 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 84,205 - - EBITDA 7,508 8,069 7,508 8,069 - - EBITDA (%) 9.8 9.6 9.8 9.6 - - Depreciation 1,699 1,726 1,980 2,034 16.5 17.8 Interest costs 1,932 1,956 2,220 2,242 14.9 14.6 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
POY/FDY Unit POY Unit 3 JBF Industries
Financials (consolidated) Exhibit 2: Income statement Net sales 49,409 64,711 71,793 76,734 84,205 % growth 14.6 31.0 10.9 6.9 9.7 Raw material costs 38,667 47,082 56,184 59,781 65,873 Staff costs 606 846 1,059 1,192 1,331 Any other costs 4,761 6,537 6,742 7,484 8,070 Others 664 668 680 768 862 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) 103.3 (25.6) 5.4 7.5 EBITDA margin (%) 9.5 14.8 9.9 9.8 9.6 Other income 268 222 468 465 474 Extraordinary items (13) - 792 - - Interest costs 1,275 1,534 1,898 2,220 2,242 Forex losses (149) 889 2,939 730 162 Gross profit 3,841 7,377 3,550 5,023 6,139 % growth 4.4 92.1 (51.9) 41.5 22.2 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) 127.2 (66.6) 50.3 34.9 Tax 540 602 (205) 460 682 Effective tax rate (%) 20.2 9.9 (10.1) 15.1 16.6 Net profit 2,128 5,461 2,230 2,583 3,423 % growth (12.8) 156.6 (59.2) 15.8 32.5 Minority interest 224 - - - - PAT after minority interest 1,904 5,461 2,230 2,583 3,423 Extraordinary items (13) - 770 - - Reported net profit 1,917 5,461 1,460 2,583 3,423 % growth (2.4) 184.9 (73.3) 77.0 32.5 Exhibit 4: Balance Sheet Equity 622 717 720 720 720 Preference shares 266 884 884 884 Reserves 8,117 13,555 15,395 17,282 20,009 Networth 8,740 14,537 16,999 18,886 21,613 Minority interest 3,633 - - - - 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 1,593 635 656 Goodwill - 778 891 891 891 Long-term Investments 27 34 37 4,836 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 1,701 503 Liquid Investments 1,282 1,246 629 665 665 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 268 222 468 465 474 Depreciation 1,173 1,314 1,525 1,980 2,034 Deferred liabilities 111 93 (207) 89 134 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 13 - - - - 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 5,882 200 200 Inc./(dec.) in long-term borrowing 1,161 (736) 4,172-500 Inc./(Dec.) in preference capital - 266 618 - - Inc./(dec.) in borrowings 1,229 4,459 10,672 200 700 (Inc.)/Dec. in investments 4 (6) (3) (4,799) (4,836) Minority interest (365) (3,633) - - - Equity issue/(buyback) 79 1,269 37 - - Cash from financial activities 948 2,089 10,706 (4,599) (4,136) Others (174) (1,137) 949 (0) (0) Opening cash 899 999 2,350 3,987 1,701 Closing cash 999 2,350 3,987 1,701 503 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 30.8 76.2 20.0 35.6 47.2 Book value 140 203 236 262 300 Valuation (x) P/E 4.7 1.9 7.2 4.0 3.0 P/BV 1.0 0.7 0.6 0.5 0.5 EV/EBITDA 4.3 2.6 4.7 4.2 3.5 EV/sales 0.4 0.4 0.5 0.4 0.3 Return ratios (%) RoCE 12.6 23.4 11.2 9.7 10.9 RoE 23.9 46.9 9.3 14.4 16.9 Margin ratios (%) EBITDA margin 9.5 14.8 9.9 9.8 9.6 PBIT margin 7.2 12.8 7.8 7.2 7.2 PBT margin 5.4 9.4 2.8 4.0 4.9 PAT margin 3.9 8.4 2.0 3.4 4.1 Turnover ratios Asset turnover ratio (x) 1.8 1.9 1.6 1.6 1.6 Avg inventory period (days) 41 48 44 44 44 Avg collection period (days) 33 37 34 34 35 Avg payment period (days) 15 67 52 52 52 Solvency ratios (x) Debt-equity 1.1 1.2 1.6 1.5 1.3 Interest coverage 2.8 5.4 3.0 2.5 2.7 Growth (%) Sales 14.6 31.0 10.9 6.9 9.7 EBITDA (9.1) 103.3 (25.6) 5.4 7.5 PAT (2.4) 184.9 (73.3) 77.0 32.5 4 JBF Industries
Rating track Date Rating Market price Target price (Rs) 24 August 2011 Buy 125 209 11 November 2011 Buy 123 190 15 November 2011 Buy 115 180 9 February 2012 Buy 111 180 13 February 2012 Buy 111 180 30 May 2012 Buy 117 169 9 August 2012 Buy 141 169 10 October 2012 Buy 144 199 5 JBF Industries
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