1QFY16 Result Update Institutional Equities JBF Industries 12 August 215 Reuters: JBFI.BO; Bloomberg: JBF IN Healthy Gross Profit Growth, But Other Costs Higher; Retain Buy Following the decline in crude oil prices, realisation of JBF Industries (JBF) reduced and therefore revenue grew by a mere 8.8% in 1QFY16 despite a healthy volume growth because of new capacity addition. Gross profit grew by a healthy 29.8% to Rs6,888mn, in line with our estimate of Rs6,87mn. However, employee costs/other expenses increased 65.3%/34.9%, respectively, because of commissioning of two new ventures of US$2mn each in 3QFY15. As all costs are booked in P&L account,ramp-up will take time, as a result of which when compared to 29.8% growth in gross profit, operating profit grew at a lower pace of 15.5% to Rs2,41mn, 16.4% below our estimate of Rs2,871mn. We believe operating profit/net profit growth of JBF will be more back-ended once it does US$1bn capex to achieve optimum capacity utilisation level, as in the near term costs are expected to remain high while because of lower capacity utilisation, operating profit growth will lag gross profit growth. In order to improve balance sheet health in the near term, we believe JBF did a very good deal raising Rs9.6bn, half of its current market capitalisation, through a mere 25% equity dilution at parent level by structuring the deal in such a manner whereby its Singapore arm was alone valued at Rs27.8bn (Rs424/share) compared to consolidated market capitalisation of Rs19.2bn (Rs294/share). Once its new ventures reach optimum capacity utilisation level, likely in FY17, JBF is expected to generate annual EBITDA of Rs21bn compared to Rs9.2bn in FY15 and generate operating cash flow of Rs16.8bn. We have retained our estimates, Buy rating and a SOTP-based target price of Rs517 on JBF based on 5.6x/4.9x EV/EBITDA and P/E, respectively, for the consolidated entity. Stable gross profit, but rise in other costs impacts domestic operating profit: JBF s input items, PTA (purified terephthalic acid) and MEG (mono ethylene glycol) are derivatives of crude oil and therefore the finished products - chips and POY or partially-oriented yarn - depend on crude oil price movement. With the fall in crude oil prices, prices of chips/poy declined 12.8%/12.4% in 1QFY16 YoY in the industry. Following lower realisation, net sales declined 33.4% to Rs8,99mn, below our estimate of Rs11,776mn although revenue rose 1.7% QoQ. Despite weak demand and a 33.4% fall in sales, gross profit improved 2.2%/18.7% YoY/QoQ, respectively, to Rs2,536mn. However, following 19%/1.6% increase in employee costs/other costs, operating profit declined 4.1% to Rs995mn, much below our estimate of Rs1,248mn. Higher other costs impact operating profit overseas: JBF reported healthy 54.1%/16.5% growth in gross profit YoY/QoQ, respectively, to Rs4,352mn in 1QFY16 at overseas operations on account of additional volume from 9,tpa film and 39,tps chip plant commissioned in 3QFY15 at a cost of US$2mn each. However, capacity utilisation at new plants is yet to touch peak level although it already incurred all costs. Following higher costs and lower capacity utilisation, employee costs increased 94.8% while other expenses rose 53.5% at overseas operations. Therefore, despite 54.1%/16.5% growth in gross profit, operating profit grew at a slower pace of 44.%/5.7% YoY/QoQ, respectively, to Rs1,46mn, below our estimate of Rs1,623mn. We believe that as the ramp-up at new ventures improves, growth in gross profit will translate into operating profit growth as well supported by operating leverage. We are participating in AsiaMoney s Brokers Poll 215. We would be pleased if you vote for us as the feedback helps us align our equity research offerings to meet your requirements. Click Here BUY Sector: Petrochemicals CMP: Rs294 Target Price: Rs517 Upside: 76% Jignesh Kamani, CFA jignesh.kamani@nirmalbang.com +91-22-3926 8239 Chitvan Oza chitvan.oza@nirmalbang.com +91-22-3926 8175 Key Data Current Shares O/S (mn) 65.5 Mkt Cap (Rsbn/US$mn) 19.2/299.3 52 Wk H / L (Rs) 319/133 Daily Vol. (3M NSE Avg.) 563,83 Price Performance (%) 1 M 6 M 1 Yr JBF Industries 11.6 17.5 19.4 Nifty Index 1.2 (1.9) 11. Source: Bloomberg Y/E March consolidated (Rsmn) 1QFY15 4QFY15 1QFY16 Chg. (YoY%) Chg. (QoQ%) FY14 FY15 Chg. (%) Net sales 2,89 21,417 22,724 8.8 6.1 85,677 88,795 3.6 Net RM costs & finished goods purchases 15,584 15,545 15,836 1.6 1.9 66,849 65,268 (2.4) % of sales 74.6 72.6 69.7 - - 78. 73.5 - Employee costs and other expenses 3,228 3,567 4,487 39. 25.8 11,79 14,32 22.1 % of sales 15.5 16.7 19.7 - - 13.7 16.1 - Operating profit 2,78 2,34 2,41 15.5 4.2 7,119 9,225 29.6 OPM (%) 9.9 1.8 9.6-8.3 1.4 - Interest costs 935 1,311 1,212 29.6 (7.5) 3,198 4,349 36. Forex gains / (losses) (58) (668) (57) (1.) (91.5) (1,52) (1,369) (8.9) Depreciation 649 796 872 34.4 9.5 2,451 3,68 25.2 Other income 53 94 78 46.1 (17.5) 41 454 1.7 Extraordinary income - - - - - (367) - - PBT 49 (377) 337 (31.1) (189.4) 12 894 7,289.3 Provision for tax 211 163 17 (49.3) (34.6) 143 583 38.7 Adjusted PAT 279 (541) 23 (17.4) (142.6) 57 311 444.5 NPM (%) 1.3 (2.5) 1. - - (.2).4 - EPS (Rs) 4.3 (8.3) 3.5 (17.5) (142.6).9 4.7 443.
Exhibit 1: Financial summary Revenue 71,793 74,558 85,677 88,795 123,165 166,122 YoY (%) 1.9 3.9 14.9 3.6 38.7 34.9 EBITDA 7,127 5,574 5,866 9,225 15,622 21,212 EBITDA margin (%) 9.9 7.5 6.8 1.4 12.7 12.8 Forex gain/(loss) (2,939) (168) (249) (1,369) (989) (221) Reported PAT 2,23 1,135 57 311 3,815 8,641 Adj. PAT 1,46 1,135 245 311 3,815 8,641 EPS (Rs) 22.2 17. 3.3 4.3 46.3 15.2 YoY (%) (73.8) (23.3) (8.5) 3.1 969.5 127.4 RoE (%) 9.3 6.4 1.3 1.7 16.9 27.8 RoCE (%) 11.1 5.6 1.4 2. 8.3 12.6 Dividend yield (%) 3..4.7.7.7.7 P/B 1.1 1. 1. 1..9.7 P/E 13.2 17.2 88.3 67.9 6.3 2.8 EV/ EBITDA 6.1 9.5 13.2 1.9 6.6 4.3 Timely execution of new projects to determine future prospects: JBF has planned aggressive capex of US$1bn - US$2mn each for film/chip plants and US$6mn for its PTA plant. The 9,tn polyester film capacity in Bahrain and 39,tn polyester chip capacity in Belgium started commercial operations and product delivery commenced in 3QFY15. We believe operating profit growth in JBF will be more back-ended, as costs of new ventures have already been booked in P&L account, but because of the delay in ramp-up, rise in profitability will take time. Timely ramp-up in profitability at new ventures is vital for JBF as its D/E ratio increased to 4.7x in FY15 from 3.4x in FY14. Significant drop in D/E ratio likely with limited equity dilution: As JBF is at the fag end of its ambitious US$1bn capex, its D/E ratio increased to 4.7x in FY15 from 1.2x in FY11. Debt of Rs86bn stands at 4.4x current market capitalisation of the company. The street feared that JBF needs to restructure debt or raise equity, resulting in significant equity dilution, which exerted pressure on its valuation multiple in the past. However, JBF was able to raise Rs9.6bn, half of its current market capitalisation, through a mere 25% equity dilution at the parent level by structuring the deal in such a manner where it maximised the value of its Singapore subsidiary. Raising US$15mn will reduce the current D/E ratio from 4.7x to 2.7x and ensure timely execution of US$6mn PTA plant by December 215. We expect its D/E ratio to reduce further from 2.7x currently to 1.3x in FY18 and likely below 1.x in FY19. Healthy free cash flow generation likely: JBF has planned aggressive capex of US$1bn of which US$2mn each for film/chip plants and US$6mn for its PTA plant. The 9,tn film plant in Bahrain and 39,tn chip plant in Belgium went on stream in 3QFY15, and a 1.25mt PTA plant at Mangalore will be set up in December 215. With recent fund raising, JBF will be able to execute its US$6mn PTA plant on time. The benefits of expansions will be visible in FY17 and therefore its operating profit is expected to improve from Rs9,225mn in FY15 to Rs21,212mn in FY17. After four years of negative free cash flow, with a cumulative negative cash flow of over US$1bn over FY11-FY15, JBF will turn free cash flow positive from FY17. From FY17, we expect JBF to generate free cash flow of more than Rs1bn annually against current market capitalisation of Rs19.2bn, leading to a substantial re-rating of the stock. Exhibit 2: Details of US$15mn investment from KKR Jupiter Investors Rsmn Detail Dilution (%) Infusion at parent level 4,912 16.4mn shares at Rs3/share 25% at parent level Infusion at subsidiary JBF Global, Singapore, level 4,77 12.2mn zero coupon compulsory convertible preference shares 17% at subsidiary level Total fund infusion 9,62 Exhibit 3: Derived valuation of Singapore subsidiary based on our FY17 estimates (Rsmn) Fund infusion Stake (%) market-cap price/share EBITDA FY17E Net debt FY17E EV EV/EBITDA Singapore subsidiary 4,77 17. 27,756 424 15,6 68,972 96,728 6.2 4.2 P/E 2 JBF Industries
Exhibit 4: SOTP-based valuation based on FY17E financials (Rsmn) India JBF Global, Singapore Total EBITDA 5,612 15,6 21,212 EV/EBITDA 5. 5.75 5.55 EV 28,62 89,697 117,759 Debt 4,73 66,859 71,562 Market capitalisation 23,359 22,839 46,197 Value (Rs/share) 285 279 564 Stake (%) 1 83. - Value(Rs/share) 285 232 517 Target P/E 8.1 3.3 4.9 Target P/BV 1.1 1. 1.2 Upside (%) 76 Exhibit 5: Details of aggressive capex Description Capacity Location Capex planned Date of commencement Likely EBITDA (TPA) (US$mn) FY17E (Rsmn) PTA 1,25, Mangalore SEZ 6 December 215 7,172 BOPET Film 9, Bahrain 2 3QFY15 855 PET chip 39, Geel, Belgium 2 3QFY15 2,964 Total 1, 1,991 Exhibit 6: Significant fall in D/E ratio post US$15mn fund infusion Exhibit 7: Balance sheet health improves 5. 4.7 4.5 4.1 4. 3.4 3.5 3. 2.7 2.5 2.1 2.6 2. 1.7 1.5.9 1.1 1.1 1.2 1.8 1..5. FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E D/E (pre-dilution) D/E (post-dilution) (Rsbn) 92.1 9 86.1 82.5 83.3 8 73.7 7 63.3 6 5 4.1 41.5 4 31.9 28.9 31.4 3 17.8 11.3 12.4 14.5 16.9 18.7 18.8 22.2 13.6 18.4 2 12.4 9.18.4 1 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Networth (pre-dilution) Networth (post-dilution) Debt (pre-dilution) Debt (post-dilution) Exhibit 8: Multi-fold jump in operating cash flow likely in FY17 Exhibit 9: Likely to generate healthy free cash flow from FY17 (Rsbn) 21.9 22.8 2 16.9 12.3 11.7 1 5.8 5.5 6.3 4.7 2.3.7 1.7 3.2 4.7 2.3 1.1.9.8 1.5 1.7 (1) (4.1) (4.8) (1.4) (3.2) (2.9) (6.2) (8.3) (8.) (7.6) (11.5) (11.5) (2) (3) (26.) (25.3) FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E CFO CFI CFF (Rsmn) 1, 5, (5,) (1,) (15,) (2,) (25,) (2,479) (6,515) (238) 2,312 (1,86) (1,14) (24,325) (22,12) FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Free Cash Flow (6,845) 1,639 3 JBF Industries
Jan-1 Jan-1 Apr-1 Apr-1 Jul-1 Jul-1 Nov-1 Nov-1 Jan-1 Jan-1 Apr-1 Apr-1 Jul-1 Jul-1 Nov-1 Nov-1 Institutional Equities Exhibit 1: Multi-fold jump in profitability (Rsmn) 22, 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, 2,668 1,324 5,185 4,712 1,963 1,917 9,578 7,127 5,461 5,574 5,866 1,46 1,135 9,225 245 311 15,622 3,815 21,212 8,641 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E EBITDA PAT Exhibit 11: Improvement in debt to EBITDA coverage 11 1 9 8 7 6 5 4 3 2 1 3.1 2.4 2.9 1.9 4. 7.2 1.8 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Debt/EBITDA (pre-dilution) 9.3 5.3 5.9 Debt/EBITDA (post-dilution) 3.9 3.5 Exhibit 13: One-year forward P/BV (Rs) 35 3 25 2 15 1 5 Exhibit 12: Our estimates versus actual performance (Rsmn) 1QFY15 4QFY15 1QFY16 YoY (%) QoQ (%) 1QFY16E Devi. (%) Revenue 2,89 21,417 22,724 8.8 6.1 25,413 (1.6) EBITDA 2,78 2,34 2,41 15.5 4.2 2,871 (16.4) EBITDA (%) 9.9 1.8 1.6 62bps (19)bps 11.3 (73)bps Forex gain/(loss) (58) (668) (57) (1.) (91.5) (23) (75.2) Adjusted PAT 279 (541) 23 (17.4) (142.6) 416 (44.6).6x.5x.4x.3x.2x 1..9.8.7.6.5.4.3.2.1. Median.5x Source: Nirmal Bang Institutional Equities Research Exhibit 14: One-year forward EV/EBITDA (Rs) 14, 12, 1, 8, 6, 4, 7x 6x 5x 4x 3x 12 1 8 6 4 Median 6.5x 2, 2 Source: Nirmal Bang Institutional Equities Research 4 JBF Industries
Financials (consolidated, including entire capex of new ventures) Exhibit 15: Income statement Net sales 71,793 74,558 85,677 88,795 123,165 166,122 % growth 1.9 3.9 14.9 3.6 38.7 34.9 Raw material costs 56,184 57,51 66,849 65,268 92,455 125,92 Staff costs 1,59 1,358 1,619 2,353 2,154 3, Any other costs 6,742 9,793 1,481 11,4 11,774 14,48 Other costs 68 783 863 99 1,159 1,582 Total expenditure 64,666 68,984 79,812 79,57 17,543 144,91 EBITDA 7,127 5,574 5,866 9,225 15,622 21,212 % growth (25.6) (21.8) 5.2 57.3 69.3 35.8 EBITDA margin (%) 9.9 7.5 6.8 1.4 12.7 12.8 Other income 468 455 41 454 613 597 Extraordinary items 792 - (179) - - - Interest costs 1,898 2,353 3,198 4,349 6,154 5,214 Forex losses 2,939 168 249 1,369 989 221 Gross profit 3,55 3,58 2,65 3,962 9,92 16,374 % growth (51.9) (1.2) (24.4) 49.5 129.5 8.1 Depreciation 1,525 2,2 2,451 3,68 3,972 5,37 Profit before tax 2,25 1,55 2 894 5,12 11,67 % growth (66.6) (25.7) (86.7) 347.5 472.6 116.2 Tax (25) 371 143 583 998 1,255 Effective tax rate (%) (1.1) 24.6 71.4 65.2 19.5 11.3 Net profit 2,23 1,135 57 311 4,122 9,812 % growth (59.2) (49.1) (95.) 444.5 1,225.8 138. Minority interests - - - - 37 1,171 Extra-ordinary items 77 - (188) - - - Reported net profit 1,46 1,135 245 311 3,815 8,641 % growth (73.3) (22.3) (78.4) 27. 1,127.1 126.5 Exhibit 17: Balance sheet Equity 72 726 653 655 819 819 Preference shares 884 1,14 149 149 149 149 Reserves 15,34 16,873 18,45 17,551 25,896 34,318 Networth 16,944 18,73 18,847 18,355 26,863 35,285 Short-term loans 15,95 16,971 17,678 24,4 28,1 24,1 Long-term loans 13,768 23,173 45,587 61,672 54,36 49,56 Total loans 28,862 4,145 63,265 86,72 82,46 73,66 Deferred tax liability 1,223 1,581 1,773 2,28 2,429 2,616 Liabilities 47,3 6,429 83,886 16,77 116,767 117,746 Gross block 35,81 41,72 59,231 85,855 19,677 116,56 Depreciation 7,341 9,48 11,858 14,926 18,898 24,26 Net block 27,74 32,294 47,372 7,929 9,779 92,3 Capital work-in-progress 1,593 6,536 15, 13,722 1,429 823 Goodwill 891 951 1,48 1,92 1,92 1,92 Long-term Investments 665 517 33 26 2 2 Inventories 7,918 9,231 1,44 1,55 14,881 21,183 Debtors 7,149 1,348 11,57 14,58 18,91 22,783 Cash 3,987 5,968 4,87 4,735 4,9 6,799 Other current assets 7,429 1,89 11,558 8,76 11,592 1,65 Total current assets 26,482 36,356 38,375 38,552 49,383 61,371 Creditors 8,322 11,23 11,841 11,133 16,375 24,1 Other current liabilities 2,2 4,994 6,11 6,482 9,543 13,841 Total current liabilities 1,342 16,225 17,942 17,614 25,918 37,842 Net current assets 16,14 2,131 2,433 2,938 23,465 23,529 Total assets 47,3 6,429 83,886 16,77 116,767 117,746 Exhibit 16: Cash flow EBIT 5,62 3,572 3,415 6,157 11,649 15,95 (Inc.)/dec in working capital (5,652) (2,1) (1,399) (641) (3,253) 2,726 Cash flow from operations (5) 1,562 2,16 5,516 8,397 18,631 Other income 468 455 41 454 613 597 Depreciation 1,525 2,2 2,451 3,68 3,972 5,37 Deferred liabilities (27) 358 192 57 149 187 Forex loss(-) (2,939) (168) (249) (1,369) (989) (221) Interest paid (-) (1,898) (2,353) (3,198) (4,349) (6,154) (5,214) Tax paid (-) 25 (371) (143) (583) (998) (1,255) Dividend paid (-) (693) (111) (18) (181) (219) (219) Net cash from operations (3,589) 1,374 1,487 3,63 4,465 16,643 Capital expenditure (-) (7,963) (11,499) (25,993) (25,346) (11,529) (6,223) Net cash after capex (11,552) (1,125) (24,55) (22,283) (7,64) 1,42 Inc./(dec.) in short-term borrowing 6,854 1,877 77 6,722 3,7 (4,) Inc./(dec.) in long-term borrowing 4,172 9,46 22,414 16,85 (7,312) (4,8) Inc./(dec.) in preference capital 618 22 (954) - - - Inc./(dec.) in borrowings 11,644 11,52 22,166 22,87 (3,612) (8,8) (Inc.)/dec. in investments 614 149 484 6 24 - Minority interest - - - - 5,14 1,171 Equity issue/(buyback) 37 59 (73) 2 4,912 - Cash from financial activities 12,295 11,71 21,92 22,815 6,338 (7,629) Others 894 396 1,488 (668) () Opening cash 2,35 3,987 5,968 4,87 4,735 4,9 Closing cash 3,987 5,968 4,87 4,735 4,9 6,799 Change in cash 1,636 1,981 (1,97) (136) (726) 2,79 Exhibit 18: Key ratios Y/E March FY12 FY13 FY14 FY15 FY16E FY17E Per share (Rs) EPS 22.2 17. 3.3 4.3 46.3 15.2 Book value 262 286 289 28 328 431 Valuation P/E 13.2 17.2 88.3 67.9 6.3 2.8 P/BV 1.1 1. 1. 1..9.7 EV/EBITDA 6.1 9.5 13.2 1.9 6.6 4.3 EV/sales.6.7.9 1.1.8.5 Return ratios (%) RoCE 11.1 5.6 1.4 2. 8.3 12.6 RoE 9.3 6.4 1.3 1.7 16.9 27.8 Margin ratios (%) EBITDA margin 9.9 7.5 6.8 1.4 12.7 12.8 PBIT margin 7.8 4.8 4. 6.9 9.5 9.6 PBT margin 2.8 2..2 1. 4.2 6.7 PAT margin 2. 1.5.3.4 3.1 5.2 Turnover ratio Asset turnover ratio 1.5 1.2 1..8 1.1 1.4 Avg. inventory period (days) 44 48 47 48 5 53 Avg. collection period (days) 34 47 46 56 54 48 Avg. payment period (days) 46 59 53 5 55 6 Solvency ratios Debt-equity 1.7 2.1 3.4 4.7 2.6 1.8 Debt/EBITDA 4. 7.2 1.8 9.3 5.3 3.5 Interest coverage 3. 1.5 1.1 1.4 1.9 3.1 Growth (%) Sales 1.9 3.9 14.9 3.6 38.7 34.9 EBITDA (25.6) (21.8) 5.2 57.3 8.1 (1.4) PAT (73.3) (22.3) (78.4) 27. 1,127.1 126.5 5 JBF Industries
Rating track Date Rating Market price Target price (Rs) 24 August 211 Buy 125 29 11 November 211 Buy 123 19 15 November 211 Buy 115 18 9 February 212 Buy 111 18 13 February 212 Buy 111 18 3 May 212 Buy 117 169 9 August 212 Buy 141 169 4 October 212 Hold 149 169 1 October 212 Buy 144 199 7 November 212 Buy 14 199 8 November 212 Hold 14 155 13 February 213 Sell 113 86 9 April 213 Sell 13 86 24 May 213 Sell 16 86 9 July 213 Sell 97 86 14 August 213 Sell 9 79 7 October 213 Sell 83 79 18 November 213 Sell 79 68 7 January 214 Sell 79 68 13 February 214 Sell 71 61 11 April 214 Sell 9 61 2 June 214 Sell 113 95 4 July 214 Sell 124 95 14 August 214 Accumulate 138 152 1 October 214 Accumulate 147 152 17 November 214 Accumulate 154 161 12 February 215 Buy 255 355 28 May 215 Buy 237 327 1 July 215 Buy 241 327 3 August 215 Buy 31 517 12 August 215 Buy 294 517 6 JBF Industries
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