Stock Pick from Petrochemicals

LOW PRICE SCRIP

Driven By Increasing Demand

Not only will the changing lifestyle and consumption patterns in Indian help the company to increase its sales, the introduction of new products will also help expand its market reach

Here Is Why:

• The company is debt-free with a leadership position in its business segment.

• It is expected to grow more than the industry average.• It is available at attractive valuation of 7.3x.

Here is a fundamentally strong company with a promising future that operates in the petrochemical industry. It is debt-free and commands a leadership position in the space it operates in. It has posted good results in the first half of FY15 and moreover, the company has, from the past five years, been consistently paying a dividend, barring FY12. Manali Petrochemical (MPL) is engaged in the manufacture of propylene oxide, propylene glycol and polyols with applications across a spectrum of industries including pharmaceuticals, polyurethane, resin, fragrances, food, refrigeration, oil drilling, etc. It belongs to the A C Muthiah Group and was set up by Southern Petrochemicals Industries (SPIC).

The company has reported a better performance during H1 FY15 wherein it posted net sales and PAT of Rs 354.26 crore and Rs 19.92 crore respectively, which are up by 36.5 per cent and 55.1 per cent over those during H1 FY14. The company’s operating profit margin has improved from 8.5 per cent for FY13 to 9.6 per cent for FY14 and further to 10.4 per cent during H1 FY15. In FY14 its net profit rose 6.33 per cent to Rs 29 crore as against Rs 27.3 crore in FY13 and sales rose 7.69 per cent to Rs 553.82 crore as against Rs 514.27 crore in FY13.

In the month of September 2014 the Government of India extended the validity of anti-dumping duty imposed on flexible slabstock polyol (FSP) imports from China, South Korea and Chinese Taipei, which will be valid until August 30, 2015. Therefore, up to H1 FY16 the company will be able to maintain or improve its margin in the light of falling crude oil prices since it uses crude derivates as its raw material.

MPL is the sole domestic producer of polyol, which is used in the manufacture of polyurethane foams (PU) that have a healthy demand from building insulation, refrigeration, furniture, footwear, automotive, coatings, adhesives, and sealant segments. The contribution of this product was around 60 per cent to MPL’s total revenues in FY14. The market for polyurethane (rigid foam) is expected to grow at a CAGR of 9 per cent from 2014 to 2019 at its worth of USD 28 billion. Rapidly growing population, government regulations to increase construction activities, growth in the automotive industry, and increasing demand for textile and furniture are the favourable market forces for the growth of polyols.

MPL has been aiming to increase its market share in all segments, especially in the pharmaceutical and industrial application space, where the value-addition is higher. The company has taken steps to develop new applications for its products like footwear, seat cushions for two-wheelers, specialty polyols, drilling applications, water proofing, etc. The company is also in the process of developing product applications for medical devices.

We believe that MPL’s topline would continue to grow at 15 per cent CAGR during FY14-16 and at the bottomline level the company will earn Rs 43 crore in FY15 and Rs 48 crore in FY16.  On the valuation front, MPL is trading at a TTM PE ratio of 7.3 and on the basis of price to book, it trades at 1.14x. Considering the past few years’ performance, cheap valuations, high dividend yield, and continuously improving return ratios, we feel that a 45-60 per cent upside from the current level in the next one year is quite possible.