Stock Pick From The Plastic Industry

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as the Choice Scrip for this issue is a market leader in the absolac market, which is a plastic resin produced from acrylonitrile, butadiene and styrene (ABS).

Styrolution ABS- Plastic Potential

• SABS is a market leader with a 65 per cent market share in the absolac market, which is a plastic resin produced from acrylonitrile, butadiene and styrene (ABS).
• It is a debt-free company with a strong performance, which is expected to get even stronger as the demand from user industries goes up further.
• Anticipating a growth in demand, the company recently expanded its capacity from 60000 mtpa to 80000 mtpa, and is in the process of further increasing its capacity to 110000 mtpa by 2014.

Fundamentally strong and consistently dividend paying companies make for good investment ideas during volatile market times. One such idea that we are presenting to our readers as our Choice Scrip for this fortnight is Styrolution ABS (SABS), formerly known as Ineos ABS India. This is a company which fulfils both the above conditions. Not only is it a fundamentally strong company, it is also one which has been consistently paying dividends for the past 22 years.

While its strong dividend payment track record is just one of the factors that makes this stock worth recommending, there are a number of others too that go in its favour. SABS is a market leader with a 65 per cent market share in the absolac market, which is a plastic resin produced from acrylonitrile, butadiene and styrene (ABS). It is a widely used intermediary product finding application in a host of industries, including home appliances, automobiles, consumer durables and business machines.

This is a debt-free company with a strong performance, which is expected to get even stronger as the demand from user industries goes up further. The company has already expanded its capacity to cater to this increased demand.

SABS enjoys a strong management bandwidth, which comes primarily from its MNC parentage. The management believes that India has an advantage as a major engineering thermoplastics manufacturing hub in Asia. The current rate of growth of this market hints at the good prospects that the industry has going forward. Anticipating this growth in demand, the company recently expanded its capacity from 60000 mtpa to 80000 mtpa, and is in the process of further increasing its capacity to 110000 mtpa by 2014.

There are certain added advantages that SABS enjoys by virtue of INEOS (its parent company) being a global company. First, INEOS has ABS manufacturing facilities at US, Germany, Spain and Thailand, and the combined capacity makes it the third largest ABS manufacturer in the world. Not only does this help SABS to add new products to its kitty, but it also helps the company procure raw materials (which is mostly imported) in an efficient manner. Being derivatives of crude, the prices of its raw material are highly volatile and efficient procurement of the same helps it to improve its margins. Power also forms a substantial part of the company’s operational costs. The fact that SBS owns 14 windmills with a capacity of producing 8.60 MW of power (provided to the grid) provides it with an advantage, reducing the net cost of power.

In CY11, its topline stood at Rs 825 crore and the bottomline stood at Rs 54.99 crore as against Rs 742 crore and Rs 70 crore respectively for CY10. The profitability was lower on account of the increase in crude prices and higher forex losses (Rs 12 crore in CY11 versus Rs 1.38 crore in CY10). However, we believe that this is an extraordinary event, and that with a fall in the crude oil prices and the expected appreciation of the rupee in the remaining part of CY12, coupled with a rise in demand, the company will improve on its performance. On the valuations front, at its CMP of Rs 719, the scrip discounts its CY11 earnings by 23x and its EV/EBITDA stands at 11.5x. Given the growth prospects of the company, the scrip demands a higher valuation. Therefore, we recommend that investors buy the scrip at thecurrent levels with a target price of Rs 870 in the next one year.