MEDIUM TERM PICK - JBF INDUSTRIES

 JBF Industries

BSE: 514034    NSE: JBFIND  CMP :159.00 
JBF Industries (JBF) is amongst the largest polyester chip manufacturers in the
world with a capacity of around 1 million tonnes per annum, catering to
polyester filament and bottle manufacturers. The location of its plants gives it
easy access to raw material suppliers and end consumers, thereby making it
cost competitive. We maintain our fundamental grade of 3/5, indicating that
its fundamentals are good relative to other listed securities in India.
After forward integration, JBF planning to go backward
The company expanded its chip capacity in India to 550,800 tpa in FY09 from
216,000 tpa. As a de-risking strategy, the company has forward integrated
into filament yarn manufacturing and is using its own chip capacity for the
same. JBF is now planning to set up a purified terephthalic acid (PTA) plant of
1.12 mn tonnes per annum in Mangalore SEZ by mid 2014. PTA is one of the
major raw materials for polyester chip manufacturing; by FY15, output from
this plant will suffice JBF’s requirement of around 1 mn tonnes of PTA and will
lead to better margins.
UAE subsidiary to become a significant contributor to revenues
JBF RAK LLC, the 100% UAE-based subsidiary, has a 1,100 tonne per day
(tpd) polymerisation plant that produces bottle-grade PET chips (900 tpd) and
polyester films (200 tpd). Its share in consolidated revenues rose to 45% in
FY11 from 20% in FY08 on account of capacity additions in the chips and film
segments; it is expected to remain the major contributor going forward,
supported by the fast-growing Middle East market.
Polyester demand to grow at 8-9%, competition to remain intense
We expect demand for polyester to grow at a CAGR of 8-9% from FY11 to
FY16, on account of rising per capita consumption of textiles and better
competitiveness of polyester filament as compared to cotton yarn. However,
the polyester market will also continue to witness intense price competition.
Key risk – price volatility and execution of PTA plant
Volatility in raw material prices, intense competition, JBF’s exposure to foreign
exchange risk, and project execution risks are some of the concerns facing the
company.
Revenues to grow at 10%; margins to decline
We expect JBF’s top line to grow at a CAGR of 10%, from Rs 64.7 bn in FY11
to Rs 79 bn in FY13E. EBITDA margin rose to historical highs on account of
higher realisation in polyester films. Going forward, we believe film prices will
decline, and we expect EBITDA margin to return to sub 12% in FY12 and FY13.
Valuation: Current market price has strong upside
We have used the discounted cash flow method to value JBF and arrived at a
fair value of Rs 229. At this value, the implied P/E multiples are 5.5 FY12E and
4.5 FY13E earnings.