Bhansali Engg's capacity expansion targets, sales guidance give it earnings visibility

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Anubhav SahuMoneycontrol Research

Bhansali Engineering Polymers ltd (BEPL), one of the two main manufacturers of ABS (Acrylonitrile butadiene styrene) in India, reported robust quarterly results last Friday leading to 9 percent surge in stock price today at the time of writing. We wrote in our research note on July 10, highlighting the robust earnings outlook on the basis of its expansion plans.

Near term earnings guided by improved capacity utilisation

In the first quarter of FY18, driven by a ramp-up in capacity utilization, the company posted sales of Rs 252 crore (+52 percent YoY, +16 percent QoQ). EBITDA margin improved by 215 bps YoY backed by lower raw materials cost (60 percent of sales vs. 64 percent in Q1 2017) and higher realisations.

It is interesting to note that company’s capacity utilization has improved to 85 percent in Q1 2018 from 64 percent n FY17. Further, Bhansali envisages to improve capacity utilization to 95 percent.

Strong outlook – takeaways from the AGM

In its annual general meeting, the company provided a sales guidance of Rs 1,100 crore in FY18, hinting maintaining momentum seen in 2018. The management sounded confident of maintaining 12-13 percent EBITDA margin in the current year and post a profit after tax of about Rs 80-90 crore. This implies an earnings growth of more than 130 percent in FY18. For FY19, company has guided for PAT in the range of Rs 110 -120 crore.

The management reiterated its capacity expansion plans for the near-term to 137,000 MT (from 80,000 MT) funded through internal accruals. Further, the company also highlighted that mega plans for 2 lakh TPA capacity is on track and likely to be commissioned by FY22. However, a delay by one year cannot be ruled out.

Fund-raising plans and increase in promoter's stake

The company voted to pass a resolution on increasing the borrowing limit of the company to Rs 1,000 crore. The result of the voting would be communicated later by the company. While Bhansali has not yet disclosed the end use of the proposed fund raise, a significant part may be utilized for the mega expansion plan for FY22.

Further, latest shareholdings data suggests an increase in the promoter’s stake to 56.48 percent (from 55.69 percent) after buying 14 lakh shares during the quarter.

Financial projections and valuations

Based on recent results and company’s guidance, we revise our earnings estimates for the company significantly. We now expect Bhansali to post sales CAGR of 56 percent during FY17-19E. With an improved demand scenario and better margin trajectory, earnings should grow at the CAGR of 81 percent in the same period.

Stock has already rallied by 18 percent since the time of our recommendation. However, given better earnings visibility leading to our revised estimates, we still find valuations reasonable at a PE multiple of 16.3x (FY18E earnings). Investors, therefore, may consider adding it to their positions.

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