CRISIL revise Dhunseri Petrochem's fair value to Rs 163

Dhunseri’s Q2FY13 revenues were in line while operating profitability was lower than CRISIL Research’s expectations. Revenues improved by 3.2% y-o-y. Polyethylene terephthalate (PET) margin contracted q-o-q due to moderation in demand. Further, the company reported forex gain of Rs 223 mn, which boosted profitability. The company reported EPS of Rs 13.6 against a negative EPS of Rs 2.5 in Q2FY13. The company inaugurated its 210,000 tpa PET capacity at Haldia (West Bengal) in October but was not able to commence production due to PTA short supply. We expect it to start commercial production from November. The company has incurred 65% capex on its 420,000 tpa greenfield plant in Egypt and expects to start production by H1FY14; as this becomes operational, the company will be one of the top 10 PET producers globally, which leads us to maintain the fundamental grade of 3/5.

PTA supply and moderation in demand lowers PET margin further
PET revenue stood at Rs 4.1 bn, down 8% q-o-q. Utilisation rates remained healthy at ~100%; however, its chips volume declined by 2% q-o-q on account of inadequate PTA supply (major raw material). PET realisation declined to Rs 83/kg (down 6% from Rs 88/kg in Q2FY12) mainly due to moderation in demand.

Strong growth in end-user industries and a preference for PET as packaging material has boosted the demand for PET; in the domestic market, it has clocked an impressive ~30% CAGR during FY07-12. With expanded capacity, moderation in PET demand and PTA supply disruption, profitability is expected to remain under pressure.

PET EBITDA margin contracted by 160 bps q-o-q to 4.8%, PET EBITDA/kg decreased q-o-q from Rs 5.7 to Rs 4.0; also it declined from Rs 7.0 y-o-y.

Better quality tea fetched higher realisation, volumes declined due to sale of estate
evenue from the tea business increased by 4% y-o-y to Rs 520 mn on account of higher realisation. Tea realisation for the industry has improved by 10% y-o-y, while it improved by 30% for Dhunseri as the proportion of better quality tea in total sales improved following the sale of tea estates, producing lower quality tea, in the past six months. Volume was down by 20% on account of tea estate sale.

Tea division’s EBITDA margin improved significantly y-o-y (up 530bps) to 35%; EBITDA/kg increased y-o-y from Rs 34/kg to Rs 52/kg on account of better quality.

Current market price has strong upside
We continue to use the DCF method to value Dhunseri and revise our fair value to Rs 163 per share. At this fair value, the implied P/E multiples are 10.7x FY13E and 4.8x FY14E EPS. At the CMP of Rs 119, the stock merits a valuation grade of 5/5.

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