Buy JBF Industries; target of Rs 199: Nirmal Bang

Nirmal Bang is bullish on JBF Industries and has recommended buy rating on the stock with a target of Rs 199 in its October 10, 2012 research report.

“We paid a visit to the plants of JBF Industries at Silvassa, Dadra & Nagar Haveli and also at Sarigam, Gujarat. The company has 608,000/279,020tpa chip/POY facilities at Sarigam/Silvassa units, respectively, contributing 61% to consolidated FY12 sales. We have retained our revenue/margin estimates but following higher depreciation/interest costs, we have cut net profit estimates by 15.7%/12.9% for FY13E/FY14E, respectively. As the company has embarked on an aggressive growth plan with a capex of US$1bn over FY12E-16E, we have changed our valuation method from PE-based to EV/EBITDA-based to factor in huge debt and roll forward target multiple to FY14 estimate (from FY13). Despite aggressive capex of US$1bn, we don’t expect peak D/E to cross 2.5x (with gross debt of ~Rs65bn) in FY15E following strong operating cash flow and the D/E ratio may in fact taper off to 1.0x by FY18E. We retain our Buy rating on the stock with a revised TP of Rs199 (from Rs169) based on 4x FY14E EV/EBTDA.”

“The company’s plants at Silvassa and Sarigam are located close to raw material (PTA) suppliers (RIL and IOC) as well as customers for its chip/POY who are within a 25km radius (key markets being Surat and Daman). This gives logistics advantage of ~Rs1- 2/kg compared to its competitor Indo Rama Synthetics located at Nagpur, ~600km away. The company has also empowered local villagers to provide continuous transportation support for raw materials/finished products. Following the company’s close proximity to raw material suppliers and customers, it maintains a very low inventory of around two-five days for PTA and 12-15 days for mono ethylene glycol (MEG) (including inventory at ports). Similarly, it maintains finished goods inventory of only 15-20 days. As the customers are located close by and the company delivers products within four hours, it helps in maintaining a lean inventory.”

“JBF Industries enjoys lower power costs at its Sarigam unit, of ~Rs4.25/unit, while it procures gas from Gujarat State Petroleum Corporation (GSPC) for this unit at US$14/mmBtu (landed cost), resulting in energy costs of ~Rs5.8/unit. Following the logistics advantage and lower power as well as employee costs, the company enjoys higher margins compared to its competitors,” says Nirmal Bang research report.

FIIs holding more than 30% in Indian cos

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