Raw material prices have surged recently mainly on account of global supply chain constraints for MDI in 2017. In the current year, however, raw material prices can stabilize due to improving supply and the expectations that oil prices would settle at current level.
Elantas Beck’s quarterly result (Q4 of CY 2017) meets our expectations. While sequential pick up in sales is positive, it remains to be seen how far it sustains given the higher imports of electrical insulators. Margin pressures have emerged but they were well anticipated on account of surge in raw material prices in the Polyurethane value chain. We expect margins to stabilize around current levels as the raw material supply side improves.
Q4 – sequential sales pick up
Elantas Beck’s Q4 CY17 result continues to point towards a sequential recovery in topline numbers as sales were up by 8.3 percent on QoQ (quarter on quarter) basis. Surge in raw material prices (12 percent QoQ) have had an impact on gross margins. However, EBITDA margins improved due to lower employee cost leading to net profit growth of 11.4 percent QoQ basis (+26.8 percent YoY).
Imports for the electrical insulators (non-ceramic/glass) remains elevated
Source: Trade Map
As we noted earlier, domestic electrical insulation industry has been impacted by the increase in low cost imports of electrical insulators, particularly from China. In the last reported quarter, imports remained elevated though seem to have stabilized on a sequential basis.
Raw material cost (% of Sales) expected to stabilize at current level
Raw material prices have surged recently mainly on account of global supply chain constraints for MDI -in 2017. In the current year, raw material prices can stabilize due to improving supply and the expectations that oil prices would settle at current level.
Guided by company’s quarterly results which met our expectations, we keep the projections largely unchanged at the topline level. However, considering cost inflation, we factor in lower EBITDA margin 20.5 percent (-50 bps from previous estimate) for CY18 and CY19. Stock is currently trading at 25x CY2019e earnings which seems to be fair, in our view.Moneycontrol Research Page.