Anubhav Sahu Moneycontrol Research
Apcotex Industries (market cap: Rs 985 crore) is one the leading producers of polymer products -- synthetic latexes and rubber -- in India. A spun-off company from Asian Paints, Apcotex is the only manufacturer for nitrile rubber, post its acquisition of Omnova Solutions. The company’s recent results highlight a turnaround in capacity utilization partly aided by process improvements in the plants. We like the company for its capacity expansion plans and R&D capabilities which help it to meet international standards in a global market dominated by chemical majors.
Product portfolio and usage
Apcotex’s legacy business offers synthetic latex and high styrene rubber (HSR) through its Taloja facility. In 2016, Apcotex acquired Omnova Solutions (Apcotex solutions) which makes it the only producer of nitrile rubber in India, through its Valia plant. In case of HSR, as well, Apcotex is the largest manufacturer.
Applications include tyre cord dipping, paper and paperboard coating, carpet backing, concrete modification, water proofing, textile finishing etc. Key clients include end market industry leaders like MRF, ITC, Relaxo, Pidilite, SRF, Obeetee Industries.
Chart: Key clients and industry
Synthetic latex – application for varied end markets
Synthetic latex applications are varied and the company caters to end markets like paper, construction and tyre industry. In case of construction chemicals, the company caters to requirements for water proofing, concrete admixtures and flooring solutions. Recent government infra initiatives for smart cities, affordable housing along with increasing urbanization and redevelopment activities are expected to create a sustained demand in near future.
Company’s strong R&D helps it to be among the leading supplier for all the end markets of synthetic latex, wherein it competes with BASF, Dow chemicals.
Chart: Legacy business revenue contribution
Source: Company
Growth area – Nitrile butyl rubber (NBR)
Post-acquisition of Omnova in 2016, Apcotex is the sole domestic manufacturer of Nitrile rubber which is otherwise import dependent. For a domestic market size of ~50 kT, Apcotex currently commands about 18-27 percent market share. Rest is imported. After capacity expansion, this share is expected to go to the range of 40 percent. The company is expected to benefit not only from the secular domestic consumption growth in the segment but also expected to partially substitute imports as it implements process and product improvisations.
In the medium term, we expect low double digit domestic demand led by industrial capex revival.
Source: CPMA India
Improving financials
The company’s immediate capacity expenditure (Rs 60 crore) are funded through internal accruals and its improving cash flow profile and healthy balance sheet keeps it ready for the plans for expansion.
Key risk – raw material
A key risk for the company arises from volatility in raw material prices (Butadiene, Styrene and Acrylonitrile). The company usually follows a monthly pricing cycle but in case of sharp changes in the raw material prices, the company can be impacted.
Additionally, an ongoing concern is that order flows from one of the largest paper customers, which was contributing about 5 percent to the overall revenue, still remain uncertain.
Capacity expansion for NBR
The company is undergoing the first phase (to be completed by Q4 FY18) of capex (Rs 30 crore) for the improvements in Valia plant which would not only reduce the operating costs but also improve product quality mainly for the NBR products.
Further, setting up of power plant at Valia (to be completed by December 2017) is expected to substantially reduce power and fuel costs. In addition, the next phase of capex (another Rs 30 crore) would be utilized for the debottlenecking leading to improved capacity of NBR plant by around 25 percent to about 21,000 MT (In FY19).
The company is also working on plans to further increase NBR capacity to 36,000 MT. Similarly, capacity expansion for latex is also under study. These capacity expansion plans hold significance as company’s existing facilities are near optimum utilization,
Valuation/ recommendation
While management is targetting gross revenues in the range of Rs 550-600 crore, we are also positive on the traction so far this year and the turnaround opportunity NBR product business is undergoing. Backed by improved utilization in the current year and capacity expansion later next year, we pencil in 21 percent CAGR for 2017-2020E.
The management expects an improved margin profile in the near-term. A pre-acquisition operating margin range of 13-14 percent would be feasible as the company moves past acquisition costs and the efficiency measures bear results in the next 2-3 years. A higher share of exports along with process improvements and commissioning of the power plant at Valia unit are expected to aid margins. We expect + 476 bps margin expansion by FY20.
Based on our projections, the stock is trading at 16x 2020E earnings, which is ahead of its global peers but in line with its closest domestic peer – BASF India. Having said that, given the multiple tailwinds – industry dominant position, exposure to growth industries and internal efficiency plans -- we consider stock could be accumulated for a longer term investment horizon.
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