Apcotex Industries Q3: Stellar result aids in market share gain in nitrile rubber

Apcotex’s Q3FY18 sales growth surged 34 percent YoY mainly led by volume growth (~30-32 percent) with both plants Taloja and Valia operating at optimum capacity. Remarkable export growth of about 79 percent puts the total export contribution to ~15 percent of sales turnover.

Additional pick up in sales came from its key customers from the paper industry (historically - 5% of sales), where in earlier uncertainty regarding order flow has eased and it’s back to 75-80 percent runrate.

EBITDA margins (+657 bps YoY) have improved on account of product mix, lower raw material cost (68 percent of sales vs. 73 percent of sales in Q3FY17) and lower operating cost in Valia plant. Higher PAT was also aided by rise in other income.

Capacity expansion plans

As an update on current capex plan (Rs 60 crore), company mentioned that power plant at Valia would be set up by March FY19 and debottlenecking of NBR (Nitrile rubber) would take place in next six months. NBR manufacturing capacity is expected to increase to ~21,000 MT (from 16,000 MT).

Further, the company has a major capacity expansion plan ( ~Rs 150-200 crore) where in details are tentative but can expand synthetic latex capacity to 75-80,000 MT (from 55,000 MT) and Nitrile rubber capacity can go up to 30,000 MT. This expansion is expected to complete in 18 months from the time it starts in FY19.

Valuation/ recommendation

Quarterly result has been encouraging and exceeds our expectation and puts the company at a striking distance at FY18 gross sales guidance (over Rs 550 crore). Turnaround in the NBR business is also encouraging wherein company’s domestic market share has increased from 17 percent to 23-25 percent. Backed by improved capacity utilisation in the current year and capacity expansion later next year, we pencil in 23 percent sales CAGR for 2017-2020E.

Table: Financial projections

Further, improvement in operating margins for the NBR plant is in offing as the company executes internal efficiency measures. However, further improvement in gross margins may be difficult particularly in context of elevated prices for key raw materials (Butadiene, Styrene and Acrylonitrile).

While stock is currently trading at 22x 2020E earnings and prices in improving industry outlook, multiple tailwinds on account of internal efficiency plans, capacity expansion and turnaround in the NBR business makes it a worthy accumulation target.

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