BHANSALI ENGINEERING POLYMERS LIMITED
LEADING PETROCHEMICAL COMPANY
ABOUT THE COMPANY
Bhansali Engineering Polymers (BEPL) was incorporated on 9 April ’84 under the name “Bhansali Steels”. It commenced business on 16 May ’84. It changed its name to “Bhansali Engineering Polymers” on 4 January ’86 by setting up a project for the manufacture of acrylonitrile butadiene styrene (ABS) resins (ABS is a common thermoplastic polymer). BEPL has been promoted by B.M. Bhansali and P.R. Bhansali in association with the Madhya Pradesh Audyogik Vikas Nigam (MPAVN), an industrial development corporation of the state government of Madhya Pradesh. In May ’89, the company came out with a public issue of 36 lac equity shares at par aggregating Rs 3.6 crore. The proceeds of the issue were utilised to part-finance a Rs 25 crore project to manufacture 6000 TPA of ABS resin in technical collaboration with Sumitomo Chemical Engineering Company, Japan. Company has received ISO 9002 Quality Standard Certificate from KPMG for manufacture & marketing of ABS polymers and Compounds.
BEPL is engaged in the manufacture of ABS resins and styrene acrylonitrile (SAN) resins which acts as a raw material for leading companies dealing in automobiles, home appliances, telecommunications, luggage, bus body and various other applications. The company’s products include general ABS, which is used in injection moulding; flame retardant ABS; ABS-polycarbonate alloys for high service temperature applications; glass reinforced ABS for very high rigidity and temperature requirement; poly methyl methacrylate (PMMA) — ABS alloy; transparent ABS; extrusion ABS, and impact modifier for polyvinyl chloride (PVC). ABS resins contributed 93.82% to total sales and 5.23% is contributed by sales of SAN resins for FY17.
BEPL’s plants are located at Satnoor and Abu Road. It manufactures over 1200 colours and 200 different grades of engineering plastic. It supplies in lots as small as 500kgs and also up to 5 tons. Margins vary across different orders depending on the size of the order as well as delivery time lines. Strength of total employees in the company as at 31st March, 2017 stood at 477.
Import of ABS technology in the eighties was banned under the technology policy. In 1990s, BEPL was the first company to introduce foreign technology from a Sumitomo group company of Japan, which is presently functioning under the name of Nippon A&L, INC., for manufacture of ABS in India having established and integrated emulsion polymerization based ABS manufacturing plant at Satnoor, MP which commenced its operations on 22nd January, 1990.
Later on BEPL entered into Joint Venture Agreement with Nippon A&L Inc., Japan (jointly owned by the globally renowned Sumitomo Chemicals Co. Ltd. and Mitsui Chemicals, Inc.) on 11th May, 2013 which helped BEPL to cater to the growing demand of ABS resins, ASA resins, AES resins and other Specialty polymers and has led to revenue growth and cost synergy opportunities for the company.

BEPL is now poised to launch a mega expansion project to set up a port based 200 KTPA green-field plant in the state of Gujarat. While the project has begun in right earnest, it is likely that it would take about 5 years to commence its operations. In the interlude, the company has an ambitious growth plan to ramp up its production and sales from 80 KTPA to 137 KTPA.
MOATS IN THE BUSINESS
Strong customer base: Customers list include Auto: Maruti, Bajaj Auto, Hero Motocorp, TVS Motor, Toyota, Mahindra; Applicances: LG Electronics, Samsung India, Whirlpool of India; Electrical: Anchor Electricals, Havells India; Larsen & Toubro; Godrej etc.
Strong results: Company delivered magnificent performance in FY17 as a result of the strategic approach adopted by the company to re-orient its marketing strategy by re-positioning its products in highly profitable consuming segments. Despite stiff competition of imports from China and South Korea with relatively weak custom tariff protection, the company could increase its turnover by 18.48% and net profit margin from 3.13% in FY16 to 4.88% in FY17. The increase in sales quantity has also been impressive, showing growth of 15.24% and correspondingly the production by 16.10%.
Tremendous opportunity: The overall demand of ABS has substantially outstripped the present supply. India’s total capacity is about 360,000 tonnes and demand is growing at double digits.
Low threat of entrants in the Indian ABS industry: Despite availability of market in India, the global players find it difficult to meet demand of the Indian market as quantity wise it is not attractive to cater to each market segment on account of variety of colours and performance specification. Manufacturing of the variety and the colours largely depend on the compounding extrusion process where it is difficult to strike a balance between the investment and the sectional capacity utilization. And due to the chemical complexity in producing ABS, it is capital intensive and hence, entry barrier for new firms is high.
RISKS AND CONCERNS
ABS manufacturers in India have to import their basic raw materials of more than 85% viz. Styrene and Acrylonitrile monomers along with several additives & pigments. This may be construed as a principal threat due to fluctuation of prices and availability in the international market. Most of the time the price of monomers is volatile on account of availability and price behavioral pattern of the petroleum and petrochemical building-block materials viz. crude oil, ethylene, naphtha, benzene, Propylene-oxide, etc.
FUTURE PLANS AND OUTLOOK
Capacity Expansion: Total ABS capacity of BEPL stands at 80 KTPA as on March, 2017. Thereafter, in subsequent years, it will ramp up its production and sales by exploiting the additional capacity being created at Abu Road for compounding to achieve an aggregate ABS manufacturing capacity of 137 KTPA by 31st December, 2018, for which all requisites steps have been initiated. Company has drawn up a plan to set up a port based green-field plant with a minimum capacity of 200 KTPA in the state of Gujarat by 31st March, 2022. Currently the company is debt free. Going forward the management has maintained that it will not borrow for capex or for working capital requirements. They have also indicated that they do not plan to dilute equity.
Demand likely to grow: Availability of purchasing power in the hands of the new consumers will contribute to push demand for consumer durable products as well. Moreover easy finance availability with low lending risk is attracting NBFCs and banks to make the finance available on attractive term to their respective customers. This has created voluminous opportunities for lower and middle income group people to own mobile phones, two wheelers, refrigerators and washing machines. All these products push the demand for ABS and other polymers in a big way. Therefore, in the last 5 years, year on year the import of ABS has been increasing as the local manufacturers i.e. BEPL and Styrolution are unable to cope up with the market demand. ABS market will be worth over USD 38 billion by 2024; according to a research report by Global Market Insights, Inc. Ref- https://www.gminsights.com/pressrelease/acrylonitrile-butadiene-styrene-ABS-market
Focus on two wheelers and refrigerator liner segments: BEPL has been striving hard to penetrate into two wheelers and refrigerator liner market segments in the manner that it does not have to produce the large quantity of general purpose grades in natural shade where competition is with cheap imports. This is precisely the reason that enabled BEPL to improve upon its price realization per unit sales volume and consequent thereupon, the gross margin.
FINANCIALS

KEY STATISTICS AND FUNDAMENTALS

VALUATION
Before valuing the business let’s first understand the thesis on which our valuation is going to hinge on. In India, ABS is manufactured by BEPL and Ineos Styrolution. Both of them together account for about 75% market share. The rest is met by imports, which also suggests the potential to expand revenue share for BEPL. There is a shortage of ABS supply from domestic manufacturers which are only two, BEPL and an MNC competitor, Styrolution whose respective capacity are identical and aggregates to around 160 KTPA against the current consumption level (demand) hovering around 275 KTPA in FY 2016–17, this is likely to continue to grow at the rate of 15% CAGR for at least a decade ahead. Hence this opportunity of high demand and low supply can be exploited by BEPL through its ongoing expansion. Also GDP growth in Indian economy post implementation of GST will push the consumption of lifestyle goods especially in two wheeler automotive segment, domestic appliances which will benefit BEPL as these segments are the major consumption area of the company’s products. From these two facts, we can safely assume that there is a lot of room for future growth.
Currently, total ABS capacity of the company stands at 80 KTPA and the capacity utilisation is 64.31%. Management of BEPL has stated that they are confident that by end of the current fiscal 2018, it will produce and sell 72 KTPA; thereby achieving its optimal capacity utilization target of 90%. And in the past, company has made average realisations of Rs. 12 to 14 crores on sale of ABS resins per kilo tons from FY13 to FY17. On a conservative basis, if we assume that company will be able to utilise 80% plant capacity thereby selling 64 kilo tons ABS resins and realise Rs. 13 per kilo tons, then its FY18 sales comes out to be Rs. 832 crores, showing an 18% increment in sales and further expansion of plant capacity to 137 KTPA by December, 2018 and 200 KTPA by 2022 will eventually increase the sales for FY19. And EBITDA Margins for FY18 and FY19 expected to be 11% and 11.50% respectively as a result of penetration in two wheeler and refrigerator liner segment.

Market Cap = Rs. 1145 crores.
Currently, the stock is trading at Rs. 69 (EPS FY19E x P/E 17.33).
In view of this, the fair value can be taken as 20 times FY19E EPS. So, at an approximate EPS of Rs. 3.98 for FY19, the fair value can be taken as Rs. 79.60.
Disclaimer: This is not a recommendation to Buy-Sell-Hold. And I am not a SEBI registered analyst.
