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Multi Baggers

Kashyap Pujara

Sushilfinance.com

5.30 AM Jan 1st 1970

Polyplex Corp

BSE ID : 524051     NSE ID : POLYPLEX

RECOMMENDED PRICE 72.00

PEAK FROM RECO 2870.00 3,886.11%

CURRENT PRICE 766.40 Resource id #18

Buy Polyplex Corporation with a 1-year price target of Rs 350, CMP Rs 144.

Robust volume growth expected in FY07

With the full commissioning of Turkey expansion, we expect consolidated sales volume of Polyplex to go up from 61,037 tonnes in FY06 to 79,438 tonnes in FY07. This would translate into a growth of around 30%. Our estimate is based on the assumption that while the India and Thailand operations would continue to operate at 95% of the capacity, the Turkey would operate at 90% capacity. Though the company is also mulling to start another 20,000 tonne plant in Turkey by Q4FY07, we have not factored in any upside from the same.

Turkey plant should operate at higher EBIDTA margin than Thailand plant

Turkey plant is meant for catering to European market, which was till now being serviced by the Thailand plant. As a result, as far as sales in Europe are concerned, we believe that there could be substantial savings in the freight cost. This would mean that the EBIDTA margin for the Turkey plant has to be better than that of Thailand.

Three months’ delay in starting Turkey plant

Polyplex management expected to start the Turkey plant by October 2005 which got delayed & started during Dec 2005. The delay was due to two reasons. Extended Ramzan holidays in Turkey was one of the reasons, besides the technical snag which came up during the installation of the plant. We believe that the delay was exceptional as the management has excellent track record of commissioning the Thailand plant in a record period of nine months.

Commissioning of Cifu’s plant added almost 10% to global PET film capacity

During CY2005, Cifu group of China commissioned a PET film plant of 1,20,000 tonne capacity, which increased the global PET film capacity by 10%. This had obvious implication on the global demand-supply scenario in the form of lower PET film price. However, the additional supply is likely to be absorbed over the next few quarters as the demand growth rate of PET film has been at about 10%. Moreover, given that the PET film prices have become unremunerative, we will have to wait & see if the new capacities which have already been announced (equipment orders have also been placed), actually come into existence.

Lower import duty on PTA and MEG to benefit domestic operations

In the Union Budget 2006, the import duty on PTA, MEG and PET film has been reduced from 15% to 10%. Lower import duties on PTA and MEG would mean lower import parity price as well as domestic price. However, the impact of lower import duty on PET film would be negligible as there is hardly any import taking place due to the domestic PET film price being lower than the import parity price.

Valuation and view

Notwithstanding the lower than expected performance during Q3FY06 on the back of lower price realization and the subsequent correction in the stock price, we are confident about its long-term growth story especially since the Turkey expansion is now on stream. We maintain our FY07 estimates of consolidated topline and APAT (after minority interest) estimates at Rs. 7,010 mn and Rs. 721 mn respectively, which would mean growth of 24.0% in revenue and 27.3% in APAT. Our key assumptions for FY07 include PET film price realization estimate of Rs. 86 per kg for the Indian operations and Rs. 89 per kg for Thailand and Turkey operations. As far as sales volume is concerned, we expect the Indian and Thailand plants to continue to operate at almost 100% capacity (inline with FY06 capacity utilization levels) whereas the Turkey plant is expected to operate at 90% of its capacity of 24,000 tonnes in FY07. Raw material cost for Indian operations is expected to be Rs. 51.5 per kg while that of Thailand and Turkey at Rs. 44 per kg in FY07. Thus, the delta (selling price – raw material price) per kg for the Indian operations is estimated at Rs. 34.5 kg and the same for Thailand and Turkey at Rs. 45 per kg in FY07. At the CMP of Rs. 144, the stock is quoting at 3.2x of FY07 consolidated EPS of Rs. 44.8. We retain our target price at Rs. 350 and maintain a ‘Buy’ rating on the stock.

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