Styrolution ABS India – Strong fundamentals with potential de-listing opportunity – Centrum
Styrolution ABS (India) Ltd. (SAL) (formerly known as INEOS ABS India Ltd.) is a 87.33% subsidiary of Styrolution Group GmbH, Germany. Styrolution Germany, a leading manufacturer of an engineering plastic namely styrene monomer, polystyrene and ABS, is a 50:50 joint venture between BASF SE and INEOS ABS. The parent had tried to acquire 100% stake in SAL in the past but has not been successful. We believe there can be a delisting offer in the future as well;
SAL is the market leader in the engineering plastics industry in India with ~60% market share in ABS resins segment and ~68% in SAN resins segment. Absolac (ABS) is plastic resin produced from Acrylonitrile, Butadiene & Styrene. Its application ranges from home appliances to automobile, consumer durables, business machines. Other product, Absolan (SAN) is also a polymerized plastic resin which is produced from Styrene & Acrylonitrile. Its main applications are in the lightings, stationeries and novelties, refrigerators and cosmetic packing. Some of the prominent clients of SAL include Samsung, LG, Videocon, BPL, Ford, Hero, Cello, Lexi, Bajaj, etc;
There is a huge demand supply gap for ABS in India which is being met through imports over the years. CRISIL Research estimates that the supply of ABS would grow at 17% CAGR to meet the demand during CY2010-15E. SAL has expanded its SAN capacity from 36,000 tpa to 65,000 tpa, which has helped increasing its capacity of ABS from 60,000 tpa to 1,00,000 tpa. This expansion has been funded through internal accruals. We expect the demand growth to continue and provide steady revenue stream to SAL;
SAL has been on a steady growth path. Over CY2006-2011, while its net sales increased at a CAGR of 9.9% to Rs.825 crore, its profit increased at a CAGR of 14.8% to Rs.54 crore. SAL reported impressive results for Q3CY2012. While total income grew 26.5% YoY to Rs.263 crore, net profit jumped 165% YoY to Rs.22 crore. Raw material cost which as a percentage of sales declined by 662 bps YoY to 72.6%, helped EBITDA margin to expand by 676 bps to 12.7% thus improving profitability;
We believe the 5% appreciation in INR from its all time high of Rs.57.32 to Rs54.22 is a positive development for SAL which is heavily dependant on imports (net imports of ~Rs.491 crore in FY2012 which was 60% of its sales) as it is likely to reduce the raw material cost and help improve margins going ahead;
The stock is current trading at 24% below its 52 week high of Rs.850 and at 15.4x its CY2013E EPS of Rs.42. We believe the parent company might come out with an open offer again for acquiring the remaining stake in SAL. Moreover, the opportunities in the growing engineering thermoplastic industry provides cushion fundamentally. In either case, we expect the company to provide good returns in the medium-long term. We recommend BUY with a fair value of Rs.756, valuing the stock at 18x its CY2013E EPS.