Thanks Nil for sharing this correspondence with BEPL. Obviously the company is tight lipped. But I had a relook at the AR17 that gives me a lot of confidence and I will be retaining my holding for the time being. Few takeaways from AR17 are.
Director’s Report: (pp 17-18)
C. OPERATIONS AND FUTURE PLAN:
A quick glance at the operational results highlighted hereinabove, when compared with the previous year, will convince the stakeholders that F.Y. 2016-17 reflects a magnificent performance and depicts manifestation of the true potential of your esteemed company. Thanks to the strategic approach adopted by your company to re-orient its marketing strategy by re-positioning its products in highly profitable consuming segments. It is noteworthy that despite stiff competition from imports with relatively weak custom tariff protection, the company could increase its gross margin by 27.80% and the turnover by 18.48%. The increase in sales quantity has also been impressive, showing growth of 15.24% and correspondingly the production by 16.10%.
It may further be appreciated that upon completion of the expansion cum revamping project in the year 2015-16, the total ABS capacity stands at 80 KTPA whereas the exploitation thereof in the year 2016-17 has been to the extent of 64.31% only. Ipso facto, improving upon the results achieved in 2016-17, is likely to be far more impressive in the F.Y. 2017-18 and definitely thereafter in the subsequent years owing to the following facts:
- Buoyancy of growth in GDP in the Indian economy especially post implementation of the GST will push the consumption of lifestyle goods especially in the two wheeler automotive segment, domestic appliances segment and other consumer durables. These first two market segments are the major consumption area of your company’s products.
- The overall demand of ABS has substantially outstripped the present supply from the domestic manufacturers which are only two, your company and an MNC competitor whose respective capacity are identical and aggregates to around 160 KTPA against the current consumption level hovering around 275 KTPA in F.Y. 2016-17, this is likely to continue to grow at the rate of 15% CAGR for at least a decade ahead.
- It is internationally estimated that overall ABS Global capacity utilization is around 70% and which makes the big capacity players to supply in the deficit zone mainly India and China.
- 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. Consequent whereupon, there is a huge import of general purpose ABS natural. This is the reason, which attracts several giant global manufacturers of ABS to sell their products in India to improve their respective capacity utilization. In view of the fact that China globally exports the products manufactured out of ABS resins, hence their consuming segments are big enough for any global player to establish and expand their capacity in China itself, however China also imports huge quantity of general purpose ABS from Taiwan. The story of India is somewhat different as we are a domestic market demand driven economy whereas China’s economy is driven by exports. This is principally the reason that has not attracted any third player in the Indian ABS market so far. In the light of the above there is not only the need for existing two ABS manufacturers to improve upon their respective capacity utilization but need to expand their individual production capacity as quickly as possible to reduce import dependence.
- It may be appreciated from the foregoing that your company’s endeavor to attain optimum capacity utilization of 80 KTPA is deemed most expedient and the company is confident that by end of the current fiscal 2018, it will produce and sell 72 KTPA-optimal capacity utilization. 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. In this connection, all requisites steps have been initiated. The entire expansion programme will be financed through internal accruals. The consistent pattern of growth in ABS domestic demand year on year basis unfolds an exciting opportunity to set up a global size port based ABS manufacturing unit for your company. Presently due to unique market situation company is able to not only sustain but earn handsome profit despite split location of manufacturing facilities as you are well aware of the fact that HRG is being manufactured in Satnoor, MP whereas bulk SAN and compounding production units are located at ABU Road, Rajasthan.
(II) Future Expansion:
Considering the scope and limitation, opportunity and threat and also after in-depth evaluation, your company has decided to set up a port based green-field plant with a minimum capacity of 200 KTPA in the state of Gujarat. The new plant will be based on state of the art technology from Japan and in this connection, the substantive initial steps have already been taken involving several round of meetings with the Japanese company followed by visit of their experts. This Japanese company is none-else than Nippon A&L, Japan with whom the company has a long standing relationship and also established marketing Joint Venture in the year 2013 who are providing sales support as well as technical support with respect to the existing operations of JV products.
Furthermore, infrastructure development work is progressing rapidly in terms of steps being taken by your company for acquisition of land and planning of captive power plant as an integral part of the expansion programme. Based on the encouragement being received from the concerned authorities of the State government and company’s technology partner, the implementation programme has been firmed up to commence manufacturing of ABS from the proposed port based green-field plant by 31st March, 2022.
Perception backed up by conviction of the company is that by the time, the new 200 KTPA port based plant is established; the company will be able to exploit its capacity of the plant optimally. This is because your company is likely to have captured the largest market share of ABS in India. Moreover, based on the competitive cost structure and quality wise at par with the best in the world, if required, your company will be in a position to export specialty grades of the ABS, ASA and AES resins as well.
The aforesaid strategy will ensure birth of a healthy baby, thwarting all threats and limitations which is often faced by any green-field project since it is otherwise difficult to maintain the economic viability in the initial years of production due to relatively lower capacity utilization resulting in not being able to achieve breakeven level of the output which certainly will not be the situation to be faced by your company.
Moreover, implementation of the project takes into account, in terms of the technology selection and logistic planning that it remains globally competitive in the event the Indian economy opens up further and custom tariff barriers is done away with.
In this context, energy conservation and minimizing environmental affects are given due impetus. Furthermore automation and safety measures are no less area of attention for implementing the project based on ultra modern process technology. Due care is being taken to ensure that the material handling system is carried out with least human involvement to improve upon the safety and avoid human errors. The project planning is on the firm footing and it is reiterated that by 31st March 2022, the new port based plant is likely to become fully operational.
This AR says that globally we have overcapacity in ABS production. BEPL is talking about surviving in a competitive environment and telling the cogent reasons. But the worries are currency fluctuations and raw material availability and prices.
Does this make BEPL a moat?