Every quarter there is some covid news from China. There is no reliability of Chinese news.
Hence, it will not help Nitrile Latex Demand.
According to me, growth would be muted in Fy24.
3 Likes
Read Q4FY23 conference call and heard Q1FY24 conference call. Here is my understanding:
Management is neither shy to share the tough news (say margin pressure in the short term, inventory losses etc.) nor hesitant to share its forward outlook about the business. I wish every management’s communication was so transparent to the minority shareholders.
Sales will increase ~20% in FY24, but profitability will be down [EBITDA by 15~20% and PAT by 30~40%] due to below factors:
- Nitrile latex sales would be ~20% of overall sales and margin contribution would be almost NIL.
- Continuation of inventory losses: Q1FY24 results confirmed that inventory losses,which were assumed to be over in Q4FY23, are still continuing due to immense correction in raw material price.
- Increase in interest and depreciation expenses compared to the last year due to capitalization of the recent capex.
Disc: No position.
6 Likes
Hello Aatish, can you please help with the source of this information?
1 Like
You can find it from Q3FY23 concall.
2 Likes
Q1FY24 concall notes:
- Sales declined 9% YoY to 278 Cr but increased 8% QoQ. EBITDA declined 40% YoY with margins at 9.2%
- Had highest ever quarterly volumes and export volumes witnessed 22% QoQ and 110% YoY growth led by nitrile latex carpet and construction. But RM prices fell sharply and hence sales dropped despite strong volume growth
- EBITDA margins were affected due to lower margins in NBR and paper binders because of pressure on demand, inventory losses
- Inventory losses to continue in Q2, lost 3% EBITDA in Q1
- PAT margins impacted by higher dep and interest costs after Capex commissioning
- Capex updates
- Company wants to increase exports and for nitrile latex they sent some samples out to customers to get approvals done which takes 3-6 months. But since they have installed new technology for nitrile latex, they need these approvals
- While for Taloja plant products like styrene butadiene latex, styrene acrylic the customers accepted product immediately because these are established products on same tech
- Both plants around 25-30% utilisation, hope to reach 70% by Q4
- Planning for capex for NBR after this
- Competitive edge vis a vis players in Europe
- Since EU has higher energy costs, service levels are lower Apcotex has some advantage
- Sometimes product quality/performance is better from Apcotex
- Apco-build
- Building distribution network for the product and now Apcotex is present in 4-5 states
- Since this is B2C business, it takes time to build
- Since Apcotex has strengths on polymer side and are backward integrated, so this is an area of strength for them
- This business may get scaled to 300–400 Cr in 5-10 years
- Export mix to go up to 40%+ in 4-5 years as nitrile latex will be majorly exported
- Nitrile latex situation
- Top Glove and Synthomer closing factories
- Margins below pre-COVID level and 1/10th of COVID level
- But Apcotex has only 50K tons capacity which is small, so they should be able to scale up as and when demand comes back
- Market is also moving away from natural latex gloves to nitrile latex gloves
- NBR situation
- This product is easy to transport and easy to store, hence some dumping from Korea is impacting
- There is inventory destocking of NBR as well, so overall demand and prices are low here as well
- Guidance
- Looking at 600-700 Cr revenue from capex done recently
- Going forward growth will be driven more by latex products and some by NBR
- Expect 4-5 times asset turns on the existing mount of assets when things turn back
17 Likes
Hello Lakshay,
I have one query regarding your valuation.
High Capex(higher depreciation) and Higher Interest cost will be impacting their bottom line for few Quaters so is EV/EBIDTA a proper tool for one to value the company?
Also have you built a position in Apcotex ?
Thanks.
Apcotex Q1-2024(july 2023)
1…PERFORMANCE
=In Q1 FY '24, on the back of new capacity commissioned, we witnessed our highest ever quarterly volumes
=Export volume growth of 22% and 110% respectively on a year-on-year
basis which was led by nitrile latex carpet and construction.
=In spite of 22% increase in volume,
revenue from operations fell by 9% due to sharp fall in raw material prices, which led to lower price realization of finished goods.
=EBITDA margins were affected due to lower margins in NBR and paper binders because of
pressure on demand, falling prices and inventory losses.
=Furthermore, PAT margin declined due to increase in depreciation and increased costs only because of the expansion projects
commissioned in March 2023.
2…Export
=I am happy to say that this quarter, 31% of our overall sale is from export market.
=However, you know, many years ago, almost 8, 10 years ago, we were only at 2% or 3% of sales
were exports.
= It’s not only in one country. So, that’s another good thing. So, now at least from a geographical risk perspective, we feel better about the company’s sort of current position
3… Competitive advantages
A…Low cost manufacturing than european manufactors
B…Services to customers
=We have been able to provide services that are better than our competitors
4…Apcobuild
=We are slowly building a distribution
network. So, we are earlier we were only in Bombay. We moved it to Maharashtra. Now we
are in four or five states.
=So, we are growing at perhaps about 20% a year for the last two years (barring the, you know, one year in COVID, one, one-and-a-half year in COVID, which was difficult.)
=As the total value of the business, it’s still a very small percentage of overall
Apcotex revenue.
=Over time, over 5, 10 years, we expect it to play a more significant
role in terms of profitability and the
business is a little different from the b2b business. . Building the
brand, building distribution network takes time
5…Nitrile latex plant utilization
=Our utilization level was approximately 30%. . And obviously, every quarter or every month rather, we are looking
to increase that and so we hope by the end of the fourth, by the fourth quarter, we would be at 70%, 80% capacity utilization for that quarter
=Unfortunately new plant came in at a time when the market
is at the bottom. Thats why only 30% utilization
=So, our focus is on improving our capacity utilization or market share and at the time when it turned, you
know, we will be there. We will be there in the market and there are a lot of opportunities not only in Southeast Asia and with some of the big customers but in South Asia and Sri Lanka, India, some opportunities have arisen with specialty products in the West, in Turkey, Europe.
So, we are now focusing not only on Southeast Asia but other markets as well.
6…Why inventory losses(for all chemical stovks)
=Exactly about a year ago, it was the other way around, there was a lot of
tailwinds.
=However, later there was crash on raw material prices in lasy quarter and the drop for some reason has been so sharp and so unexpected in the
last quarter that even with regular stock we have had to bear with these inventory losses.
=It continues into Q2. It’s little bit recent, but in the last week or
10 days I would say things have seemed to have bottomed out, but I think it’s too early to say.
We have to wait for another couple of weeks, but it was still dropping as of July. So, it’s difficult
to predict where. If you were to ask me, in my opinion, there is not much left to go below it.
Really some of our petrochemical raw materials are at the lowest that I have seen in many
years, you know, even some of them below COVID if you believe it or not when the first COVID
wave hit. So, it’s unbelievable.
=Decline in raw material price
=, it’s a big drop. It’s one of the biggest drops you have
ever seen in such a short period of time in a quarter. It has happened in the past as well, but
it’s very, very rare.
=Because of China slowdown that was unexpected and therefore there has been a sharp drop and then, of
course, that also has had an impact on the demand for these raw materials, so as a result of
which sudden crash has happened.
7…Nitrile latex business
=When it runs at full
utilization level, 40% sales will be from export
8…Gloves
A…During corona time,. All medical whether it was gloves or masks or
everything else, you know, demand was through the roof. So now onwards ,obviously compared to those numbers, you can’t count growth,
B…However, in long run, this industry will definately grow.
The quality of health care and the awareness of personal protective equipment in Asia is really almost at the bottom. That only can go up.
While in America and Europe , it’s a mature market.
C…Within gloves also, there is natural latex gloves and nitrile gloves. Now because of the availability issues, uncertainty of availability plus
the protein allergies in the west, you know, issues around those things, the market is moving from natural latex gloves to nitrile latex gloves. So, as a result of which nitrile latex gloves are growing at a faster clip than overall other PPE markets. So, we continue to remain bullish.
=All reports show that, you know, growth over a 10 year period for nitrile gloves worldwide
9…NBR v/s latex
=NBR is a little bit of a cyclical
commodity market unlike our latex products which are not easy to store, not easy to transport.While , NBR you can store anywhere. You know, it’s a synthetic rubber. You can store it
for six months, one year.
=In last few quarters, demand was pretty poor in China.
So, raw material prices came down.That leads to destocking
happening which typically doesn’t happen in latex products but in rubber products that can happen. People don’t want to say they run at very low inventory. So, there is a amount of destocking.
=We see it turning now going forward because it’s kind of bottomed out . That cycle continues for two, three months till it kind of bottoms out, you know.
=So, volumes and margins have been quite challenging for NBR in the last quarter for sure.
10…Capex
A…Latex@100cr capex completed
…As of now we have just completed a CapEx of 100 crore over the last year or two. So, we are more in the consolidation phase and what we have is enough for the next couple of years.
=So, we are just consolidating right now watching our cash flows, debt levels.
B…NBR
… In the meanwhile ,we have completed the detailed engineering and budgeting for expanding our NBR business where we are trying to double detailed engineering, but we were trying to see now we are
working at sort of advanced stages to see how we can reduce the CapEx cost and investment
cost. At the same time, you know, there is enough work going on in terms of selling this
additional capacity that we have just invested in.
C…Additional latex
= When the nitrile latex market turns in terms of margins, you know, at a minimal investment we can
further expand volumes by about 60%.
D…New products
=We are looking at new products, new
opportunities which are very different from our current sets of products.
11…Next growth
A…Latex
The last chunk of the growth is going to come from the latex products, nitrile latex and latex and styrene butadiene latex, styrene acrylic latexes and so on.
B…NBR
=But even NBR we are expecting a growth because we have done some
debottlenecking recently, which I had not announced earlier, but to the extent of another 15%,
20%, we should be able to. We are working on the exact numbers because we were able to
free up a lot of the capacity since nitrile latex now has moved into its own new plant.
12…Dumping risk in India which we faced in 2019? (For nbr)
=That risk is always there because NBR is store product. China is really the main consumer of NBR. Anytime we see China demand slowing
down, we see dumping.
=Dumping meaning much lower margins and when I define dumping,
it’s much lower prices or margins than the average that you would see over a period of five, seven years and it happens from mainly Korea, Russia, china
13…Roce and asset turnover
= Till FY '22, all our assets were pretty
lower and suddenly we have this large chunk of 200, 250 crores coming
in in one year as a result of which and the volume hasn’t picked up that much and therefore asset turn is lower in that one shot. Same thing happens with ROCE, for example, ROCE
14…High depreciation/ interest expense
=In the last con call ,
I had mentioned that please expect higher depreciation in finance costs going forward. Simple
reason is that we have commissioned two projects worth about more than 200 crores in the
month of March or around Feb, March in Q4 of last year and therefore, the depreciation of
those projects and the loan that was taken to partly finance those projects, all those start
hitting the P&L from Q1 of this year.
= So, you can expect depreciation and interest going forward for the next few years, next few quarters to be at these levels.
= Of course, as we repay the loan
from next year, interest amount will come down, but depreciation will be high for a few quarters.
15…Turnover
=Our turnover as I explained to one of the previous callers, that our volumes
have gone up by 22%, but as a result of the decline in raw material prices, overall our realizations have come down by 30%. Therefore, it looks like our turnover has come down by
9%, which is true, but please don’t look at our turnover only in terms, you know, that will correct depending on our raw material prices and business that we are in where there is a huge
volatility and turnover.
16…Summary
=Just to summarize, I want to mention, it’s been a difficult
quarter for us on two, three front.
=Raw material price falling sharply resulting in inventory losses,
=Margins in some of our products also falling sharply irrespective of the raw material prices coming down, in general,
=It’s been difficult, especially in NBR and to some extent in the
paper industry as well where we supply our binders or polymers there.
= In the long term, we continue to walk on the charted plan and our target.
= The silver lining is, of course, the 22% growth in volume.
=So, we are focusing on volumes and market share and increasing our
geographic breadth and depth with each customer .
Disc…invested
8 Likes
1 Like
Apcotex-update-
Apcotex growth and future growth triggers
1…PERFORMANCE
=18%-21%cagr in last 10 yrs
=22%cagr in last 4 yrs(2019-2023)
=In Q1 FY '24, on the back of new capacity commissioned, we witnessed our highest ever quarterly volumes
2…Why low PAT
=In spite of 22% increase in volume,
revenue from operations fell by 9% due to sharp fall in raw material prices, which led to lower price realization of finished goods.
=EBITDA margins were affected due to lower margins in NBR and paper binders because of
pressure on demand, falling prices and inventory losses.
=Furthermore, PAT margin declined due to increase in depreciation and increased costs only because of the expansion projects
commissioned in March 2023.
3…Future Growth triggers
A…Recently completed nitrile latex plant@100 cr
(Just 30% utilization)
B…Export
Disc…invested
2 Likes
Very poor result and very pessimistic commentary from management.
Too many headwinds -forced management to hold further capex!
No pricing power, EBITDA is not in management control !
Automobile EV trend will be negative for NBR as per management.
High valuation and too many headwinds…expect derating of PE and price correction.
Disc - Tracking for investment opportunity at right time as I like management !
4 Likes
Q2 2024 Concall Notes
-
Excellent volume growth, but fall in raw material price was the key reason behind the low finished goods realization. No substantial inventory loss in the quarter.
- Recent raw material price in second half of the quarter has negated some inventory loss (observed till Mid July) - so no material inventory loss in the quarter
- Sequential volume growth: 5%, overall growth is close to 5% QoQ and this is not just from nitrile latex growth. No volume guidance provided from management, but like to utilize the full capacity max by 3 years.
- Export growth for Apcotex due to cost being too high for European competitors & manufacturers looking to diversify out of China
-
New facilities commissioned are utilized close to 25% - 30% on yearly basis. When capacities are fully utilized for newly commissioned plants, it will generate close to 600 - 700 crore.
- Received clearance to operate the multi-purpose Taloja facility at full capacity, at end of Q2.
-
Revenue mix:
- 70 : 30 in both volume & value terms vs 80 : 20. Exports are more towards carpets, XNB
- End user industry mix: Latex - 55% and Rubber - 45%
-
Nitrile Latex & new plant commissioned for it:
- Top Glove (leading glow manufacturer) - Expects the prices of Nitrile latex to drop further, but management doesn’t see much room for further price drop.
- At the moment Nitrile latex EBITDA is just close to break-even @ close to 0% and it is dragging the overall EBITDA. But EBITDA pre covid was around 14 - 15% or even more than that. But some of the current Orders are below the break-even levels, where we like to operate at least at or above break-even levels
- Current capacity utilization is around 25 - 30%, hopefully will be able to utilize at least 90% capacity by End of the year at monthly run rate.
- Exploring smaller Vietnam | Thailand | Sri Lanka and some new players in India, other than earlier preferred market like Malaysia
-
Capex: No decisions made yet, For NBR related capex - Design is ready but waiting for EV related developments, as NBR has major application towards ICE vehicles, very much less quantity of NBR will be going towards EV vs ICE. As of now no major capex other than maintenance capex.
Note: These are some personal notes from Q2 FY 24 conference call, as per my understanding
11 Likes
Hey Pragnesh
Any reason why a fall in the raw material prices result in inventory losses? To that extent is the decrease in inventory also the reason why operating profits fall?
Hello Aadi. Exactly the reason you’ve mentioned. Let me elaborate
If a co buys Raw material at some x price. Later if the raw material price falls, the end product price also falls. So, if the co is carrying Raw material inventory bought at higher prices, the gross profits would be lower.
There’s something called inventory gains. Let me explain with example of some cos.
If you know Ambika Cotton and Sportking India, they manufacture and sell cotton yarn. They generally carry some raw material (cotton) or finished good (Cotton yarn) as inventory on their balance sheet. They can sell this in market at higher prices when the price of cotton yarn cotton goes up. You can check how they made abnormally high profit in FY22 because of this reason.
Hope this answers and you don’t mind I took the liberty to answer the question directed at Pragnesh. @Pragnesh bhai, please feel free to add your points as well,
Thank you
Praveen
3 Likes
Hi, Praveen. Thanks a lot that does help.
I had another questions, if the price of end product variable? Wouldn’t Apcotex be selling a product that has a fixed value?
Hello Aadi. Sorry, I haven’t followed this company enough to answer this question on how they price their products. I’ll let other members take this Q
@Pragnesh may help with this
Praveen
No. The agreements Apcotex gets into with their customers has variable pricing model based on the raw material. Generally, as the prices of raw materials increase they can pass on this cost to the customer. And they do as well for most of their products. In such cases they don’t lose much of the GM. Company did it well in 2020-2022 period.
Ofcourse, in some products company can’t pass on all the cost to customers. For example their current XNBR Latex is facing demand headwinds and thus to fight off the competition they are selling the XNBR at cost.
Similarly if the prices of raw material decreases they have to pass that cost savings to the customers. Now if they have excessive inventory of that raw material, they will take a hit on GMs.
5 Likes
Very poor result continue. Stock Price not corrected but expecting to align price with earnings in near future. Too much margin pressure due to dumping and lower capacity utilization and negative conditions remain in Q4 also
Disc - not invested but waiting for reasonable valuation to enter
1 Like
While I hate to see contracting margins of Apcotex, what keeps me invested in this company is the honesty of the leadership. Around one year back, post good Sept 22 results, Abhiraj had no qualms to declare that next few quarters are going to be tough, due to over capacity in nitrile latex supplies and post covid tepid demand from glove industry . I remember stock price dropped post conference call. Like any other chemical company, Apcotex is going through down cycle of lower demand and hence lower prices.
5 Likes
While domestic market share remained intact, it is gaining market share in global market. For the first time, it exported Nitrile gloves to China. Few Nitrile Latex plants are shutting down. Company remains the lowest cost producer of NL gloves. It is a question of time when good tides will come Apcotex way.
Disc: Remain invested.
1 Like