ValuePickr Forum

Bhansali Engineering Polymers - An Import Substitution Story!

Hi @madhavikkutti,

Would like to know your thoughts on stock selection process. How did you zeroed in on this stock when it was at 37 or so?

Rgds,
Advait.

Hi @Advait_6270,

I selected this stock during early May this year. It got into my watch list during April due to the excellent Q4 numbers. In spite of the good results, the stock price had corrected from Rs. 41 levels to Rs. 37, making my entry easier. I had researched on the company and the key attractions were the oligopolistic industry with multiple entry barriers, their ambitious expansion plans, ABS demand increase (https://economictimes.indiatimes.com/markets/stocks/news/some-cheer-for-underperforming-abs-makers/articleshow/58059058.cms), tie-up with Nippon, well-diversified clientele, and an extremely passionate promoter.

Please note that, during my research, I also had read about the alleged relationship of BEPL with Shradda Stock Broking 14 years ago (http://archive.indianexpress.com/news/sat-lowers-penalty-against-shraddha-stock-broking-to-rs-3-lakh/1040395/), the news which Amit Mantri is trying to revive through Twitter now, but based on my best best judgement, I still decided to invest. I could be right or wrong, which time will prove.

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A key reversal day on BEPL charts - usually followed by a sharp down movement and fellow boarders should keep an eye out for signs of a possible reversal of the trend. Also from what i can see - this is the first key reversal day since its octane powered upmove started. Just some technical observations from my side from a neutral standpoint.

Some areas that caught my eye while looking at the balance sheet on screener

  1. Reducing net block which means increased FA turnover which means increase ROA.
  2. Material cost forms 75% of sales in 2017 which is down from forming 85% of sales in 2014 which is also the time period of its OPM expansion from 3% to 10%. Possibly favourable raw material prices aided that which may not be sustainable going ahead.

This combination of reducing net block combined with favourable RM prices has definitely aided its return ratios which should revert back to its normalized levels over time.

  1. While they have deleveraged the balance sheet - the dividend payout ratios have also reduced in line with the deleverage. The DE ratio from 0.53 has come down to 0 while the Dividend payout has come down from 112% to under 10% over the same period indicating that dividends have been funded out of debt.

I think key operating metrics will normalize and so will the prices.

Best
Bheeshma

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In terms of RM Price as long as Styrene price remains low, Margin should remain stable. If one reads the competitor Q2 concall, it is under control

You can also check

http://www.sunsirs.com/uk/prodetail-168.html

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I agree that we should keep a vigil regarding RM and ABS prices. Also spreading negativity is a well known trick in stock markets. Some recent actions about BEPL should also be examined in this light.

While a lot of discussions are happening on other ValuePickr threads (Electric Cars/Bus :: Call it a Disruption?) on the increased usage of Copper, Aluminium, Graphite, Cobalt, Lithium etc., for Electric Vehicles (EV), I have not seen any discussions regarding the usage of plastics on Electric Vehicles.

I feel that, there will be significant increase in usage of plastics (including ABS) in the Electric Vehicles. Following article suggests that, the global plastic in electric vehicles market is estimated to grow with a CAGR of 37.3% and will reach $943.01m by 2021:

https://forums.tesla.com/forum/forums/plastics-electric-vehicles-soaring

Here is another article, which projects a slightly less CAGR number of 28% though:

Following whitepaper from TATA Strategic Management Group suggests that the usage of polymers in vehicles (kg per vehicle) is constantly on the rise (primarily led by replacement of metals with polymers) globally and the same has grown from 120 kg (per vehicle) in 2013 to 150 kg in 2015.

http://gcpa.themachinist.in/digital_assets/553/Whitepaper.pdf

Key drivers for Auto OEMs adopting plastics have been its lower weight, cost economies and versatility offered in the design. In case of overall plastic consumption, the consumption of plastics per vehicle in India lags developed countries (India’s usage is half of the global average) considerably, hence here exists significant headroom for strong growth of polymers/plastics in India in coming decades.

Even on non-electric vehicles, plastic play a key role in improving fuel efficiency and lower emission by reducing the weight of vehicle. 1 Kg of plastic can typically replace 2-3 Kg of traditional materials in a vehicle. And typically, 100Kg reduction in weight can save 0.3-0.4 Litre of fuel on a distance of 100 Km, as per the Europe commission report on light-weighting.

Reva e20, Mahindra Reva’s electric vehicle, uses 80 kg of plastics for instrument panel, fenders, front & rear bumper and the plastic body.

I feel that BEPL has already started benefiting from the EV market and going forward, it will see even more increased benefits, considering that, India has set itself an ambitious target of having only electric cars by 2030 (https://economictimes.indiatimes.com/industry/auto/news/industry/indias-all-electric-cars-target-bumps-on-the-way-of-nitin-gadkaris-bulldozer/articleshow/60424970.cms).

I would request all your valuable opinions on this.

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Moneycontrol has removed BEPL from their Diwali picks citing valuation concerns however they are positive on the business.

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The valuation seems stretched even if it grows at 75% man. For the CURRENT valuations to even appear sensible, the FUTURE needs to be more than perfect. And probabilities of a cumulative number of things is always going to be low. This is not worth the price its trading today for sure.

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It may be a folly, but I believe that BEPL story is yet to unfold in its full glory. One just has to read the Ambit report …

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Have read the whole report and it does paint a rosy picture, but also says that returns from here will be solely from EPS expansion and valuations are already at a premium, The problem with these investments is not that the company will not perform, but whether the stock will perform or not. And this is a major handicap with investors - We fail to differentiate between the two. More often than not, even if the EPS growth comes in, in cases like these, valuation normalization takes away any potential upside. One needs to understand the expectations already built up in the price and upsides left.

With more than 8x return for the year, markets have already factored in years of growth, if not decades. And if sell side reports were that good, they would have stopped selling those reports long way back.

PS; Used to be a sell side analyst with a leading MNC house.

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Dear @abhi2525, I appreciate your concern related to 8x return for the year, but won’t there be a good chance of the fundamentals of the company superseding the above concern? I am hoping that, it will, as I have been witnessing it happening at every level for Bhansali since Rs. 37 (even since I invested in this stock). During its journey from Rs. 37 to the recent Rs. 199, stock had corrected to the tune of more than 10%, at least 3 times which I believe was due to valuation concerns, but every time it retracted with increased vigor. I must say that, its last 3 quarter excellent results have been very supportive for the upward journey in its stock price.

Please refer to some of the earlier discussions between myself and @Agarwala on this thread regarding the price improvements of ABS since the beginning of the year. The global price of ABS has increased 40% to USD 2,000 per ton since the beginning of the year till end of September and subsequently increased to USD 2,600 per ton till now, making it an overall increase of 82% since the beginning of the year. Let me disclose that, we have made the best guess of the above figures, based on the details presented in certain news articles and websites.

Please also refer to my earlier posting on the very likely positive impact of Electric Vehicles on BEPL. I believe that, this will be a really big disruption which we will not be able to afford to ignore for the next many years and I believe that, BEPL has already started benefiting from this.

Also, if you really think objectively, how many companies in India currently can claim to have such strong MOAT as BEPL? I feel that, it is a very strong growth-oriented business. I think, what Ambit has come up with is a really excellent report and considering that, Ambit and its very talented CEO Saurabh Mukherjea more often come up with doomsday predictions and conservative/ negative views about the market/ stocks rather than positive, I feel that this report from them must be taken to be as highly positive for BEPL.

Coming to current valuation of BEPL: Current TTM P/E is 45.6 and the EPS for the corresponding period is Rs. 3.62. Between Q1 & Q2 this year, the profit has grown by 49%. I am not assuming that the profit would grow at the same rate over the next 4 quarters, in spite of the positive environment for the company. Let me assume a 20% profit growth Q-o-Q for the next 4 quarters. This translates to an EPS of Rs. 9.73, which is around 2.67 times the current TTM EPS of Rs. 3.62. Even if we assume a very modest 10% Q-o-Q growth rate, the EPS would work out to be Rs. 7.71. For a growth rate of 49% (which it achieved in Q2), the EPS as of Oct-18 would work out to be Rs. 11.09.

The optimism of at least 10% Q-o-Q profit growth over the next 4 quarters is keeping me invested in BEPL, in spite of the stock multiplying 8 times during the last year.

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Hi madhav, assuming a 10% Q-O-Q growth and EPS at 7.71 the P/E for full FY18 would come up to 21 (taking today’s closing price), is that not expensive in your opinion from a valuation point of view.

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Hi @pandi.rao, 10÷ growth Q-o-Q is approximately 46% annual growth. BEPL’ s products are used mainly in Automobiles and home appliances like refrigerators. There is cyclicality to a certain extend in its products, but I feel that the positive cycle which it has entered into now will be a prolonged one, lasting many years from now. As I had already mentioned on this forum earlier, BEPL has many positives currently: oligopolistic industry with multiple entry barriers, tie-up with Nippon, well-diversified clientele, passionate promoter etc. I am that kind of an investor who would be comfortable with a P/E of even 40, as I expect an yearly profit growth of at least 46% yearly at least for the next 3 years.

The latest Moneycontrol report on BEPL wants us to enter the company at a more comfortable or reasonable valuations. If the analysts at Moneycontrol were not comfortable with the valuations, why did they not give a sell call or change their recommendations when there were continuous upper circuits? I feel deeply uncomfortable by the timing of the call. We have no way to know, if it is a deliberate action to bring the prices down further? Here is their current view on BEPL…

In case of Bhansali Engineering Polymers, we remain positive on the business which is well placed for market share gain in the ABS (Acrylonitrile butadiene styrene) plastics aided by fourfold increase in manufacturing capacity (by FY 2022). However, post significant run-up, we suggest to wait for a reasonable price level to consider a re-entry.

Great then. At the end of the day, its individual’s perception that makes the market. And of course, faith in an analyst is one’s personal choice.

Let’s take 20% Q-Q growth in earnings, which translates to an EPS of Rs.9.73. Just to ensure, a 20% Q-Q growth for 4 quarters is 107.4% yearly growth in earnings. with an increase of 70% overall increase in capacity ( From current 80K tpa tp 137K tpa which includes 7K of low margin SAN products). Which translates to more than 35% increase in prices over next one year and more than 100% increase after that 2-3 years. Not going into how is this sustainable or achievable, but just have a case where it doesn’t happen. What’s the worse case scenario? Why should Ineos not offer competitive price given this much increase and will not other players, even if it’s in form of imports, pop up to take advantage of the same?

And electric vehicles has got nothing to do with ABS. The compound is used in fenders, housing head lamps, seat base, tail cover, side cover cleaners, and air cleaner ducts for 2 wheeler and mostly door panels, and all lights housing for 4W. Yes, there is a rise in ABS price and it is cyclical. Automotive has been a secular growth story in India since last two decades and I see no reason why it’s being suddenly touted as the next big thing. Nothing has changed materially there. Electric or Petrol or Diesel or CNG, demand for ABS is not going to change based on that. Uses in other home appliances such as Refrigerators and Washing Machine is going to grow at a rate it has been growing earlier.

Yes, have gone through the entire thread and various reports on BEL as well as their last 7 year AR. This was a good value buy at 30-40 levels. At this price, I won’t touch it with a barge pole. Not because the company will not do good, but because even if it grows at a rate of 50% for next 3 years, this will be a disappointment given the expectations built in the price. There is no margin of safety here. Forget that margin, the current prices looks to have already factored in next 2-3 years growth, at a high rate. But then again, I might be very wrong and I hope you are right and this gives you enough return, from hereon.

This may be relevant what the analyst at Moneycontrol wrote just a few days ago on Nov 25, when BEPL had closed the previous day at 162.15. To be fair, it was a different analyst and probably a different perspective.

Bhansali Engineering Polymers: Buy | Target Rs. 179 | Stop loss Rs 150 | Return 10%
Bhansali Engineering continued with a strong uptrend momentum forming a series of rising peaks on its long-term chart coupled with marginal consolidation at a higher level which turned the scrip healthy. It also witnessed a similar growth in volume along with its upward movement.
The scrip formed a strong bullish candlestick-pattern on its weekly price chart and continued to trade laterally on 60-degree trend line touching an upper band which indicates a positive signal.
The secondary momentum indicator further suggested a strong support for an uptrend regime with incremental in its RSI level from the previous zone along a with MACD still continuing above Signal Line.
The stock is currently facing an immediate resistance at Rs 179 and support level at Rs 145. We have a buy recommendation for Bhansali Engineering which is currently trading at Rs 162.15

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Just looked @ traded Volume of BEPL

@9:15-50k

@10:00-76k

@11:00-92k

@12:00-101k

@1:00-117k

@2:00-125k

@3:30-142k

And the crucial part is that the Stock remained @ LC thr’out the day

Well done…

:joy::stuck_out_tongue_closed_eyes:

Disc: Tracking quantity

Coming back to valuation, it is not in our control. Let’s not debate on this. Rather, we should focus on finding news of Promoter, Scuttlebutt, Competitors,

There are many stocks that are going up without any fundamental reason.

Let’s not waste time and also try to predict growth. Just remember , there is a significant gap between demand and Supply. Also there is a supply restriction in the domestic market. All seasoned investors focus on Supply rather than on Demand

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Mutual fund action in BEPL
October '17 data I could find. Bank of India AXA AMC has doubled the exposure to BEPL in four of its funds.


Please look at the source here…
I think November '17 data might be more interesting, if somebody can find out.
PS: Many fund houses contacted BEPL during last days of October '17.

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Of course it’s in our control. In fact, it’s the only variable in our country where we can decide our own buy price. Everything else is an opinion.

Anyway, i give up on this thread. Lot of confirmation bias here. Hope everyone who has entered at later stages make money. :slight_smile:

@mukeshbhatt77 For money control board, well, I am sorry if a chain of reasoning looks like MM message.

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