Bhansali Engineering Polymers - An Import Substitution Story!

The share has come down by more than 50%, is this much downtrend has any serious cause for worry since iam not aware of any change in the fundamentals. can someone throw some light ?

nothing seems to have changed fundamentally regarding the company. which means these are probably short term investors/traders selling. no negative news about the march 2019 capex, so that also seems to be on track. the stock price appreciated greatly in 2017, this may just be a correction regarding that. will be interesting to see if institutional investors buy into the company after monday’s meeting.

I am tracking and invested in this company. I do not see any fundamental changes. Other than 1. Plant fire issue 2. One time foreign exchange appreciation loss and 3. Raw material cost high there is no problem. All are temporary for few quarters. Not sure what made this stock falling so much.

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The problem lies in
1st QTR plant fire
Next QTR 9 cr Write off and expansion plan postponed and again flip flopped to back on track
Next QTR Not hedging Forex
I am awaiting what Next QTR excuse will be unless they prove back quarter with exceptional results (Bottomline).
Also wait for Jayesh Bhansali to buy back in aggressively and not few shares here an d there from KMP (Mishra) who is no longer at BEPL (Look at his historical purchase).
There is a likely chance that it can reach 40 if market does not support . So wait for at least a quarter of good results before buying or averaging.
My 2 cents…

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Finding it hard to figure out the current management/corporate governance issues from the screener data - https://www.screener.in/company/BEPL/

Nothing very apparent from the credit rating data either.

Could someone experienced guide me on what to look for in terms of numbers?

Would appreciate your help as well @phreakv6 .

Thanks

@Chetanpinto - The company must have been overstating earnings since demonetisation. In comparison with Ineos Styrolution which is a direct competitor, Ineos had OPM of 8%,6% and 6% in FY13-FY16 while BEPL had 4%,3% and 4%. Clearly Ineos was a better company then (and even going back). But somehow post demonetisation, BEPL started reporting phenomenal numbers, especially after Mar 2017 where there was a lot of divergence between Ineos and Bepl. This in retrospect is strange considering this is a commodity business and both companies were importing similar raw materials which were a bulk of the expenses.

During this time, a lot of entities probably related to the promoter exited and the price moved up dramatically which makes me suspect this was a pump-and-dump where the promoter was also involved and probably benefited. I had analysed this in this post

Now that game has played out, the margins are reverting back to normal and I suspect BEPL will go back to being an average company. This sector (ABS plastics) might also be having near-term headwinds with auto slowdown so this de-rating makes sense. Yesterday’s was another case of pump-and-dump so its better to be wary and not be lured into a bull trap. The fundamentals are deteriorating or rather, mean-reverting.

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If you listen to commentary by Ineos on its calls, it has consistently accepted in the last 1-2 years that BEPL has done better than it in ABS business. Also, Ineos margins are strictly not comparable to BEPL as Ineos has repeatedly suffered badly in the Polystyrene segment (which is much more “commodity” than ABS) and polystyrene is not manufactured by BEPL.

Having said that, BEPL stock had baked in too much optimism with crazy valuation being given at peak margins till last year. Hence, it has retraced to normal levels for a business with very little pricing power.

But the growth opportunity in the ABS business as detailed in BEPL annual reports is mostly confirmed by Ineos also in its commentary.

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Earlier, my understanding about the business was that BEPL made customized solutions differentiated for each customer’s end use. If I am not wrong, something like this was mentioned in this thread also long back. However, an accounting head “Purchase of traded goods” entered the financial results last year. Its proportion has increased significantly over time. ‘Traded goods’ implies this is a pure commodity business with not much differentiation happening at the company’s end. In a commodity business, the lowest cost supplier wins. Factors such as ‘there are only two manufacturers of ABS in India’ become less relevant. Globally, most of BEPL’s competitors are large chemical giants, and many of them are increasing / have recently increased capacity. For these companies, ABS forms a small portion of their product portfolio, which means they can easily cut prices to sell their output without hurting themselves, but BEPL will be significantly impacted. Such a business cannot get good valuation.

Then there was the fire incident. It may be a one-off, but it and the flip flop on capacity expansion reflected poorly on quality of management.

I haven’t tracked the company closely for some time, but looked it up recently out of curiosity. I am not sure how the forex loss announced in Q2 due to rupee depreciation is ‘other expenses’. Or maybe it is from an accounting perspective, but surely it should be added to RM cost from a business perspective? (assuming the payment is for purchase of RM / traded goods – I don’t have the details). It seems they don’t even hedge their forex exposure. In the coming quarters, rupee depreciation will surely reflect as higher RM cost and not as Other Expense.

BEPL’s capacity expansion may come on stream one day, but if my understanding of the business is correct then making money will not be easy for this company. There is no moat.

(Disc: No position)

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Any insights on what the management said in these meetings?

Wouldn’t a higher RM cost also mean a higher product realization? Cost pass-through should perhaps net off the impact at the margin front to some extent.

The problem is perhaps on the inventory side. Crude oil prices surged sharply and then fell equally sharply. They could have perhaps been hit now by inventory losses as prices of crude derivatives that Bhansali might be moving with some lag. But that would be a transient issue than a structural one.

The stock is trading at about 11x FY18 EPS. I don’t know future expectations but most likely FY19 EPS would be lower than FY18 given the various issues over 9MFY19. Not sure if there is any issue on the demand front though. Given that capacity expansion would come online eventually and there is no immediate threat of competitors in the domestic market, there should not be a problem in near-term earnings growth from FY19 onwards (perhaps 2 year CAGR would look good). Question would be whether price multiples stay put at say 10-11x over this period so that stock price appreciation mirrors earnings growth.

Data suggest ABS price is in downtrend in international and domestic market since August along with its raw material.Everytime its not related to Crude price. But since first week of December ABS prices has started to hold up again .May be trade relation normalization between US and China . Main factor is due to weak auto demand in china.Indian ABS market has also threat of import from Korea.You can find management answer of this ABS dumping in Ineos concall.Both Bhansali and Ineos projected 15% volume growth for ABS from here on and globally ABS volume growth will be single digit.Request you all to research on ABS price and post here. Most of the polymer news site is paid.Dont have much data to post here.

I have bought Bhansali in recent correction.

Yes, higher RM prices should logically mean higher product realization; see if that is actually happening. The important thing in this business would be margins & operating profits rather than absolute topline. But if the proportion of trading income increases, margins will not remain attractive. It also reduces the visibility of future income since what stops the customer from buying directly from outside if you are not adding any value? So the risks increase and overall P/E multiple comes down. Having said that, I am commenting only on the business model and not on current valuation.

Bhansali reported the Q3. EPS came down

Prabhudas alone cover this stock as per them high cost inventory has eat into profit and sudden drop on ABS and styrene price did the demage. It will continue in q4 also. Sanity will appear from FY 20. ABS demand is intact. BEPL-28-01-2019-PL.pdf (776.8 KB)

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BEPL Q4Fy19 lost due to high value raw material.Company does not provide detail metrics of its performance. Hence report from Prabhudas is the source of below pointer…

  1. No challeng in selling the ABS for BEPL but speciality grade to auto sector is suffering as sector is going through the downturn.New customer is added.BEPLdiverting volume to electrical appliances.
  2. Q4 Fy 19 ebidta/kg was INR 4.1 it was for Q4Fy18 at INR 27.3 in Q3 Fy19 ebidta was INR 10.3/kg.
    3.High cost raw material has been used up.Styrene price has stabilized. EBITDA per Kg to improve from FY20. Prabhudas expect sales to improve at cagr 20% from here on.
  3. All domestic auto companies are client including Maruti expect Bajaj auto.atleast korean and chinese ABS are dominating auto OEMBEPL-14-05-2019-PL.pdf (793.5 KB)
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Correct me if I am wrong… but going through the latest financial report of the company, it seems like the company made 40.77 cr in net profits (Reserves and surplus) and has given out 21.42 cr (current financial assets) as loans… this amounts to about 52% of the net profits given out as loans… Now to whom has this loan been given to and what interest rate… Is this normal, or am I missing something here…

Discl: Invested

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Excellent numbers posted by BEPL. Is it going to be a turnaround story from hereon? :thinking: Big question.

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Are the nos real is what we need to figure ?
When the whole auto induatry is down , how come this company is able to turnaround and produce good results.

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Yes good no considering challenging auto market and overall consumer market.
10% odd ebitda margin company has posted in q1 Fy20 compared to 3% in last quarter, Q4 fy19.
It was the costly imported inventory that was the reason for extremely bad last 2 quarter and crash of ABS price.

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