_CRISIL reserach initiated coverage on Filatex with a valuation grade of â5/5â, indicating that the current market price has a âstrong upsideâ from the current levels._They have used the discounted cash flow method to value Filatex and arrived at a fair value of Rs 64 per share. CMP on Nov 8 is Rs 45.
Filatex India Limited (Filatex) manufactures a range of monofilament and multifilament synthetic yarns. The timely execution of the proposed large-size expansion and volatile raw material prices are the key monitorables for the company. We assign Filatex a fundamental grade ofâ2/5â, indicating that its fundamentals areâmoderateârelative to other listed securities inIndia.
Demand for MMF is expected to increase; PFY will be the main growth driver
CRISIL Research expects demand for man-made fibre (MMF) to grow at 7-8% CAGR over FY10-FY13. Within the MMF segment, the demand for polyester filament yarn (PFY) is expected to grow at a higher CAGR of 9.3% between FY10 and FY13 because of increased price competitiveness of PFY vis–vis cotton yarn.
Capacity expansion and backward integration to boost prospects
Filatex is in the process of setting up a polyester polycondensation plant with a capacity of 216,000 tonnes per annum (TPA). The plant is expected to commence production in the first half of FY12. Consequently, its PFY capacity is expected to increase from ~58,000 TPA in FY10 to ~179,000 TPA by FY12. The backward integration of producing PFY directly from PTA-MEG instead of from externally-sourced polyester chips is expected to reduce operational costs.
Timely execution of the proposed expansion remains the key
The proposed plant is under construction and as per the company, the necessary arrangements for machinery, utilities and funds are in place. However, the size of the expansion is almost three times the companyâs current capacity. An expansion of this magnitude is a first for the companyâs management. Hence, we believe that the execution of the project remains a key challenge for the company.
Filatex to emerge as a mid-size player in the PFY segment
Filatex, with a capacity of ~58,000 TPA as of FY10, constitutes only 3% of the total industry capacity. The PFY industry is dominated by Reliance with a 40% market share. Mid-size players account for ~8% market share each. Post expansion, Filatex will join these second-rung players with a ~7% share in FY12.
Revenues to grow at a CAGR of 57%, EBITDA margin to improve
We expect Filatexâs revenues to grow at a CAGR of 57% from Rs 4.2 bn in FY10 to Rs 15.4 bn in FY13 on account of capacity expansion. We expect EBITDA margin to improve to 10.4% in FY13 from 9.7% in FY10 due to lower operational costs. EPS is expected to increase from Rs 10.0 in FY10 to Rs 30.7 in FY13.
Key monitorables: Project execution, volatile crude oil prices
i) Project execution of the ongoing capacity expansion, which is three times the current size. ii) Volatile crude oil prices as raw materials are derivatives of crude oil. iii) Decline in prices of cotton yarn, PFY substitute, which will lower the demand for polyester yarn.
Valuations - strong upside from current levels
We have used the discounted cash flow method to value Filatex and arrived at a fair value of Rs 64 per share. Consequently, we initiate coverage on Filatex with a valuation grade of â5/5â, indicating that the current market price has a âstrong upsideâ from the current levels
