Current PAN & OX prices attached below. Spreads seem to be very high because PAN prices are increasing whereas RM(OX) prices are flat
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Thanks for you data.
This stock can do very well
Being duopoly in India along with Thirumalai
can you pls post the latest chart of PAN & OX spread?
Any one tracking IG Petrochem. Today there was a 20% jump in prices.
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In August 2021, the government of India imposed anti-dumping duty in August on the PAN.
Rating of company upgraded by Ind-Ra in Oct 21
Current price is 685. Looks attractive.
Note : Invested at 635
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Anyone tracking this company? Looks like margins have gone down after the company ventured into new products.
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IGPL has good CAGR but it was because of fall in oil price which led to increase in margin ,Its largest and lowest cost producer of PAN in India & and only MAN manufacturer in India .
Here are pictures of slides in the ppt
the company also makes full use of byproducts made while manufacturing PAN by making benzoic acid & MAN of it
the company is also planning to CAPEX
the only thing left keeping company behind is margins
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Things seem to be getting interesting here - one of the lowest cost producers (IG Petro) in a cyclical industry has now posted a loss at the EBITDA level. A further reduction in spreads would lead to shut-down of capacities in Taiwan, Korea & China.
Gross/EBITDA margins are at their lowest in recent history - main reason being…
Phthalic Anhydride-Orthoxylene (PAN-OX) spreads have almost come down to the company’s conversion cost of ~$85/ton. Further, Maleic Anhydride prices (where company earns an EBITDA margin of ~95%) are 10%-15% lower than PAN prices (compared to 10%-15% higher historically).
While domestic demand for PAN continues to grow (accounts for ~90% of the company’s revenue), geopolitical issues have temporarily impacted the key end-user industries (Pigments, Paints, Plasticizer, Specialty Chemicals). Rising Orthoxylene prices (key raw material - a derivative of crude oil), excess supply of Maleic Anhydride (MAN) are further reasons.
Virtual duopoly in the domestic market (IG Petro & Thirumalai), while KLJ has now backward integrated (used to import earlier). IG Petro is the second largest PAN manufacturer globally. This is predominantly a regional business and setting up a new plant takes 3-4 years (availability of raw material is a constraint).
Company has also forward integrated into Diethyl Phthalate (DEP) where EBITDA margins are relatively stable (in the range of 10%-15%).
The share of Non-PAN business in the company’s revenue has been steadily increasing.
Meanwhile the company’s new plant has just commenced production and is expected to add ~Rs. 500 crores to the topline. Another Rs. 200 crore capacity expansion in DEP is being planned, with potential for Rs.800 crores in revenue. Demand for DEP is growing at 10%-15% annually.
Both IG Petro and Thirumalai have increased capacity. They expect the capacities to be absorbed given the strong domestic demand and growing use of PAN. China has built up 2 MT of MAN capacity for use in downstream capacities which are coming up (expected - Jan 2025). In the interim, this excess supply is leading to depressed prices. Overall things should only get better from here?
While the pain may last for a while, can the company do an EBITDA of ~Rs. 350 crores once the situation normalizes? If we assume this, company’s Profit After Tax should be around Rs. 200 crores (Other Income offsetting interest expense and depreciation of around Rs. 70 crores).
Brief Context on Past Cycles
The tricky part seems to be - how does all this translate in terms of valuations/potential entry point? If this doesn’t work out, what could be the potential downside? And if it does, is the upside large enough to compensate for the waiting period and all the volatility?
A few open-ended questions in this context:
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Price/Sales could be one way to look at it. However, with volatile sales, both due to fluctuating PAN prices as well as increase in volume from new plants, this on it’s own doesn’t provide the full picture?
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Given that IG Petro is one of the lowest cost producers of this commodity with a net debt free balance sheet, a reasonable P/E or EV/EBITDA on normalized earnings could be assigned. What could be a reasonable multiple in such a case?
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Decrease in institutional holding (FII+DII) or insider buying could be another important indicator?
Would love to get any thoughts.
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I do not understand the cyclical part of it. Nor will I comment on the valuation bit. However, what I do know is that the company is very well managed! I’ve been supplying cables to them for the last decade or so.
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Thanks to some valuable feedback, learnt that there is a significant second round of capacity additions taking place - both KLJ and Thirumalai are adding about 1 lakh MT each over and above the current domestic capacity of ~5 lakh MT. This ICRA report mentions that it will take a few years for domestic demand (~5 lakh MT and growing at ~8%) to be able to absorb the new capacity.
For years these companies didn’t expand capacity when there was a shortage, so wonder what is prompting the current expansion spree. Will keep this on radar but for now there seem to be better opportunities if the market corrects.
So just trying summarize the the current developments.
IG happens to the largest player in the industry (275l Mt pa) close to 50% of total domestic capacity. One of their key customers has actually backward integrated into PAN production for DEP. Meanwhile imports have sharply fallen by more than 50%. It is simply not possible to compete with cost of production of IG and all (economies of scale and cheapest producer). A substantial quantum of PAN is consumed by the paints sector which should sustain, but there is nothing which can change exponentially either on demand/supply side (as far as I understand) however, Indian players are benefitted by imposition of ADDs, some of which shall expire by CY26 I think, unless this factor opens up something.
Asset Turns are around 1-1.2x overall, erratic PAT/OPM keep the RoE/RoCE readings very volatile as well as PAN-Ox spread is the key to track which is directly related to crude and global demand function. So factors which are within control of IG happens to be lesser.
Maybe why in FY18 when RoCE was 35%+ P/BV was 3.5, but currently oscillating between 1-1.25x. Uncertainty maybe is the reason.
Probably why they’re now diversifying into downstream plasticizers (PVC led consumption) which is more stable margins and much higher Asset turns of 5x (mgmt guidance). Full scale productions to happen by FY26 end and should be interesting.
LT Borrowings have gone up, interest cost jumped up as well, which shall add another volatile reading to track: Int coverage ratio.
All said, may not be very comfortable for many right now, but key to watch how the industry dynamics change post the ADDs expire, and if the plasticizers make the business more stable. Both factors shall play out around the same time between CY26-27.
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