Bhansali Engineering polymers BEPL

Bhansali Engineering Polymers (BEPL): Q2’FY19 Quarterly Result Analysis

November 1, 20184:50 pm

BEPL came out with its Q2 FY19 result on 19th October’2018. The anticipation was high, given that the company had given below average in result in Q1 FY19 because of the fire incident at their satnoor facility in Q1.

But again the results for Q2 were slightly below expectations. The sales growth was outstanding but the profit lagged. Since Market is considered to be a slave of earnings, the price for the stock was expected to drop. But with the stock already being hammered so much, I didn’t expect the price to fall sharply. My assumption was to be taken for a toss. The stock got brutally hammered further down. From a close of ₹134.6 on 17th Oct, the share price dropped to a low of ₹82.7 on 31st October, a drop of ₹39% or ₹52, that’s quite significant.

Sometimes, the market becomes so irrational, that nothing makes sense, thus opening up opportunities.

Let me analyse the numbers for you.

BEPL: Q2’FY19 Quarterly Result Analysis
Bhansali Engineering polymers BEPL
BEPL: Q2’FY19 Quarterly Result Analysis​

Other than drop in profit margins by 5% YoY (quite significant), there wasn’t anything wrong with the BEPL’s result. Sales grew by 41% YoY & 73.5% QoQ. Does that warrant such a price drop? I don’t think so. 

The company incurred forex loss of 11 cr and that was quite obvious given that rupee depreciated by 6% in a matter of just 20 days. Quite difficult to anticipate such a major drop in such a short span of time.

What is Forex loss/gain: Click here

Almost all of the chemicals, plastics, paint companies, luggage manufacturers import raw material and for most/all of them margins have suffered due to this forex losses.

BEPL Q2’FY19 Quarterly Result Analysis: Margin Contraction
Bhansali Engineering polymers BEPL
Auto Sales data for Q1 & Q2 FY19

Also, One might argue that the company has lost its pricing ability. If you look at just the margins, that would appear so. But then you need to look, how are their end consumers performing. 

Q2 results: Maruti posts first decline in net profit in 17 quarters

If the end customers are facing stress and that too big companies such as Maruti Suzuki, the stress will obviously be passed to the vendors. 

I am sure there might be some more reason for the margin contraction but let’s not write off the company just because of one bad quarter. I have written to the management seeking some insight into the numbers. Will update the blog if I receive the reply.

Sales are expected to pick up in Q3. Although, car sales growth was sluggish for the month of October but the Two wheeler sales showed robust growth.

Hope, November & December brings cheers to the passenger vehicle industry. Also, the rupee showing signs of stabilizing in October and over 10% drop in crude oil is going to benefit BEPL. The GST collection for October’18 can be an added sentiment booster for the widening fiscal deficit, thus controlling rupee drop.

ADDED UPDATES ON BEPL

1. Although the Auto sales have declined, the consumer appliance sales have shown tremendous growth particularly in  the recent E-commerce sale.

Passenger vehicle sales for the month of November is just marginally down by 0.3%. This might assure us that the margin pressure on BEPL to be very little or nothing.

2. South Korea is world’s largest manufacturer of ABS, exported a large amount of  their products to China. The slow down in Chinese auto segment have led to South Korean dumping their extra produce to India. Will that have impact on BEPL? 

These imports are mainly general purpose ABS whereas the speciality grade ABS made by BEPL is mostly customized and contractual in nature.

3. The reason for the import of HRG is that given the immense product demand, BEPL is manufacturing SAN at Satnoor. Earlier only HRG was manufactured at Satnoor and SAN & ACN at Abu road. Since HRG is only 15% of raw material cost, that is being imported from South Korea. This is what the company means by additional activity of trading HRG.

4. With respect to forex losses, most of the companies don’t mention it separately and included in “Other expenses” according to the new accounting standard “Ind AS”. You can observe other expenses rising in the p&l of other companies. So, its not that forex loss happened only in BEPL. It has been a common problem for all companies since last 3 quarters.

ABS Prices{Correct One}

Given that ABS is a crude derivative, the prices are derived internationally. The auto slowdown in China drove the prices of ABS southwards and it’s a significant drop.

Variables impacting the result to Bhansali Engineering Polymers
Bhansali Engineering polymers BEPL
Variables impacting the result of Bhansali Engineering Polymers​

I was trying to figure out, if there is any way, I can, to some extent predict rough estimate of the result of BEPL. So, I created the flow chart on top. Given that BEPL is a single product company, we have so many variables. Think what will be the number of variables for other companies. Add to it the variables, there are numerous factors outside the company’s operations such as trade wars, geopolitical tensions etc

Trying to predict prices is a futile exercise. If you have faith in the management and have some understanding of the business, you need to be convinced & think that the price drop of the company as “This shall too pass”.

Also, there has been so much negative being said about the company and each & every point made has been proved wrong. Let me just walk you through them.

1. Some PMS guy on twitter, claimed that the promoters were taking debt by pledging their own shares & then showing the market that the promoters were buying back using the same money (Couldn’t find the tweet): This also turned out as usual as another hoax by them. The company in their  intimation on 31st March 2018 notified that they have cleared all their debt and freed the pledged shares. There wasn’t any base to their claims.

Bhansali Engineering polymers BEPL
Explanation regarding the Write off of Rs 8.56 cr

2. In Q4 FY18, BEPL wrote off ₹8.55cr of receivables. There was lot of hue & cry as to how can this happen when the company has all tier 1 client. How can any company & that too a smaller one, can have all tier 1 client & continue to grow? I had explained this in my earlier blog as well. 

In the annual report 2018, the culprit came out as Rotomac.

3. In Q1 FY19, there was an amount of ₹75 crore as Stock adjustment. Similar kind of noise was spread around it. I have wrote on this earlier.  The company has notified exchanges on 1st June’18 that they will continue to manufacture SAN which constitute 75% of ABS at Abu road plant while the Satnoor plant goes through maintenance. FYI, the company has 2 plants one at Satnoor (Manufactures HRG) & Abu Road(Manufactures both SAN & ABS). Post this it’s common sense.

4. When on 31st Oct’18, the share price fell by 10%, there were some mavericks making point that since there is something severely wrong with the company, that’s why management has called up the meeting. Now, that needs some hardcore insider information (Pun intended). 

Why in the world the company need to explain to Institutional investors who are not a shareholder yet?

How in the world they will all manage to come down to company’s office on the same day when the company had called them?

All these meetings are already decided in advance.

The point that I am trying to make in the above paragraph is that nobody knows anything (including me). But everyone act as an expert (pardon me). If you want to make money in the market it can be done only if you use your own brain.

MORE THAN ANYTHING “INVESTING IN STOCK MARKET REQUIRE NERVES OF STEEL”

Checklist to test my conviction on BEPL

1. Is there something wrong with the operations of the company? My scuttlebutt doesn’t say so.

2. Is the forex loss something that big: When I read and listen to conference call of other companies, everyone is on the same boat. So, if there is forex loss, then there will be forex gain as well. 

3. Crude oil affecting the margins have been significantly down. Another positive point for the company.

4. How are the end consumers performing: Other than cars, other segments are doing fine. So, need to track the car sales data.

5. While sales of Ineos Styrolution declined (the only competitor, the sales of BEPL increased implying BEPL taking away Ineos Styrolution’s market share.

6. Even after such poor result of Ineos Styrolution, the share price didn’t fall even fraction of the fall of BEPL, implying a clear case of stock manipulation. Now, if something is brought down below its fair value, it needs to go up. 

author-avatar

Shekhar Yadav

I am a full time stock market investor. The blog is an extension of my research, thoughts & opinion. Please don't consider anything on this website to be an investment advise.

28 Comments

  • Vedant says:

    Looking at market past couple of weeks BEPL price has come down more than 12%. I suspect it is a false move by the market with no volume to support the trend as well. The past quarter was affected due to foreign currency exposure, but looking at USD/INR and oil prices market should have resulted in a uptrend for the stock. Instead stock is falling. Or Has there been any news/event which has not come into main stream and not many investors are aware of which is driving the price lower? Are we missing anything? Let us know your views on the same.

    Thank You,
    Vedant

    • mm admin says:

      I am not aware of any additional news. Regarding, price movement we dont have any clue when it will move. Its just that the market was expecting very good results but the result have been below par, thats y the stock have been beaten so much. Hopefully Q3 will be better and the price movement is more likely to start post result.

      • Ved says:

        Seems like operator are having upper hand. Also studying their candlestick pattern it looks like some manipulation with low volumes. It’s good that iheld myself from buying as price is becoming more attractive. Shall wait before accumulating the stock as it has fallen 25% since I planned investing. Now I can buy more with same amount though if more pulldown is there.

        • mm admin says:

          Difficult to predict the bottom. But you can buy little on every fall.

          • Ved says:

            Did today @61.. Expecting a better result than previous Quarter, lower crude oil price, stabilized rupee and lower styrene prices should help in providing better results.

            It’s time BEPL and INEOS apply for anti dumping duty for improved market play in India. That will surely help the local players IMHO…

            Also can you review a bank, anyone. Would like to understand how the banking stocks are analyzed. It would be very helpful for new investors like me.

          • mm admin says:

            Will work on NBFC space later this month.

  • Jeet says:

    Thanks for the update Shekhar. Great job as usual. Won’t be selling a single share until the Greenfield expansion is done in 2021-22.

  • Aj says:

    Excellent work sir ..makes it a lot easy to stay invested for long yrs ..also plzz guide me thru dat i think ths business has a long runway and 10 yrs hence a lot of money can be made in this counter

  • murugu selvan k says:

    Thanks for the write up.
    my 2 cents:
    Forex loss in q2 is not an isolated case. In last 11 years, company has forex loss in 8 years and gain in 3 years. When rupee depreciates bepl losses; when there is sudden depreciation like in Q2, bepl losses substantial money
    40% increase in topline can not be given much importance as it varies in tune with abs prices worldwide, which in turn somewhat correlated to crude oil.
    The sales growth in kg is mere 1% in Q2 yoy. I think that the fire at satnoor in Q1 was affecting the production in Q2 also; thats why the import of HRG, i guess.
    Further, the capacity expansion from 100 to 137KTPA results in temporary shutdowns, i read somerwhere, which in turn may affect the production this year as the expansion program will go on till March’19.
    So quiet a few headwinds near term, slight appreciation in rupee is positive. Lets see how it goes.

    • mm admin says:

      40% increase in topline can not be given much importance as it varies in tune with abs prices worldwide, which in turn somewhat correlated to crude oil.” In that case why the sales of Ineos declined?”
      I think that the fire at satnoor in Q1 was affecting the production in Q2 also; thats why the import of HRG, i guess.” As far as I know the facility is constructed to manufacture SAN.”
      Further, the capacity expansion from 100 to 137KTPA results in temporary shutdowns, i read somerwhere, which in turn may affect the production this year as the expansion program will go on till March’19.“Yes it might be possible. Not sure about it.”
      Last quarter the impact was due to high crude oil multiplied by falling rupee. Also, subdued client demand which is the main dampner.

      Yes there are some headwinds. I think most important is the NBFC liquidity crisis.

      • murugu selvan k says:

        Hi
        Thanks for your reply.
        I am quoting PL report on Q2 results below.
        “Net Revenues grew 41.2% YoY and 73.5% QoQ to Rs 3,500m. The company
        reported its highest ever quarterly volumes of 17,490 tons (nearly doubled
        sequentially but flat YoY – up 1.5%). Average realisation for the quarter was
        10.7% lower sequentially to Rs 200 per kg”

        In Q2, you would have noticed a huge jump in “trading goods”. I think that bepl is not able to supply enough ABS to its customers due to fall in HRG production and resorted to import to keep supplies going.
        They had produced only 17.5KT despite the capacity being 25KT (100KTPA) in Q2.
        All in all, in Q2 all headwinds hit BEPL simultaneously and henceforth, we will see improvement in bottom line in the coming days. I expect full potential in FY19-20 only though. Lets see how it plays out
        Cheers

      • murugu selvan k says:

        BTW, I sent a request to meet the management of BEPL , they replied in negative. However, i sent some queries and they replied.

        With reference to your trail mail, we wish to state that

        1. Is the satnoor facility working at required/ optimal capacity afte r the fire?

        Yes, Satnoor Unit is operating in same capacity as it was operating as pre fire accident.

        2. Does BEPL continue to import HRG in Q3 also ? If so, how long do you think the import of HRG will continue?

        Yes, Company has imported HRG in the t hird quarter.

        3. Does the capacity expansion from 100 to 137KTPA require, any / frequent shut down of the existing capacities?

        It does not require any / frequent shut down of the existing capacities.

      • murugu selvan k says:

        From annual report 2006-07
        On implementation of the expansion program to establish 200 KTPA ABS plant in the 3rd quarter of
        2009 -10, the Company would be in a position to achieve cost and quality leadership in the domestic market and become
        internationally competitive player.
        When the management talks about expanding capacity to 200KTPA, you got take it with a king sized spoon of salt 🙂

        • mm Shekhar says:

          Nice to know that. Things keep changing so fast, management has no other option than keep revisiting their plans. Even the current port based plan seems like a distant future.
          And the recent couple of years of growth has been more to do with the Nippon tie up where they are focusing more towards Auto ABS where the demand as well as margins are higher, rather than capacity.

          • murugu selvan k says:

            Yes, Nippon JV is the most important thing that has happened for BEPL. Post JV, the debtor days have come down drastically and OPM has also gone up considerably.
            Everything looks upward for BEPL in the coming years; my only concern is new competition that may come up. Eventhough KINGFA India has not yet talked about ABS, as KINGFA china produces ABS, its only matter of time before they do, in my view.
            Lets see.

  • Jeet says:

    Any idea what was presented during the analyst meet on 10th December?

  • Ashish says:

    Mgmt is clear that they are not going to take debt and all the funds required for expansion will be from internal accruals. With below average results, Fy19 will not be superlative one as it was previously. Given this expansion plan will mostly be delayed. But any kind of h convincing communication on that can make way for the stock price. Also so many big institutions interesting to know business definitely shows that it has some spark in it. Hope it does well in future. Invested

    • mm admin says:

      Agreed, unless the results exceeds expectations, the returns are going to be subdued. In almost all expansion for all companies, there will be some delay. But if there is negative sentiments prevailing, any bad news adds to the case.
      Lets hope for some positive news.

  • Rajan says:

    Hi Shekhar,

    Im glad that I found your blog. I also started following you on Twitter. Any update on BEPL after Q4 results ? Would be nice to know your thoughts.

    best
    Rajan

    • mm Shekhar says:

      Hi Rajan,
      Thanks for following me. As of now, the end sector which BEPL cater to i.e. Autos is faced with a number of problems. The company has been able to show increased revenue via trading styrene, not via its core business. It seems to me that it will take some time for the turnaround to happen.

Leave a Reply

Your email address will not be published. Required fields are marked *