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.
Update 08.05.2020: I have written 6 blogs on Bhansali Engineering Polymers Ltd.
APRIL 22, 2018—> Bhansali Engg(BEPL): Q4’2018 Result Analysis
MAY 7, 2018—> What made me invest in Bhansali Engg Polymers?
NOVEMBER 1, 2018—> Bhansali Engineering Polymers (BEPL): Q2’FY19 Quarterly Result Analysis
JANUARY 24, 2019—>Learnings from my investment in Bhansali Engg Polymers(BEPL)!
FEBRUARY 19, 2019—> Bhansali Engg Polymers(BEPL) & Ineos Styrolution- Q3FY19 Result analysis
AUGUST 8, 2019: —>BEPL Vs Ineos Styrolution: Q1FY20 Analysis
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
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.
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.
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
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.
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.