Bhansali Engg polymers(BEPL) had the historically best Revenue and profits in the third quarter of the year(Q3FY21). While revenue grew 58% Year-on-Year and 33% Quarter-on-Quarter. Profitability margin also jumped to a whopping 33%. I will explain the details in the blog ‘ Bhansali Engineering Polymers Ltd(BEPL)- Q3FY21 Result Analysis’.
Let me start by taking pointers from other brokerages management meet notes regarding the near term future of the company.
Excerpts from Prabhudas Liladhar notes
Bhansali Engineering Polymers is an import substitution story implying it is catering to the domestic demand replacing imports. The only product of BEPL which is ABS(acrylonitrile butadiene styrene) is mainly imported from South Korea to India.
In the recent months, there are some headwinds to these imports.
There has been delay in shipment coming from South Korea as they were selling to China for higher prices. Also, Freight rates have gone up 3-4 times in Japan, China & Korea rendering imports more costly.
To add to the import issues, the other factor helping BEPL case has been customer switching from their Indian competitor which is Ineos Styrolution.
Coming to the demand part, there were some concerns of demand slowdown post festive season but demand has sustained in both consumer durables and auto. All of BEPL’s capacity has been sold out till March 31st 2021. Currently the capacities are operating at peak utilization.
In terms of demand mix, the two largest end consumer of the company’s products are Auto industry & consumer appliance segment. As I have earlier mentioned in my blogs that the auto segment fetches better margin than the appliance, the mix has moved favorably for BEPL from 40:60 pre-covid to 50:50 currently(Auto: Consumer durable)
Many OEMs(Car & Bike manufacturers) are looking for local suppliers of ABS, resulting in significant customer additions in last 3-4 months. BEPL is now supplying to all OEMs(4-Wheelers) other than Hyundai & KIA.
Demand momentum expected to continue for the next 2 quarter.
Since, the current capacity utilization is running full. They can look at expanding the capacity at Abu road and Satnoor as there are surplus land available at both the locations.
Also color & specialty grades is expected to grow faster versus natural grade which will improve margins.
There has been upward price movement trend for ABS and increasing Spread(Difference in End product & raw material prices).
ABS Prices & Spread
BEPL- Q3FY21 Result Analysis
Why such high profit during the quarter?
As you can see in the image above that during Q3FY21, the product prices continuously increased. The company also moved from a product pricing mix of Contract: Spot prices to 25%:75% from the earlier mix of 35%:65% which means that they are selling more on spot prices. Spot prices is basically the current prevailing price of the product in the market whereas Contract prices would be prices determined based on some formula for a period of one month/45 days or a maximum of 3 months.
In the rising pricing price scenario, the higher you sell on spot prices, the better. I guess that’s the reason company switched more to spot pricing.
But going forward the management will revert to 35:65% pricing.
Also, in a rising price environment, the inventory or raw material prices bought earlier will be sold at a higher price, leading to higher profitability.
Will such high profit margin & revenue growth to continue?
The product prices have stabilized at an higher level. Also, the capacity utilization is at the peak level. Only little increase can be expected in terms of the company’s revenue on a quarter on quarter basis.
Coming to the profitability, well, this quarter was an aberration. The jump in profitability from ₹35cr to ₹136cr (Q0Q) is extraordinary which doesn’t happen regularly.
Since prices are stable now, inventory gains wont be much. Now, We can expect good profitability but not as good as Q3FY21.
Management of BEPL, don’t expect/want the prices to move up further as it would be detrimental for the user industries. ABS realizations have reached an all time high.
One may ask, Why would that be detrimental?
With increase in input cost, prices of end products rises. With increase in product prices, the consumption of end product goes down which again impacts the demand.
Valuation: if we consider a profit of 80 cr and EPS of 5 for Q4FY21, the TTM EPS comes to ₹15. At an PE ratio of say 15, the prices comes to ₹225 and an PE ratio of 20 takes it to ₹300.
Risk: With the increase in input cost of raw material, end product manufacturer has already started increasing product prices. For example, recently Maruti Suzuki raised prices by ₹35,000 for some models. To add to that, if there is any interest increase by the RBI, it could derail the growth momentum.
BEPL's New Website
Link to All My blogs on BEPL
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