BEPL Vs Ineos Styrolution: Q1FY20 Analysis

BEPL Vs Ineos Styrolution: Q1FY20 Analysis

August 8, 20192:19 am

The two ABS(Acrylonitrile Butadiene Styrene) plastic company in India ‘Bhansali Engineering Polymers Ltd(BEPL)’ & ‘Ineos Styrolution ltd’,  were faced with a number of headwinds for the last 2 quarter has now seeing green shoots emerge in terms of margins improvement. I will discuss them in the blog ‘BEPL Vs Ineos Styrolution: Q1FY20 Analysis’.

Let me first explain what was the problem faced by these 2 companies:

BEPL Vs Ineos Styrolution: Q1FY20 Analysis

Factors impacting the performance of these 2 companies:

1. High-cost inventory:  The last 2 quarterly results of FY19 was tough for these companies. With the sudden drop in ABS prices(the end product of BEPL & Ineos Styrolution), they were left holding inventory manufactured at high-cost raw material(Styrene monomer) prices. This lead to the company selling the high-cost inventory at the prevailing low prices of ABS. One of the reasons for higher inventory was their preparedness for expected higher demand for the festive season.

You can read more about how the pricing of the products of Bhansali Engg polymers is decided here.

2. Consumer demand: The auto demand is under severe stress. We already have seen production cut by auto companies. Now, if we look at the supply side, there are 2 companies in India which are providing ABS,  Bhansali Engg polymers & Ineos Styrolution. They provide the required ABS to auto as well as consumer durable companies. These 2 companies even with subdued demand are not able to fulfill all the requirements, hence the remaining requirement is imported, mostly from South Korea. The management of BEPL has always maintained that they don’t face any demand crunch. The only problem lies with maintaining the margins which are dependent on ABS & Styrene monomer(SM) prices.

Now, the new vehicles which will be launched by April 2020 with BSVI norm will be priced higher by 15-20%. It is likely that there will be a pre-buying rush for BSIV vehicles before that. Also,  the interest rate cut will be transferred sooner or later by the banks to consumers. 

3. Product pricing: The ABS price is still at lower levels but with the low prices of Styrene monomer, the raw material for ABS, the margins have normalized.

4. Forex risk: Since these 2 company imports its raw materials, they are exposed to forex risk. If rupee appreciates, it will be beneficial for them and vice-versa. 

In the current situation, with the exodus of foreign investors in India, we already have witnessed some amount of currency depreciation. If this selling continues, the currency is likely to see some more weakening.

5. Crude oil prices: Crude oil has marginal to no impact on the performance of the company. With the global economic slowdown, I don’t expect it to rise much more from the current range of $60-65/barrel.

The main factors that impacts the result of BEPL or Ineos Styrolution are :

  1. Prices of ABS(End product): The prices of ABS or SM is determined by globally demand-supply scenario(mainly China).
  2. Prices of Styrene Monomer(SM)(Raw material)
  3. Rupee Depreciation: Since the raw material is imported. Depreciation causes forex loss where rupee appreciation is beneficial for them
  4. Effectively the spread between ABS & SM is the key parameter to look for the margin.
BEPL performance over the past 2 years
BEPL Vs Ineos Styrolution: Q1FY20 Analysis
Fig 1. BEPL financial performance over last 2 years
BEPL Vs Ineos Styrolution: Q1FY20 Analysis
BEPL Q1FY20 financial analysis
Fig 2.- IBEPL Q1FY20 Analysis

Bhansali Engg polymers had 3 rough quarters which started with a fire at the company’s Satnoor plant on April 30th, 2018. Because of which the plant had to be kept shut for a month. The problem got ugly with the sudden drop in ABS prices of about 20-25% while the company was holding high-cost inventory. In December and March quarter, the company cleared that high-cost inventory and are now back to normal. 

To add, BEPL has expanded its ABS production capacity from 100KTPA to 137KTPA as guided by March-end 2019. I would believe that would also have some impact on the improved margin. BEPL Vs Ineos Styrolution: Q1FY20 Analysis

Also, the company in its recent communication has said that they will be increasing authorized share capital from ₹20cr to ₹40cr. This is just an enabling resolution. As the management has mentioned repeatedly that they will try to keep the debt level at zero and will raise fresh capital for expansion via issuing equity to investors. So, once the company’s valuation increases, they might use this authorized capital to convert into paid-up capital & raising the required capital.

BEPL Vs Ineos Styrolution: Q1FY20 Analysis ​

Ineos Styrolution Q1FY20 financial analysis​

BEPL Vs Ineos Styrolution: Q1FY20 Analysis
Fig 3.- Ineos Styrolution Ltd- Q1FY20 Analysis

While ABS is the only product for BEPL, Ineos Styrolution is into ABS(70%) as well as Polystyrene (PS)(30%). For ABS, the SM contributes about 65% of total cost whereas, for Polystrene, 95% is SM.

For the current quarter, the spread was better in PS. ABS is mainly used in Auto and Consumer durable industry, PS finds usage in Consumer durable and miscellaneous items such as bangles, packaging, etc. 

Ineos Styrolution management in their concall has mentioned that they expect the spread in ABS & PS to similar for the next quarter.

BEPL Vs Ineos Styrolution: Q1FY20 Analysis ​​

From the time BEPL has started its trading activity, its Gross margin has started declining and for the last 2 quarters i.e. Q4FY19 and Q1FY20, its Gross margin has lagged that of  Ineos Styrolution. While the gap was too high in Q4FY19 at 5.7%, this quarter the gap has reduced to just 1.2% in Q1FY20. But still, as usual, the Ebitda & Profit margins of that of BEPL outsmarts that of Ineos Styrolution even in these 2 quarters. This implies a very efficient utilization of resources at BEPL.

When you look at the numbers, the gross margins are more or less similar for this quarter for both the companies. The key difference lies in Other expenses(Operating & Manufacturing Expenses) where BEPL spent ₹24.4 cr compared to ₹56.1cr for Ineos Styrolution in Q1FY20. In order to make sense why is such a wide difference, I looked at Other expenses for the 2 companies for FY18, since Annual report of BEPL for FY19 is not available yet. You can look at ‘Fig 4.’ to understand where is the difference.

On top of that, the asset turnover ratio for BEPL is 2-3 times better than Ineos Styrolution. That shows better asset utilization by them.

Given that the size of Ineos Styrolution is now only a bit higher than BEPL, the more than double Power cost is quite puzzling. So, I went through the previous con calls of Ineos Styrolution. 

One possible reason for the high power and cost might be the age of the equipment. Most of the equipment/machinery of Ineos styrolution is more than 30 years old. And it could be it is not well maintained. While that of Satnoor for BEPL is of similar age but Abu road ones are pretty recent.

BEPL Vs Ineos Styrolution: Q1FY20 Analysis
Fig 4. Other expenses for the 2 companies (In Crores)

Looking at ‘Fig 4.’, my understanding is that BEPL management pays attention to each small aspect of the business for the best optimization of resources. For Ineos Styrolution, the Indian entity has to share a large amount of fee (₹37.76 cr to its parent) for FY18, that is a big drain on the financials. Even for the other items, the costs associated are quite higher than BEPL.

Since, both these companies witnessed a turnaround in the performance, while BEPL increased its Profit margin from 0.8% to 7% QoQ, Ineos Styrolution went from a loss of ₹14cr to a profit of about 9cr.

As of now, it seems like the worst is over for these 2 companies but we need to be always cautious on the factors that impact the performances and keep monitoring them.

Historical Product Prices- BEPL(Bhansali Engg Polymers Ltd)
Bhansali Engg Polymers(BEPL) & Ineos Styrolution- Q3FY19 Result analysis
Bhansali Engg Polymers(BEPL) & Ineos Styrolution- Q3FY19 Result analysis
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.

11 Comments

  • Jeet says:

    Well written, excellent analysis! INEOS is also in other segments right? Could the higher Power & Fuel cost be due to that?

  • Tushar Pandya says:

    Hi Shekhar,
    Excellent analysis, I must say. Nicely written which explains and covers almost everything about the two companies’ results perfectly.

    However, I have a doubt regarding M/s BEPL:
    While going through the annual report (2018-19) of the company, it is observed that on Page no. 88, in the Balance Sheet (standalone), under Current Assets > (b) Financial Assets > (iv) Loans has been shown as Rs.2146.04 lakh (increased from 3.12 lakh last year). However, in note 6(ii), I could not find the details of the entity whom the said loans are given. Further the purpose of the loans given is also not clear. The amount of the said loan i.e. 2146.04 lakh is approximately 46% of profit from operation. Further, as per the results released by the company for Quarter ending September, 2019, the amount of the said loans have increased to 4751.17 lakh.

    Could you find out the details of the said loans?

    Thanks

    Tushar Pandya

    • mm Shekhar says:

      Hi Tushar,

      You have rightly pointed this out. I could not find anything in related party transaction as well. Let me try to find it out.

      • Tushar says:

        Hi Shekhar,
        Thanks for replying promptly. I have shot an email to the company, would share their reply with you.
        However, I feel the loan might be balance with statutory/ govt authorities .

        In past (check notes in AR-15-16 page no 101 and AR 14-15 page no 70) such entries are there in their balance sheet where balance with statutory/govt authorities is shown as loans. Might be due to some statutory requirements due to expansion plans. Still needs to be verified and hence email sent.

        Please let me know, if meanwhile you get to know any such detail.

        Thanks

  • Sneha says:

    Hi Shekhar,

    Excellent analysis. But it seems that the worst for BEPL is not YET over. Especially with the looming shadow credit crisis for SMEs.

    Do you think the stock, which has halved from May 2019, will recover?

    • mm Shekhar says:

      The end product ABS prices have been falling. That depends on demand from China, which is also declining every month. On the other hand, the Indian auto industry is cutting production every month. For things to fall in place, it might take much longer.

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