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
Updated as on 01.10.2019–(Updated again on 06.05.2020)
I am sure if you have been reading my blogs you must be aware of my conviction regarding Bhansali Engg polymers. And if you are following the stock you must be seen its downfall since May 2018.
Having had a stellar run, BEPL have been faced by one problem after the other in the past 1 year. First, it was fire, followed by currency depreciation and crude oil appreciation. And the latest one is the subdued customer demand. It seems it will take sometime for the situation to improve.
Wise men have rightly said you learn the most in difficult times.
I will share my Learnings from my investment in BEPL. Only if you learn from from actions, you are going to get better at things.
I am not saying the company is bad. It’s just facing a temporary problem(LOOKS MORE LONG TERM NOW) and to be honest I have not found any similar terrific company for a long time despite looking for stocks on a daily basis.
Before going further into the learnings, I would like to share below my reasons for the bullishness. Have a look at the numbers for yourself.
BEPL numbers for last 5 years
Learnings from my investment in BEPL
1. Expectations Mismatch
BEPL quarterly result analysis since Dec 2015
BEPL which has been struggling for years had its fortune turned around by from 2015 onwards. Since then, the company has been consistently improving its performance which resulted in the share price multiplying several times. The performance improvement was coupled with growth in Sales.
Now, consistent performance has a flaw as well. The market expects the company to keep performing & improving the margins or atleast maintain the recent margins achieved. If a few quarters don’t give the expected results, the market punishes the stock the same way it rewarded it.
In Dec 2017, the company operated at an EBITDA of almost 17% which is about 4 times of its margin of 4.7% in Dec’15. Once, the company improves things to a certain stage, the further improvement in margins becomes much more difficult. That’s the test of extraordinary companies, if they are able to improve the margins beyond the so-called high levels, the company moves from good to excellent ones. I believe the BEPL will be able to do so, let’s see when that time comes.(THEY COULD NOT)
Learning: One should look at companies where the expectations of performance are low or nil and where the company has very recently improved its operations.
Learnings from my investment in BEPL
2. End Customer Performance
The customer for BEPL are Car, Bike, Consumer appliances companies. According to the company’s annual report, the higher margin products are the ones sold to Automobile companies which contribute to about 50% of sales. Passenger vehicle sales have been doing well last 2-3 years but since July 2018, the sales growth starred dropping from the highs of 20-30% growth rate to negative territory.
When things are going good, nobody cares to check all these but tough times are excellent teachers.
Learnings: One needs to keep a tab of how the end consumers of the company are performing. Only if they are performing well, the demand for the products will exceed supply, thus giving the pricing power in the hands of suppliers.
Good performance by auto companies as well as consumer durable lead to increase in revenue of BEPL. Auto products are customized and are approved after a lot of scrutiny.
08.05.20: THE PRODUCTS USED BY THE END CUSTOMERS ARE MORE OF A DISCRETIONARY TYPES SUCH AS CAR, ELECTRICAL APPLIANCES. SINCE, 2018, THE INDIAN GDP GROWTH RATE HAD STARTED TO SLOW DOWN. SLOWING GROWTH RATE HAS DIRECT IMPACT ON DISCRETIONARY SPENDING.
Learnings from my investment in BEPL
3. Raw Material Issues
Crude oil price movement
Bhansali Engg Polymers as the name suggests(polymer) is a petrochemical company. Hence, about 85% of raw material is derived from crude oil. So, the fluctuations in crude oil prices are bound to have some impact on the margins even if petrochemical businesses work on a pass-through mechanism.
Learning: In order to be able to predict the near term financial performance of the company, it is imperative to track the raw material prices of any company.
Crude oil hás very minimal impact on the raw material cost of the company.
Learnings from my investment in BEPL
4. High Cost Inventory
At present, the crude oil price is hovering around $60 per barrel which is much lower than the earlier $80+ barrel a couple of months back.
The biggest problem is the product price falling by around 25% from ₹ 165 per kg to ₹125 per kg.
The change in the prices of any company’s product is much quicker compared to their ability to pass the change in raw materials cost. So the company will have to sell the higher cost inventory at a lower price realization. That leads to margin shrinkage.
The steel industry in India is suffering from the same problem where the companies such as JSW is holding high cost inventory which they are selling at the new low prices.
Learnings from my investment in BEPL
5. Forex Losses
Another data point to be tracked is the Exchange rate. The exchange rate fluctuations can cause forex loss or forex gain depending on the kind of movement. Since 85% of raw materials for the company are crude derivative and hence imported. Any sudden currency fluctuation will have some impact on the company.
When the purchase is made by any company, not the entire payment is made at the same time. It may be paid in tranches or after a certain based on the purchase agreement. But the amount mentioned in the purchase agreement will be based on the exchange rate of that particular date on which Trade payable was decided. Now suppose the home currency i.e. INR gets depreciated, then the purchaser will end up paying more than the amount mentioned in the purchase agreement. That’s called Forex loss. Similar is forex gain.
Because of the current fluctuations, some forex loss or gain happen every quarter. Most of the companies don’t mention it separately but as a part of other expenses. It is upto the management if they want to show it explicitly.
BEPL in the Q4 FY18 had a forex loss of around ₹6 cr followed by ₹3 cr in Q1FY19 and ₹11cr in Q2FY19.
Currency movement
Learnings from my investment in BEPL
6. Product Prices
The prices of company’s product are difficult to get hands on. You may occasionally find it by just searching on google.
ABS is which the only product for BEPL saw the prices dropping by 25% due to weak car sales in China(Primary reason) and the drop in crude oil prices. And since ABS is a petrochemical product, it’s prices are determined globally with minor fluctuations locally.
This is also equally(MOST) important aspect for BEPL. Since when contracts are made, pricing is pre-decided for 50% of products supply and the rest 50% is usually on a formula derived on the Spot or Current price. Now since the Spot prices have dropped by nearly 25% but the raw material price was high in the past one quarter, which has led to margin shrinkage.
Learning: Keep a track of product prices. Scuttlebutt is helpful in this case.
08.05.20: THE PRODUCT OF THE COMPANY ARE COMMODITY PRODUCTS. BEPL HAS NO CONTROL OVER THE PRICING OF THE PRODUCT.
ABS price movement
Learnings from my investment in BEPL
The margins for the BEPL are decided on the basis of spread between raw material prices(styrene monomer) and end product prices(ABS). Both of them are decided on the basis of demand-supply.
Key factors determining the business performance of BEPL & INEOS Styrolution
The main factors that impacts the result of BEPL or Ineos Styrolution are :
Prices of ABS(End product): The prices of ABS or SM is determined by globally demand-supply scenario(mainly China).
Prices of Styrene Monomer(SM)(Raw material) and prices of ABS
Rupee Depreciation: Since the raw material is imported. Depreciation causes forex loss where rupee appreciation is beneficial for them
Effectively the spread between ABS & SM is the key parameter to look for the margin.
End consumer demand such as Auto & consumer durable impacts the topline.
Learning: Stock market investment becomes so difficult for the short term due to so many variables involved. But over the long term, things pan out fine(08.05.20 NOT NECESSARILY)
BEPL is a commodity business whose key performance i.e. revenue amount is dictated by international prices based on demand-supply. Only once the prices improve things will get better but do not know when that will happen.