Manali Petrochemicals Ltd. – A safe midterm stock idea

A look at growth

Manali Petrochemicals Ltd. has posted an excellent set of numbers for FY 2012 and looks undervalued based on the improving financial numbers & growth ahead:

Particulars Mar 12 Qtr Mar 11 Qtr % Variation FY 2012 FY 2011 % Variation
Sales 161.87 127.80 26.70% 573.03 451.90 26.80%
PBIDT 24.29 13.30 82.60% 66.69 40.76 63.60%
Tax 4.60 2.67 72.28% 15.21 9.03 68.44%
PAT 17.54 8.48 106.80% 43.68 25.28 72.80%
EPS 1.02 0.49 2.54 1.47

*All Financial figures are in crore rupees (except EPS).

Manali Petrochemicals is a leading producer of Propylene Oxide (PO), Propylene Glycols (PG) and Polyols in India. These products find application in industries such as Pharmaceuticals, Polyurethane, Resins etc. Below are some extracts on the growth prospects from the last annual report of the company:

The polyurethane market has improved considerably in India and is growing in excess of 20%.

The automobile industry is growing phenomenally and India is becoming an export hub. Resulting from the expansion plans of auto companies and other PU industries, the 2nd tier market is expected to double within the next 5 years, and hence the outlook is good for the 3rd tier polyol & isocyanate manufacturers.

Considering the growing demand, the company has more than doubled it’s installed capacity over last 2 years. The capacity has been expanded to 36,000 MT of PO, 20,000 MT of PG and 50,000 MT of Polyols vs 24,000, 13,250 & 14,000 MT respectively. To scale up the capacity utilization the company needs good quantities of PO and has recently tied up to set up storage and handling facility at Ennore Port, Chennai for bulk import of PO. The company is expected to improve capacity utilization at minimal incremental cost and hence the margins may even improve.

The stock is listed both on BSE (500268) & NSE (MANALIPETC) and is quite liquid. Valuations look attractive at CMP of Rs.11.50 :

  • The stock is trading at a PE of just 4.50.
  • The company is debt free and is expected to continue its growth rate of 15-20%.
  • The company has been regularly paying dividends. For FY 12, the company has declared a dividend of 12% on face value of Rs.5 i.e. Rs 0.60/share. The dividend yield works out to be 5%+ at CMP.
  • The stock is trading at 1.2 times its book value.
  • The company has continuously improved on its financial ratios. The ROCE has improved to 25% for 3 years now.

Given the improving fundamentals and low valuations, it is a safe stock idea at these levels. Investors may accumulate the stock.

Among our existing stock ideas, we feel Oriental Carbon is trading at a very attractive valuations at CMP of 110 and exposure may be increased in it.

Financial Valuations of Manali Petrochemicals:

Capacity Utilization and Quarterly Growth

Company Website

44 thoughts on “Manali Petrochemicals Ltd. – A safe midterm stock idea”

  1. Hi Ayush,

    Few queries

    1) Raw material prices are a function of crude i think. Is the company able to pass on these increases
    2) AR says they are dependent on Chennai Petroleum for raw materials, and Chennai petroleum does maintenance every 2 years. Since this was written in 2010, is it possible that company might face some RM challenge this year
    3) any known competitors

    Looks a good pick though, and almost fits into Graham’s debt capacity bargain model.

    1. Hi Saurabh,

      Being a chemical company, one shouldn’t expect much of a pricing power and hence the risk is there of a cyclical downturn. But the good thing is that as the co has already done the expansion and is now growing by increasing capacity utilization and debottle-necking the margins may remain healthy.

      Yes, we need to watch for the shutdown by Chennai Petro. In the meanwhile, the co has been tying up to import PO…this will bring down this risk.

      Also the co benefits by rupee depreciation as imports become costlier.

      1. Thanks Ayush. Also, any data in % terms on which industries are the goods sold too or customer list of the company.
        Sorry was not able to understand your rupee depreciation point ! If rupee weakens and they have to import, then imports would become costly ?

        1. Hi Saurabh
          Though MPL is deepends on Chennai Petro. Its other Peers are are generally depends on Imports (more than 50%). so ruppe depriciation is benifits the co. above its peers.

          1. Thanks! It seems company can benefit from both rupee appreciation & depreciation 🙂

        2. What I meant was – as per reading of the annual report, it seems that the end product is imported in India. So with rupee weakening, Manali would get better realisations.

    2. when stocks like SBI and L&T are available at good valuations, why o go for this bull shit stock?

  2. Hi Ayush,

    I was looking into the company and growth is looking intact.Apart from that i have some doubts please clarify the same

    1. prdouction of polyols is 21461 vs 50000(installed capacity) and that of propylene glycol is 19224 vs 20000 (installed capacity)
    Now 1st doubt is why they have incresed the installed capacity of polyols not propylene glycol

    2.Operating margin lookslike quite lumpy any spefic reason for same.

    3.Deperecation is decreasing on anuall basis.

    4 Interest seems to be -ve in 2006-2007
    can you throw some light.

    Regards,
    Vishal

    1. Hi Vishal,

      The capacity of Propylene Glycol was increased from 13,250 MT in 2009 to 20,000 MT. Don’t know why inc is more for Polyol.

      Yes, margins have been affected during previous downturns. The depreciation is doing down as the plant is already fully depreciated and they haven’t incurred any significant capex.

  3. WILL CHEMICAL BUSINESS CREATE WEALTH FOR INDIAN INVESTORS ? VINATI N ORIENTAL CARBON OR BALAJI AMINES HV NOT BEEN GOOD EXAMPLES.

    1. Hi,

      Yes, chemical sector gets lower valuations as usually the products are commodity in nature and there is volatility in earnings. But good cos in this area do create wealth.
      Vinati did very well and was a wealth creator between 2004 to 2010. Stock price multiplied by almost 30 times! And if one looks at Vinati, it has a niche and superior margins. I think the same thing can hold true for Oriental Carbon. Infact Oriental is a monopoly and has much better margins.

  4. hi Mr ayush,

    Do you think these holding companies will ever reward the investors ? Say Kalyani Investment available at a discount of more than 85% of its investments and now other stock Hexa tradex is attracting me to trap my money for long as it is also available at more than 82% discount. Anyway BNK capital taken by me years ago is already sinking like titanic .

    So is any of this companies ie Hexa tradex , Kalyani Inv or Bnk Capital have any potential to be re-rated by markets and become multi-baggers or should I stay away from these ??

    Pl. advise on urgent basis ………..

    1. Hi,

      In our experience holding cos over 80% discount do work out well but it takes time…generally the movement comes during cheeful market times when people are hunting for value. During dull and weak markets, they can continue to languish.

      BNK Capital has also got stabilized at 20 levels and is flat without much volumes.

      1. Thanks for your immediate reply ! but can u tell which would be the best for me to pick 1) BNK Cap or 2) Kalyani Inv or 3) Hexa Tradex or your value pick 4) Oriental Carbon for multibagger returns ?

        Again Thanks a lot to be a great value picker and advisor

        1. I think Oriental Carbon is a good business available at cheap valuations. If the co can continue growing with the margins in last 2-3 yrs, it should do well.

          Also, would advice you to keep a bit diversified portfolio. Do invest small amounts in stocks which click to you to try and learn.

        2. In my opinion if you looks for the Holding company then Balmer Lawrie Investment ( 532485 ) is looks better then the above three. Its a regular dividend paying co. Last year it paid 8.50 per share. This year the dividend is expected minimum 9.50. Great Div. Yield. But it holds only Balmer Law. co shares. Only div. from balmetr & Law. & Interest income is its income. It does not invest in other co shares “thats the weakness”.

          Mr. Ayush please comment…

  5. Hi Ayush,

    I have again gone through the report still i have some doubts,please help me clarify same
    1. what was the driving force for profit margin is improvement in last 2-3 years.
    2.Whether last year profit margin will be maintained in coming years.

    Regards,
    vishal

    1. Hi Vishal,

      If one goes back, co has had healthy margins for continuous 4 yrs during 2004-07. During 08 & 09 the margins were affected due to huge volatility in RM, appreciating rupee and general showdown. So yes, like other chemical cos, they will also be affected in case of a big slowdown etc. At the moment, the current industry seems to be doing well.

      The margins have also improved due to growth and better utlization of capacities

  6. Hi Ayush,

    Any views on the following lage caps?

    sintex ind, praj ind, united phosphorous, coal ind, aditya birla nova, rel capital, jain irrigation, adani enterprises

  7. The company belongs to the group that owns first leasing, sicagen etc. For some reason all these companies are value picks. Good yield / good roe/ low valuation.

    Is there any reason for this?

  8. Ayush,
    Due to market sentiments the stock is back to 11 levels. Can one enter the stock as I had been waiting with patience to get at these levels. Not sure if the valuations have changed.

    Can you pls suggest and you haven’t come up with some new suggestions recently eagerly waiting for it 🙂

    1. Hi Harish,

      Yeah, it does look good at these levels. One may take some exposure and increase if Q1 results are good.

    1. If one does YOY comparison then margins are quite stable. The variation is if one compares it from March qtr and it seems the March Qtr had extra-ordinary margins. These margins seem to be more stable and sustainable.

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