Improvement In Margin Likely - Ineos ABS

We had recommended Ineos ABS (earlier Lanxess ABS) to our investors in analysis column (Issue No 13, June 22,  2008) at Rs 155. Our recommendation was backed by the factors like good valuations and, most importantly, the continuous growth in topline and bottomline for the last three years. But, we also mentioned about the risk factors like rising crude oil prices (as its raw material prices are linked to crude prices) and its impact on the company’s performance. The rising crude oil prices surely made an impact on the company’s performance. Same can be seen from the fact that, although the sales has increased the bottomline got impacted on account of shrinking margins. The double blow came in the form of depreciating rupee as the company imports 86 per cent of its total raw material requirement. Now due to this the double blow the scrip has taken a beating on the bourses and is trading at Rs 91.30 showing a decline of 41 per cent. Now at the current level, although the scrip has declined sharply, we would ask the investors to hold the counter. Although the depreciating rupee is a concern, decline in crude oil prices has ultimately reduced the raw material prices significantly.

While rupee has depreciated by 16 per cent since June 2008, raw material prices have declined by more than 50 per cent. Hence margins are expected to improve. In addition, the price to book ratio of 0.68x and the market cap to sales of 0.27x valuations are also good. Again, the dividend yield of 3.50 per cent seems to be good and the company has been paying dividend continuously since 1990. Hence we recommend the investors to hold the counter with a longer term perspective.