Going Great Guns - INEOS ABS (India)

It is said that, in uncertain times consistent dividend-paying companies are considered to be best bets. INEOS ABS (India) is one such company with a strong dividend payment history of 21 years along with the current dividend yield of 1.25x (Ex-dividend on April 15, 2010). But the consistent dividend payment is not the only factor, the other compelling factors include market leadership status with 65 per cent market share, expected strong growth in demand on account of growth in user industries like automobile and consumer durables that will be catered through recently expanded capacity, strong management bandwidth from an MNC parentage like INEOS, which is a third largest chemical company in the world and has also mentioned about its focus on Indian markets and good bottomline for CY09. On the valuation front also the scrip seems to be placed better where CMP of Rs 299 discounts its CY09 earnings by 10x and EV/EBITDA stands at just 4.21x. We recommend the investors to buy the scrip at current levels.

INEOS ABS (India) manufactures engineering thermoplastic such as ABS (Acrylonitrile-butadiene-styrene). The product finds the application in interior and exterior automotive parts, consumer durables, diagnostic equipments and other IT & Telecom related products. Here, the parent company (INEOS) believes that India has an advantage as a major engineering thermoplastics manufacturing hub in Asia. And the current rate of growth generated shows great prospects in coming years. Hence to cater to the demand, capacity has been expanded to 80000 mtpa from 60000 mtpa. It will be fully available from the current month. As the basic infrastructure was available, it managed to carry out the expansion in just Rs 20 crore (one-third of actual cost).[PAGE BREAK]

There are certain added advantages of INEOS being a global company. First is INEOS also has ABS manufacturing facilities in the US, Germany, Spain and Thailand and the combined capacity makes it the third largest ABS manufacturer in the world. Not only this helps the INSEOS ABS (India) to add new products to its kitty, it also helps the company procure raw material (as it is mostly imported) in efficient manner. Being derivatives of crude oil, its raw material prices are highly volatile and the efficient procurement will help in improving on margins front. Power also forms a substantial part of its expenses. But for the INEOS ABS (India) the advantage is, it also owns 14 windmills with a capacity of 8.60 MW (provided to the grid) and hence the net cost is bit lower. This also helps in improvement of the margins.

Any irrational increase in crude prices and cheap imports from China are some concerns for the company. But the management seems to be well equipped to take care of these threats, specially on imports. As regards the financial performance, the margins were good in CY09 also. The topline stood at Rs 559.47 crore and bottomline of Rs 48.99 crore as against Rs 604.86 crore and Rs 17.95 crore respectively for CY08. The profitability was higher on account of rational crude prices and cost-cutting initiatives. With rising demand, we expect another good round of performance from the company and recommend the investors to buy the scrip at current levels with a target price of Rs 375 in next one year.