Recommendation from Specialty Chemicals Sector

This column gives you a scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

I G PETROCHEMICALS LIMITED: CREATING FORMULAS OF GROWTH

HERE IS WHY
✓ Most cost-effective PAN producer
✓ Expansion plans will increase revenue streams
✓ Chemical sector doing well

Covering more than 80,000 commercial products, India’s chemical industry is extremely diversified and can broadly be classified into bulk chemicals, specialty chemicals, agrochemicals, petrochemicals, polymers, and fertilisers. According to India Brand Equity Foundation, India’s chemical sector, which was estimated to be worth USD 220 billion in 2022, is anticipated to grow to USD 300 billion by 2025 and USD 1 trillion by 2040.

Keeping in mind this scenario, the choice scrip for this issue is I G Petrochemicals Limited (IGPL). IGPL is an established market leader in Phthalic Anhydride (PAN). It also produces Maleic Anhydride (MAN) through wash water generated out of the production process of PAN. MAN is used in agro and food businesses. IGPL also manufactures Benzoic Acid (BA) as a by-product, which is used in the manufacturing of dyes, polyester resins, etc. 

In Q2FY24, on a consolidated basis, the company’s net revenue declined by 11.84 per cent YoY to ₹501.75 crore compared to ₹569.12 crore from the previous year’s same quarter. For the period Q2FY24, the PBIDT excluding other income decreased by 69.63 per cent and stood at ₹25.93 crore from ₹85.37 crore in the previous year’s same quarter. The net profit showed a decline of 81.8 per cent and was at ₹10.08 crore from ₹55.37 crore in the previous year’s same quarter. On a sequential basis, its net profit decreased by 71.72 per cent from ₹35.64 crore. 

Going ahead, the performance of the company is likely to improve as IGPL is the largest domestic PAN producer and holds more than 50 per cent market share in India.

This is on account of its production capacity of 222,110 MTPA. PAN is a versatile intermediate in organic chemistry and finds an application in various industries and sectors. Its end users are manufacturers of paints, inks, coatings, boxes, containers and packaging films, among others. 

Its emerging applications are agrochemicals, speciality chemicals, specialised polymers, electric vehicles and electronic products. The company has a diversified product portfolio beyond PAN with products like MAN, Benzoic Acid and Diethyl Phthalate (DEP). It has in place a cost-efficient production facility with strategically located plants and advanced technologies. Thus, IGPL is recognised as one of the most cost-effective PAN producers globally. IGPL is currently engaged in brownfield expansion, which will increase its PAN capacity by 24 per cent through optimal utilisation. The facility is expected to be on stream by March 2024. The company is also evaluating the addition of other downstream derivative products of PAN to produce advanced plasticizers. 

This will unlock new revenue streams. All major end user industries are growing at a healthy pace. IGPL’s attempt to narrow the spread between PAN and OX is expected to normalise and this will boost profitability. The company is currently trading at a PE of 14.6 times as against the industry PE of 36.4 times. In the last three years, it has delivered average ROE of 23.3 per cent and ROCE of 28.9 per cent. Given the growth prospects of both the company and the sector, we recommend BUY.