We recently met the management of JBF and following are our key takeaways.
The main raw material for JBF is PTA, which is derived out of crude. The prices of crude oil have corrected sharply from around $145 per barrel to currently around $40 per barrel.
This has led to decline in prices of PTA by 46.6% from Rs.56.0 per kg in July 2008 to Rs.29.9 per kg in December 2008.
Also the prices of its other raw material i.e. MEG have come down by 53.5% from Rs.53.1 per kg in July 2008 to Rs.24.7 per kg in December 2008.
In response to the fall in raw material prices the prices of the final products like polyester chips have gone down by 43.8% and POY by 31.0%.
It is important to note that the fall in final product prices have been lower then the fall in its key raw material prices. This is well supported by the fact that the consolidated operating margins improved by 200 bps to 13.7% in Q2FY09.
We expect the demand for the products of the company like polyester chips, POY, bottle grade chips and films to grow at steady pace. The exports demand has taken a hit due to overall slowdown in the textile exports due to recession in US and Europe.
However, the domestic demand is expected to be steady as post the sharp fall in the key raw material prices, the products are now cheaper by 20 to 25% as compared to cotton.
Also a lot of industries like carpets, upholstery and packaging among others are shifting to polyester due to price advantage.
JBF has successfully commissioned its 216000 TPA chips manufacturing plant in Gujarat adjacent to its existing plant of 216000 TPA. The PET grade chips and polyester film units of RAK have stabilized their operations.
The management is confident of operating RAK unit at optimal capacities by March 2009 as it has already entered into long-term supply contracts with major beverage leaders.
We have revised earning estimates for FY09E to account for lower raw material prices which would lead to increase in operating margins, higher interest costs, depreciation and forex losses.
On consolidated basis we expect JBF to report revenues of Rs34 billion, operating margin of 12.9% (11% earlier) and PAT of Rs1.4 billion (down 5%).
Accommodating for expected non-conversion of FCCB and warrants we expect JBF to report higher consolidated EPS of Rs22.5 in FY09E as against our earlier estimates of Rs19.5.
We have valued the consolidated entity on DCF method of valuation with 13.6% WACC (13.2% earlier) and 3% terminal growth rate.
In view of sharp correction in stock price, good growth potential and attractive current valuations we recommend BUY on JBF Industries Ltd. with revised price target of Rs75 (Rs100 earlier).