We interacted with the management of JBF Industries (JBF) to get a fair idea of how it is placed in the current challenging macro business scenario.
Consequent to this, we estimate the company to register topline CAGR of 22% over FY2008-10E, while margins are estimated to decline to 9.5% levels leading to bottomline CAGR of 20% in the above-mentioned period.
JBF has managed to register good operational performance amidst the ongoing economic slowdown. This can be attributed, to a large extent, to the substantial decline in the crude oil prices, which resulted in the fall of raw material prices.
Going ahead, demand for POY is expected to increase due to the price advantage over substitutes like cotton. The manufacturers of polyester products are also expected to benefit from the restrictions on the total arable land that can be used for cultivation of cotton.
Moreover, with production of polyester becoming increasingly non-competitive in Taiwan and Korea, major capacities are shifting to China and India. India is fast becoming a production hub for polyester due to adequate availability of raw materials and lower conversion costs.
The continuous weakening of the INR, which in the recent past hit its historical low against the US dollar, is expected to be a major overhang on the company’s profitability.
Nonetheless, the sharp fall in the stock price discounts the concerns arising out of the exchange losses. Thus, going ahead, any positive news would provide an upside to the stock price.
Moreover, the company’s FCCBs are due for conversion in FY2011 at Rs90, which is more than two times the stock’s current market price, which we believe will not happen.
Hence, the company’s announcement of the buyback of FCCBs worth $14.3 million at a discount of 32.3% is a step in the right direction. At Rs40, the stock is trading 1.3x FY2010E EPS and 0.3x FY2010E P/BV.
We maintain a BUY on the stock, with a revised target price of Rs91 (Rs140) implying a P/E multiple of 3x its FY2010E earnings.
We have assigned this target P/E multiple, in line with the de-rating that has happened in the valuation of the company’s peers.