The two listed ABS (Acrylonitrile butadiene styrene) company ‘BEPL’ & ‘Ineos Styrolution’ came up again with discouraging results for the latest quarter(Q3Fy19). I will try to dissect the result in this blog “Bhansali Engg Polymers(BEPL) & Ineos Styrolution- Q3FY19 Result analysis”.
Before I go into the analysis, let me try to explain what is going on in the industry.
Factors impacting financials of these 2 companies
The ABS industry has faced a number of headwinds(Problems):
1. Lower ABS prices
2. Higher inventory cost due to a sharp drop in end product cost/price
3. Slowing Car sales in India
4. Rupee depreciation
Update 08.05.2020: I have written 6 blogs on Bhansali Engineering Polymers Ltd.
APRIL 22, 2018—> Bhansali Engg(BEPL): Q4’2018 Result Analysis
MAY 7, 2018—> What made me invest in Bhansali Engg Polymers?
NOVEMBER 1, 2018—> Bhansali Engineering Polymers (BEPL): Q2’FY19 Quarterly Result Analysis
JANUARY 24, 2019—>Learnings from my investment in Bhansali Engg Polymers(BEPL)!
FEBRUARY 19, 2019—> Bhansali Engg Polymers(BEPL) & Ineos Styrolution- Q3FY19 Result analysis
AUGUST 8, 2019: —>BEPL Vs Ineos Styrolution: Q1FY20 Analysis
Bhansali Engg Polymers(BEPL) & Ineos Styrolution- Q3FY19 Result analysis
How are the ABS price decided?
To make sense of the analysis let me try to explain how the ABS prices are decided. Earlier, I was under the assumption that prices move up and down based on the domestic demand and supply in India. But I was wrong given that ABS is a petrochemical product, the price is determined globally, mostly influenced by the large size of the Chinese auto market and to a very limited extent to crude oil prices.Implying it is a commodity business.
Indian demand-supply has no role in product pricing as of now. The only contribution of the Indian market is towards revenue of these 2 companies.
Also, crude oil mainly factors towards the ‘Cost of Goods sold’ and hardly anything towards the top line.
While the car sales fell for 7 consecutive months in China last year, even 2019 does not offers any respite.
Chinese auto companies are pleading for a purchase tax cut that had boosted the sales in 2016 & 2017, but the Chinese govt has poured water over such requests.
Amid all gloom, let’s look at something encouraging. Looking at the size of Chinese car market which is more than 8-9X (8-9 times) Indian market even with both the countries having a similar population size, it amazes me of the distance India needs to cover as well as the immense opportunity Indian companies have. Also, this makes sense of the port based plant envisioned by BEPL management. All this will boil down to when the Per capita income in India reaches a certain level.
Bhansali Engg Polymers(BEPL) & Ineos Styrolution- Q3FY19 Result analysis
What happened to ABS prices?
If you look at the prices at which ABS has been selling in the last 1 year, it would throw a lot of insight into the dismal performances lately.
At one point of time(May-June 2018), the General and Speciality grade ABS was selling at a price of 165/kg and 172/kg compared to 120/kg & 135/kg towards the end of last quarter(Dec 2018) implying a drop of 28% & 22% respectively.
The drop in the prices was quite sudden as shown in the charts below. This lead to an accumulation of high-cost inventory which are getting sold at lower prices.
Recently, BEPL has raised the prices by ₹5/kg on the start of this month for Speciality grade ABS as well as ₹2/kg general grade ABS on the back of global trend. Whereas Ineos Styrolution has increased prices by ₹1/kg & ₹2/kg respectively. But, with the negativity surrounding the sector, the hikes look too little.
BEPL Color grade ABS price history
BEPL Injection Moulded ABS price history
Bhansali Engg Polymers(BEPL) & Ineos Styrolution- Q3FY19 Result analysis
How are ABS contracts made?
Let me try to explain how the contract works. I have got some understanding by speaking to people from the petrochem industry and this applies to more or less all commodity sectors.
There are 2 contracts:
a)Supply contract(decides the volume)
b)Rate contract(decides the pricing)
For smaller companies, the rate contract varies from a quarter to a year. Around 50% of the contract prices are fixed based on the expected future prices of ABS(Long term contract), Crude oil and other variables.
The remaining 50% is derived mostly from the Spot price(Spot contract) i.e. on the basis of current prices and a few other variables. It’s a win-win situation, given that if ABS prices increase, ABS manufacturer will be able to take advantage and vice-versa.
Similarly, the prices of raw materials are set.
Forex loss is altogether a different issue which manufacturers have to live with.
Bhansali Engg Polymers(BEPL) & Ineos Styrolution- Q3FY19 Result analysis
Bhansali Engg Polymers(BEPL)- Q3FY19 Result analysis
Bhansali Engg Polymers(BEPL)- Q3FY19 Result analysis
Based on the BEPL’s Q3FY19 result, I had mailed the management asking them about the increasing “Stock in trade” as well as margin impact due to the slowdown in Car sales, for which they have replied below:
BEPL Management reply to my queries
It confirms my hypothesis that Auto sales impact just the revenue and not the prices.
The remaining factors for the dismal performance remain the same.
Ineos Styrolution- Q3FY19 Result analysis
Ineos Styrolution- Q3FY19 Result analysis
Slide from 'Ineos Styrolution' Investor presentation
Ineos Styrolution in their latest investor presentation listed out the reasons for the lackluster performance. Also, would like to clarify ABS constitute about 75% of Sales for the company and the rest is polystyrene.
Few other pointers I got from the conference call:
1. Other than HRG which is imported from its parent company, all other raw materials are imported from Shell, Sabic, Mitsubishi etc.
2. Car companies are very stringent with the specification. It takes about 1-2 years to get the approvals. Other segments are much less stringent.
3. Full capacity utilization (100%) is difficult to get because of the shifting of production from one grade to another.
The largest dent on the margin according to the disclosure was “High-cost inventory”.
The Company suffered inventory losses during the quarter with the sharp fall in prices of Styrene Monomer (SM) being its main raw material. SM prices fell from a high of US$1450/MT in August 2018 to USS 950/MT by end of November 2018 (Source: lClS-LOR). Inventory loss is the reason for 50% of losses and rest 50% can be attributed to lower demand & plant shutdown.
Until ABS prices start recovering and Indian Automakers start showing growth, the stock performance can’t be expected to be great. But, you need to be optimistic in the market. The way ABS prices dropped suddenly, it can climb up at the same speed(hoping so).
Also, looking at the financials of both the companies, it is quite obvious BEPL is much more prudent in financial discipline than Inoes Styrolution.
Further reading:
Balaji Amines and Alkyl Amines- Q3FY19 analysis