India Glycols – Golden Chemical to invest in

About the Company – 

India Glycols Limited (IGL) is a leading company that manufactures green technology based bulk, specialty and performance chemicals and natural gums, spirits, industrial gases, sugar and nutraceuticals.

IGL manufactures chemicals including glycols, ethoxylates, glycol ethers and acetates, and various performance chemicals. Its product range spans the chemicals, spirits, herbal and other phytochemical extracts and guar gum and industrial gases and finds application across an increasing number of industries.

IGL has a 5 variant business model, catering to the streams of Chemicals, Industrial Gases, Ennature Biopharma, Natural Gums and Spirits.

Business Model – 

The Company is the largest Producer of Bio-Mono Ethylene Glycol (Bio-MEG) in the World. The Company manufactures Mono-ethylene, Di-ethylene, Tri-ethylene glycol as well with a significant market share. 

Chemicals: The chemical business contribute over 62% of the total turnover. Even though Sales has decreased from Rs. 2601 Crores to Rs. 2309 Crores due to depressed Global economic situation, the company expects this segment to pick up from Q2FY18. 

Ethyl Alcohol: It contributes over 36% of total turnover. During the year, thrust was given to the export of high quality EXTRA Neutral Alcohol and IGL gained Premium Quality ENA Suppliers in International Market.

Others: During Year company sold 928 Metric Tonne (MT) of Steri gas compared to last year 912 MT.

The Company has achieved a total export sales of Rs. 873 Crores and is granted “One star Export House” status by Government of India.

The Company has become a Qualified suppliers to many large conglomerates worldwide for natural colours, nutraceuticals, health supplements and plant based active pharmaceutical ingredients. 

In 12th Five Year Plan, allocation of 10% share of the USD 1 Billion is being allocated towards the R&D and Technological advances in the chemicals field by way of setting up of technology upgradation fund of USD 100 million.

Industry Analysis – 

Industrial Insight:

1. The global bulk chemicals market has been experiencing a significant growth due to its increased use in the downstream market applications especially the booming textile industry and PET (Polyester Fiber) resin products industry.
2. The Global Glycol is expected to have a demand of CAGR of 7.6% from 2017 to 2025. Glycol Market size worth is $42.7 Billion.

Product Insight:

1. Mono Ethylene Glycol is Expected to have CAGR of 4.8% for 2017-2020.

TEG (Tri-ethylene Glycol) is expected to be the slowest growing segment with an estimated CAGR of 3.6%.

1. The Ethylene Glycol market is Dominated by Mono Ethylene Glycol with about 90% of Volume share.

Application Insights:

Among the Applications, Fiber is expected to grow at fastest CAGR of 5.1% from 2017 -2020 which is considered as a dominant in the Revenue Section.

Regional Insight:

Asia pacific is Dominant consumer of Ethylene Glycol with 66.46% of share and it is expected to continue with CAGR of 4.9%, above the consolidated CAGR of 4.7%.

Competitive advantage:

The Company is the largest manufacturer of Bio-Mono Ethylene Glycol in the World. This helps the company to deliver better margins as compared to other players. MEG produced from molasses gives approximately 20% cost advantage to the company. 

It is expected to have a healthy growth in exports over the coming years, especially from Ennature Bio-Pharma division, revenue of which has doubled in FY 17 to 150 odd crores and EBITDA margin at 65 crs.

Company information – 

1. Since its incorporation, the company has changed its registered office 8 times since its incorporation in 1983.
2. Chairman, Mr. Uma Shankar Bhartia who owns 1.45% in India Glycols, is a related party by way of directorship in other investee companies like Kashipur Holdings Ltd as well as Mayur Barter Pvt Ltd.
3. The company owns 10 Trade Marks in its name.
4. The company currently has Rs. 2,473 crores under charge on its immovable property and book debts.

Outlook – 

Ethylene Oxide Derivatives: It is a very important chemical used as an intermediate for the production of other chemicals and Sterliant Industrial Surfactants.

Globally Chemical Industry was valued at $4.3 Trillion in 2015 and is expected to grow at 5.5% per annum till 2020 to $5.7 Trillion. Indian Chemical  Industry is estimated to be valued at $147 Billion and contributes 3% to the Global Chemical Industry. 

With GST coming into effect from 1st July, logistic cost for the company is expected to come down by 10-15% as well as reduce effective tax by 15%. 

In chemical industry Ethylene is classified as Intermediary. The Ethylene segment is expected to provide significant growth opportunities for Indian Players.

Quarter Ended	31-Mar-17	31-Dec-16	30-Sep-16
Top Line	610.85	536.24	718.41
Expenses	595.58	514.17	709.33
EBITDA	70.51	65.35	54.43
PAT	15.85	8.92	11.96
EPS	5.12	2.88	3.86

Summary – 

The company has proposed raising of funds, subject to members approval for an amount NOT EXCEEDING `250 Crores by way of issue of securities through Public Offering/Private Placement/QIP or otherwise.

These funds will be mostly used for reduction of debt. The company has a debt of 1100 crs and expects to bring it down by 300 crs in this year. On back of this, the effective interest cost is expected to come down from 120 crs to 100 crs. The company expects to do a PAT of 60 crs of PAT in FY18 vs 45 crs thereby translating into an EPS of 19 per share. Even giving an Industry PE of 14, the target price would be 266 (upside potential of 30% from current levels of 195 Rs).  

5 Reasons why India should be upgraded by S&P retrospectively

Frankly, given a choice, if i am the one to give rating to India at this point of time, i would rate it AAA. Such is my confidence on this land of opportunities, that we really don’t deserve to be a notch just above “Junk” (BBB-). My buoyancy is backed by below 5 points, which will prove that it’s high time India is upgraded by Credit rating agencies.

During the last review by S&P in Nov 2016, the issues raised were more on Low per capita income and weak public finances. Likewise the expectations was to bring Govt debt below 60% of GDP. Even though S&P made all the positive noise in its statement, the fact the outlier upgrade was not given was a disappointment to Govt. 

We have been at the same rating since Jan 2007 (with just change in outlook). The below argument dwell that we should be upgraded soon in next 2-3 months. 

1. Debt to GDP Ratio – India GDP is $2.4 trillion. If India manages to grow at double digit for next 5 yrs, India’s GDP will double by 2025. This will be huge in terms of generating jobs as well. Also, current debt This is one of the most important parameter while deciding on rating. According to IMF estimates, the Debt to GDP estimates for 2016 was 68.5%. In 5 yrs from now this is expected to come down to 60%. For sake of comparison, China’s Debt to GDP is 272% and that of Japan’s is 250%. Even debt of US is 105%, which is AAA ranked. For a country like Spain & Italy this is above 100%. Apart from the Brexit issues, political instability is another reason this region faces. In last 5 yrs, Italy has seen about 12 Prime Ministers.!
2. Inflation, CAD, Fisc Deficit, Rupee – RBI has come really hard on Inflation targeting. The era of Raghuram Rajan was one of the classical ones in terms of bringing inflation under control. From a 9% CPI inflation, we are now in range of 4-5%. The real rupee returns is going to create multiplier effect as well. The rupee has already appreciated 4.5% during the first quarter of calendar year 17, making it one of the top 3 best performing currency in world. Indeed, Current account deficit (CAD) is completely under control with timely restrictions put on. S&P expects CAD to be in range of 1.3-1.5% of GDP in next 2 yrs. 
3. FDI Inflows – This parameter actually decides the sentiment of country as well as how foreign investors view the political stability along with Macro economic status of the economy. In terms of FDI, India received $43.46 billion in FY17 as against $40.01 billion in FY 16 – This is the highest FDI India has ever received. Likewise, FII’s too have invested in Equity markets about $7.7 billion during FY 17 which shows the confidence on the India. By far, India has outperformed majority of the developed countries in % increase vis-a-vis previous yr. 
4. GST – For all the hue and cry which is happening since 2004, India is going to implement GST come 1st July 2017.! It is in real sense going to be a ‘Game Changer’ the way business is going to be run in India. It is expected to widen IDT tax base by 10 million people.  This will push the GDP by 2-3%. The velocity impact of it is still not being appreciated by Economist fully. 
5. Economic Reform Policies – Needless to speak on this post the decision on demonetization, where even the critics have accepted that demon was one of the best steps India has taken. The important point to note over here is also the Synergy in various dept of Govt. Gone are those days where projects used to be stalled for a decade due to minor issues. Govt has made sure each dept sits across the table to sort out the issues. Also, entire focus is on Ease of Doing business where India has moved up quickly to 131st position and dreams to reach in Top 50. It’s mesmerizing to think of states competing with each other in EADB. Also think of Skill Development, Women entrepreneurship, JAM, Sustainable development, Swaach Bharat, thrust on Infrastructural sector, Housing for all by 2022, Surplus power producer in next few years, implementation of Universal Basic income (UBI), Political stability for another 7-8 years etc. The impact of each of this on Per capita income as well as GDP is going to be humongous. 

Rating agencies should realise day is not far when India will be racing towards double digit growth. For 2018, IMF is forecasting a growth of 7.5 – 8% for India. Will successful implementation of GST as well as ongoing reforms can push GDP par 10% for years to come.

For me, S&P should regret for not having upgraded India since 2007 and should not do so retrospectively.