CD Equisearch has recommended 'Accumulate' on Apcotex Industries with target price of Rs 539 in its report.
Commenting on the investment rationale, the stock broker said, ''Strong demand outlook for styrene butadiene latex, particularly in Asia - Pacific, bodes well for its suppliers globally. Higher demand for coated paper will buoy demand for latex in Asia - Pacific, region, which accounts for 45% of the global styrene butadiene latex industry. Other markets such as Latin America and the Middle East and Africa (MEA) would also do reasonably well not least due to robust off take from the construction industry in these regions and paper processing industry in Brazil.
Though leading European and North American markets of styrene butadiene latex would feel the heat of slowdown in their coated paper market, Apcotex would yet steer clear for its shipments to these markets are awfully low. It is eying more regions in its stronghold Middle East, North African and South East Asian regions and introducing more value add products to stimulate exports. As a result, margins could further rise - operating margins rose to unsustainably high 14.2% in fourth quarter of last fiscal. Apoctex reckons that its overall margins are more a function of product mix than of the cost plus fixed-mark up.
Its roll out of acrylics products for paper, construction and carpet segments in last few years has been well received. More such value added products would be unveiled over the next few years, which would further cement its market share in these segments; current share at 40-43% for paper & paper boards; 65% for carpets; 40% for construction; 30-35% for tyres; 50% for rubber.
High volumes estimated at 15-16% would more than make up for fall in realizations as income from operations would rise by 11.5%. Though operating margins could rise marginally in current fiscal, increased volatility in crude oil prices dent realization of finished products. No less significant would be shortage of key raw materials - styrene and butadiene - and lag effect in fixing supply contracts with clients. Apcotex's synthetic rubber business has been struggling for few years now because of shift in market preference for cheaper polymers.
The stock current trades at 17.3x FY16e EPS of Rs 26.54 and 13.6x FY17e EPS of Rs 33.67. Notwithstanding robust demand for synthetic latexes, Apcotex's high market share in user industries (paper & paperboards: 40%; carpets: 65%) and low financial leverage, external risks abound. Apcotex's puny business size helps little to quash concerns of volatility in earnings due to high competition overseas. Sharp correction in crude oil prices could also impinge sales. Rerating of the stock in last few months reflects Apcotex's improved growth prospects - earnings rose by some 88% last fiscal. But the base effect is now visible. We, therefore assign ‘accumulate’ rating on the stock with target of Rs 539 based on 16xFY17e earnings (peg ratio: 0.8), over a period of 6-9 months.
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