Small hiccup: Maintain BUY
Fire accident at Polypropylene new manufacturing plant at Shahjahanpur on 31st March 2017:
VEL’s newly commissioned Polypropylene manufacturing plant was destroyed in a fire that engulfed this particular section at company’s Shahjahanpur manufacturing facility in Rajasthan. The damage was limited to only one building that housed the polypropylene section and a material warehouse. The company’s four other manufacturing units situated in the same factory complex are safe and fully operational. No human casualties were reported and all company’s employees are safe. The polypropylene unit was expected to contribute ~3% to company’s annual sale in FY17-18. It would take a minimum of 4 months to restore full production of this unit. According to initial estimates, the total damage to the factory building, machinery, WIP, raw material and finished goods stock could be ~Rs.15-20cr. The building, machinery and stocks destroyed were fully insured.
Management discussion: 1) The Polypropylene (PP) facility was commissioned in the December quarter. This facility will be again operational in H2FY18. 2) VEL’s main customers of PP compounds are the white goods manufacturers. PP compounds are used to make outer casing of AC and Air Coolers. Due to this fire accident, the company has toned down their revenue expectations to ~Rs.50mn in FY18 which is ~32% of earlier estimation of ~Rs.150mn from this segment. 3) The company may see deferment in the orders of this product 4) Other four manufacturing units in the same factory have started their production 5) MTM capacity expansion for FY18 is ~6000 MT p.a. 6) Current capacity for MTM is 3,000 MT p.a.
Company description: VEL is engaged in the business of manufacturing and distribution of eco-friendly Specialty Polymer Compounds and Additives. It is the only Indian manufacturer of Methyl Tin Mercaptide (Organotins Stabilizer), a lead free heat stabilizer used in the processing of PVC. These high end products are used in Agriculture/Infrastructure Components (eg. Pipes & Fittings), Wires & Cables, Auto Parts, Textiles, Electrical Goods, Medical Goods, Writing instruments, Organic & Inorganic chemicals, Footwear, Packaging, among others. VEL exports to more than 20 countries which contributed to ~48% of overall revenue. It had ~10% market share in FY16 and sold ~600MTPA of Organotins in India. The company entered into new product called ‘Polypropylene Compounds’ with a capex of ~Rs 25mn in Q3FY17.
Valuation: We continue to believe in VEL’s growth prospects, however, we would like to see the traction of newly commissioned Polypropylene unit for next couple of quarters to review our estimates. VEL may take 4-6 months to cope-up with the loss due to fire accident and insurance company may take ~10-12 months for the settlement of dues. We have not considered the revenue contribution from this segment in our valuation therefore there is no change in our yearly estimates. We believe, VEL may take hit in Q4FY17 on account of loss of assets, finished goods and raw materials but as per management the material impact is nil.
We expect, growth in PVC industry, opportunities in export markets, capacity expansion and demand for toxin free stabilizers would create huge prospects for VEL’s revenue/ earning to grow at a CAGR of 34%/41% over FY16-19e. The stock currently trades at 17.4x/10.9x/7.7x of FY17e/FY18e/FY19e EPS. We maintain our BUY recommendation with a price target of Rs 40 implying upside of 81%. (14x on FY19e EPS).