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Dhunseri
Petrochem and TeaLimited
Independent Equity Research
Enhancing investment decisions
In-depth analysis of the fundamentals and valuation
Business Pros ects
Financial Performance
Cor orate Governance
Management Evaluation
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Explanation of CRISIL Fundamental and Valuation (CFV) matrix
The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making
process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade)
Fundamental GradeCRISILs Fundamental Grade represents an overall assessment of the fundamentals of the company graded in relation to
other listed equity securities in India. The grade facilitates easy comparison of fundamentals between companies, irrespective
of the size or the industry they operate in. The grading factors in the following:
Business Prospects: Business prospects factors in Industry prospects and companys future financial performance Management Evaluation: Factors such as track record of the management, strategy are taken into consideration Corporate Governance: Assessment of adequacy of corporate governance structure and disclosure norms
The grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals)
CRISIL Fundamental Grade Assessment
5/5 Excellent fundamentals
4/5 Superior fundamentals
3/5 Good fundamentals
2/5 Moderate fundamentals
1/5 Poor fundamentals
Valuation GradeCRISILs Valuation Grade represents an assessment of the potential value in the company stock for an equity investor over a
12 month period. The grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market
price (CMP)) to grade 1 (strong downside from the CMP).
CRISIL Valuation Grade Assessment
5/5 Strong upside (>25% from CMP)
4/5 Upside (10-25% from CMP)
3/5 Align (+-10% from CMP)
2/5 Downside (negative 10-25% from CMP)
1/5 Strong downside (
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CRISIL Equities
Independent Research Report Dhunseri Petrochem and Tea Limited
A PET growth story Industry: Chemicals
Date: November 04, 2010
1
Kolkata-based Dhunseri Petrochem and Tea Ltd (Dhunseri) manufactures polyethylene
terephthalate (PET) resin and cultivates tea. It is all set to increase its PET capacity four-
fold and take advantage of the growing domestic and global demand for PET. We assign
Dhunseri a fundamental grade of3/5, indicating that its fundamentals are good relative to
other listed securities.PET industry: Robust domestic and stable global demand to drive growth
Strong growth in end-user industries and a preference for PET as packaging material has
given PET demand a boost; it clocked an impressive five-year CAGR of 35% during FY05-
10. Despite a steep rise in consumption, Indias per capita PET consumption is very low at
0.3 kg compared to the global average of ~2 kg, which leaves tremendous room for further
growth. Globally, improving demand from both developing and developed nations is
expected to result in firm operating rates. We expect domestic and global PET markets to
grow at a CAGR of 18-20% and 5%, respectively, over the medium term.
Dhunseri to capitalise on stupendous domestic demand
Owing to robust domestic demand coupled with import duty protection, Dhunseri has been
enjoying higher realisations from domestic sales. To take advantage of this situation,
Dhunseri d-bounded from its 100% export-oriented unit (EOU) status in FY10. Further, torealise the full potential of domestic and international demand, Dhunseri is expanding its
domestic capacity by 210,000 MTPA by FY13 at a cost of Rs 3.7 bn. Post expansion, the
companys capacity at the Haldia plant would reach 410,000 MTPA.
Egypt plant to effectively service international customers
Dhunseri is setting up a greenfield plant in Egypt with a capacity of 420,000 MTPA. Post
commissioning of this project and the brownfield expansion, the companys capacity will
increase from 200,000 MTPA in FY10 to 830,000 MTPA by FY14. Sales to Europe and
America from Egypt, the key markets for Dhunseri, will happen at less than half the time
resulting in effective client servicing and savings in freight costs. This unit will ensure
proximity to end markets and raw material sources too.
Project execution, volatility in raw material prices, forex fluctuations are key risks
Dhunseri is in the process of doubling its domestic PET capacity and setting up a green-field PET capacity of 420,000 MTPA in Egypt. The timely execution of these projects
would be key for the companys future prospects. The companys EBITDA margins are
sensitive to the movement in raw material prices especially during excess supply. The
company keeps its imports and foreign loan transactions un-hedged. Any adverse
movement in exchange rates could adversely impact the companys net profitability.
Further, the company is highly dependent on a single supplier for its raw material supply.
Revenues to grow at a two-year CAGR of 9%, EBITDA margins to improve
We expect revenues to grow at a two-year CAGR of 9% to Rs 13.8 bn in FY12. Thereafter,
revenues are expected to soar owing to an increase in capacity. EBITDA margins are
expected to improve in FY11 backed by savings in power costs before declining in FY12
due to excess global supply. The companys capex plans are expected to increase its
gearing between FY10 and FY12 and lower its RoE as compared to FY10.
Valuations: Aligned at current levels
We have valued Dhunseri based on the discounted cash flow (DCF) approach and arrived
at a one-year fair value of Rs 236 per share. We initiate coverage on Dhunseri with a
valuation grade of 3/5, indicating that the market price is aligned with the fair value.
Key forecasts
(Rs mn) FY09 FY10 FY11E FY12E
Operating income 12,294 11,582 13,786 13,835EBITDA 1,263 1,154 1,781 1,437Adj Net income 210 769 985 836Adj EPS-Rs 5.7 20.9 26.8 22.7Adj EPS growth (%) (11.6) 266.7 28.1 (15.1)PE (x) 38.5 10.5 8.2 9.7
P/BV (x) 2.1 1.4 1.2 1.1EV/EBITDA (x) 8.0 8.3 5.6 10.5
RoCE (%) 11.7 9.2 13.6 7.5RoE (%) 5.5 15.8 15.7 12.0
Source: Company, CRISIL Equities estimate
CFV matrix
Fundamental grade of '3/5 indicates good fundamentals
Valuation grade of '3/5' indicates CMP is aligned
1
2
3
4
5
1 2 3 4 5
Valuation Grade
FundamentalGrade
Poor
Fundamentals
Excellent
Fundamentals
Strong
Downside
Strong
Upside
Key stock statistics
NSE Ticker DPTL
Fair value (Rs per share) 236
Current market price 220
Shares outstanding (Mn) 35.0
Market cap (Rs mn) 7,693
Enterprise value (Rs mn) 9,239
52-week range (Rs) (H/L) 227/133
P/E on EPS estimate (FY12E) 9.7
Beta 0.90Free float (%) 37.4%
Average daily volumes 42,680
* Closing price as on report date
Share price movement
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Dhunseri Nifty
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Analytical contact
Sudhir Nair (Head, Equities) +91 22 3342 3526
Arun Vasu +91 22 3342 3529
Suhel Kapur +91 22 3342 4149
Email: [email protected] +91 22 3342 3561
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Dhunseri Petrochem and Tea Limited
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Table 1: Business environment
ParameterPET and tea
PET business Tea business
Revenue contribution (FY10) 89% 11%
Revenue contribution (FY12) 90% 10%
Product offering Bottle grade PET resin The company mainly produces CTC (crush,
tear and curl) tea and a small percentage of
orthodox tea (about 10%)
Geographic presence Domestic market and 30 countries across the globe
Mainly exports to Europe and America
Exports accounted for 40% of the sales revenue in
FY10
Caters only to the domestic market
Market position Second largest PET manufacturer in India after
Reliance
Currently produces 3% of the overall tea
produced in India, which is a highly fragmented
market
Is the market leader in Rajasthan
Industry growth expectations Domestic demand is expected to grow at 18-20%
over the next five years
Global PET demand is expected to grow at about 5%
over the next five years
Tea prices are expected to grow moderately at
a two-year CAGR of 3-4%
Production is expected to remain at the same
level
Sales growth (FY10-FY12 2-yr
CAGR)
9% 4%
Demand drivers Growing packaging industry
Superior product characteristics of PET
Strong domestic demand for tea which is the
countrys staple drink
Margin drivers Improving efficiency coal-based power plant to
replace FO-based plant Firming operating rates globally post FY12
Focus on improving efficiencies
Key competitors Reliance Industries Ltd and J BF Industries Ltd Assam Tea, McLeod Russell, J ayshree Tea,
Goodricke Group and Warren Tea
Key risks Timely execution of PET projects in India and Egypt
Margins are susceptible to wide fluctuation in raw material prices
Foreign exchange fluctuation
Dependent on a single supplier for its key raw material supply in the PET business
Tea prices are susceptible to demand-supply economics
Tea business is labour sensitive; labour cost accounts for about 25% of net sales
Source: Company, CRISIL Equities
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Grading Rationale
Dhunseri is the second largest domestic manufacturer of PET
Dhunseri is the second largest domestic PET resin manufacturer with a capacity to
produce 200,000 MTPA (metric tonnes per annum) as of FY10. Reliance Industries
Limited (Reliance) and JBF Industries Ltd (J BF) are the other two producers of PET
resin in India with a capacity of 290,000 MTPA and 110,000 MTPA, respectively. While
Dhunseri and Reliance have capacities dedicated solely for PET production, J BF has
been diverting capacities meant for producing polyester chips for producing PET resin
since FY08.
What is PET? Figure 1: Domestic PET capacity was 6 lakh tonnes
in FY10E
PET (polyethylene terephthalate) is a clear, strong and
lightweight engineering plastic belonging to the polyester
family. PET has become the worlds packaging choice for
many foods and beverages because of its distinct
characteristics - hygienic, lightweight, unbreakable, non-
reactive, economical and freshness-retentive.
Reliance290,000
49%
Dhunseri200,000
33%
JBF110,000
18%
Source: Industry, CRISIL Equities Source: Industry, CRISIL Equities
Global demand-supply scenario set to improve over the next five years
PET is one of the fastest growing polyester applications, having logged a CAGR of 6%
in the past five years. This holds out bright prospects for the PET resin industry
catalysed by population growth, widening applications and the replacement of
container/glass bottles. The global PET resin industry has been experiencing surplus
situation over the past few years and is expected to witness lower operating rates over
the next two-three years before improving demand from developing and developed
countries tightens it. The long-term prospects of the PET resin industry appear upbeat
owing to product convenience and characteristics.
Over the next five years, global operating rates are expected to improve from around
an estimated 77% in 2010 to around 82% in 2015 though intermittent periods could see
some excess supply.
Dhunseri has the capacity to
produce 200,000 MTPA of PET
resin as of FY10
Global operating rates are set to
firm post 2011
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Dhunseri Petrochem and Tea Limited
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Figure 2: Operating rates to be firm post 2011 Figure 3: Global end-user industry for PET 2010E
15.2 MMT
83.3%
84.2%
82.5%
84.3%
86.4%
82.4%
79.0%78.1%
73.5%
75.3%
77.9%
76.2%
76.6%77.4%
80.6%
81.6%
65%
70%
75%
80%
85%
90%
0.0
5.0
10.0
15.0
20.0
25.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
2015E
Global Capacity Operating Rate
(MMT)
Carbonated softdrinks, 19%
Non-Foodcontainers, 29%
Foodcontainers, 28%
Otherdrinks, 24%
Source: Industry, CRISIL Equities
MMT: Million metric tonnes
Source: Industry, CRISIL Equities
Domestic demand follows suit
The market size of the Indian packaging industry is estimated to be about Rs 775 bn as
of 2009-10; it has constantly grown by ~15% yoy in the past five years. Owing to
strong growth in the domestic packaging industry and preference for PET, demand for
PET clocked a strong growth of around 35% during FY05-FY10E.
Figure 4: PET demand driven by strong growth in
packaging industry
Figure 5: Market segments for PET chips in India
(FY10E)
62.5%
23.9%
19.9%
50.2%
23.9%
0%
10%
20%
30%
40%
50%
60%
70%
-
50
100
150
200
250
300
FY05
FY06
FY07
FY08
FY09
FY10E
Domestic demand Growth (y-o-y)
(000 MT)
Liquor, 20%
Pharma, 20%
Edible Oil, 13%
FMCG, 26%
Pesticide, 7%
PersonnelCare, 5%
Others, 9%
Source: Industry, CRISIL Equities
MT: Metric tonnes
Source: Industry, CRISIL Equities
Although the demand for PET resin in India has rallied in the past five years, India's per
capita consumption of PET is only 0.3 kg compared to the global average of around 2
kg. Thus, there is tremendous scope for growth considering the growth in various
packaging applications and end-user industries. Growing middleclass population,
rising per capita income and an organised retail sector are expected to drive growth in
the packaging segment. Over the next five years, we expect demand for PET to grow
at a CAGR of 18-20% to reach 680,000 tonnes by FY15.
Domestic demand is set to grow
at 18-20% over the next five
years
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Dhunseri Petrochem and Tea Limited
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Dhunseris domestic focus to enhance prospects
Domestic demand is witnessing steep growth in India which is resulting in higher sales
in the domestic market. All three players Dhunseri, Reliance and J BF have been
increasing their sales volume in India.
Figure 6: Growth in domestic PET demand has
pushed up PET sales in India
Figure 7: Reliance caters to more than 50% of the
domestic market in FY10
99 123147
221 274
285 302263
279 284
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY06
FY07
FY08
FY09
FY10E
Exports Domestic sales
(000 MT)
39.370.1 88.7 138.2 143.3
59.9
52.8 58.7 78.1
100.5
5.0 30.4
0%
10%
20%30%
40%
50%
60%
70%
80%
90%
100%
FY06
FY07
FY08
FY09
FY10E
JBF Dhunseri Reliance
(000 MT)
Source: Industry, CRISIL Equities estimate Source: Industry, CRISIL Equities estimate
Owing to robust demand from end-user industries and the import duty protection
enjoyed by PET manufacturers in India, Dhunseri has been enjoying higher realisations
from domestic sales.
Figure 8: The delta between domestic and export realisations has
increased for Dhunseri
56,064
62,01362,400
59,489
60,585
55,300
60,880
57,317
56,680
56,134
55,000
56,000
57,000
58,000
59,000
60,000
61,000
62,000
63,000
FY06 FY07 FY08 FY09 FY10
(Rs/MT)
Domestic reali sation Export realisation
Source: Industry, CRISIL Equities
In order to take advantage of the strong domestic demand, Dhunseri d-bounded from
its 100% EOU status in FY10 to cater to the growing domestic demand with an option
to export.
Further, to realise the full potential of domestic and international demand, Dhunseri is
expanding its domestic capacity by 210,000 MTPA by FY13 at a cost of Rs 3.7 bn. Post
Dhunseri d-bounded from itsEOU status to take advantage of
the robust domestic demand
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Dhunseri Petrochem and Tea Limited
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expansion, the companys capacity at the Haldia plant would reach 410,000 MTPA.
The company is progressing well with its brownfield expansion plan and has appointed
Oerlikon Barmag, Germany as its EPC contractor. Of the total debt requirement of
about Rs 2.3 bn, the company has achieved financial closure for Rs 1.6 bn in Q1FY10
and the balance is expected to be achieved in November 2010.
Dhunseri has maintained its margins even with higher quantum of exports
Dhunseri operated as a 100% EOU till October 2009 with almost 60% of its production
being exported. During this period too it was able to maintain healthy EBITDA margins
despite lower realisations on export sales compared to domestic sales depicting its
competitiveness vis--vis established international payers. We believe Dhunseri's
change in focus towards the domestic market, given its growth prospects, holds it in
good stead to better its profitability on the back of better domestic realisations.
Figure 9: Stable margins despite large exposure to export markets
8.0%
9.8%
8.3% 8.3%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
FY06 FY07 FY08 FY09
EBITDA in Petchem
Source: Industry, CRISIL Equities
Coal-based power plant to result in substantial cost savings
Until FY10, Dhunseri met its power requirements through furnace oil (FO)-based power
plant. In J une 2010, the company has commissioned an 8 MW coalbased captive
power plant at its existing plant in Haldia. This power plant is sufficient for meeting the
companys entire power requirement at its plant.
The switch from FO to coal will result in substantial cost savings for the company. We
estimate an annual savings of about Rs 75-100 mn in power costs considering current
FO and coal. Consequently, EBITDA expansion of about 100 bps is expected from this
initiative.
Haldia plant in close proximity to raw material source
Dhunseris existing plant at Haldia is strategically located in close proximity to rawmaterial source. The major raw materials for manufacturing of PET resins are PTA and
MEG accounting for about 95% of the total raw material costs. While PTA is mostly
Power would be generated
through low-cost coal instead
of high-cost furnace oil
Dhunseris existing plant is
strategically located near raw
material source
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Dhunseri Petrochem and Tea Limited
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sourced from MCC PTA India Corp. Private Ltds (a subsidiary of Tokyo-based
Mitsubishi Chemical Corporation) Haldia plant, MEG is sourced from Mitsui, Singapore.
In FY10, MCC PTA India doubled its PTA capacity from about 0.57 mn tonnes to about
1.27 mn tonnes.
Setting up plant in Egypt to service international customers
In order to tap the full potential of global PET demand, Dhunseri is setting up a
greenfield plant in Egypt with a capacity of 420,000 MTPA. The company had originally
embarked on setting up the plant in Egypt in FY07 with the objective of catering to the
underpenetrated North African and European markets. Dhunseri had floated a
subsidiary under the Egyptian Indian Polyester Company, S.A.E. to enter into a joint
venture with Egyptian Petrochemicals Holding Company (ECHEM) and Engineering for
the Petroleum and Process Industries (ENPPI) (both government companies) to set up
the plant in which Dhunseri would hold a 70% stake. However, due to regulatory issues
the project got delayed.
The company has finalised a new plot of land in Ain El Sokhna, a deep sea port on the
Red Sea and has received all regulatory clearances as communicated by the
management. Further, the company has also achieved financial closure for the project
in October 2010 with International Finance Corporation as the leader with US$35 mn
exposure. The balance loan has been tied up from local Egyptian banks. The
approximate project cost is estimated at about US$160 mn and it is being financed at a
debt-equity ratio of 2:1.
The company has appointed Oerlikon Barmag, Germany as its EPC contractor for the
Egypt plant as well. Barring any unforeseen events, we believe that the company would
be able to commission its plant in Egypt by FY14.
Egypt plant close to end-markets and raw material sources
Of Dhunseris total exports of about 80,000 MT in FY10, about 54% were to Europe
and about 22% to America. With the manufacturing of PET in Egypt, the deep sea port
on the Red Sea will make it possible for shipments to reach any European market
within two-three days and any US port within seven days. This would result in
substantial savings in time and freight as it takes about seven days and 20-25 days forshipments from India to Europe and America, respectively.
Proximity to a high MEG-producing region in Saudi Arabia and the Middle East is
expected to reduce procurement costs. Proximity to rapidly growing PET resin markets
in Africa (Algeria, Morocco, Libya and Tunisia), Israel, the US and the European Union
is expected to strengthen the units global footprint.
Dhunseri is amongst the top 10 tea cultivators in India
Dhunseri is amongst the top 10 tea growing companies in India and a market leader in
the packet tea segment in Rajasthan. The companys tea production has grown from7.6 mn kg in FY05 to 10.5 mn kg in FY10, constituting almost 3% of the total tea
production in India.
Proximity to rapidly growing
African markets and raw
material supplying nations are
some of the key benefits for the
Egypt plant
Egypt plant would be apt to
service international clients
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Dhunseri Petrochem and Tea Limited
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Figure 10: Dhunseri is amongst the top 10 Indian tea producers
7.5 7.8 7.5 7.5 7.2 7.6 7.5 7.4
10.4 9.910.5
-
2.0
4.0
6.0
8.0
10.0
12.0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
(Mn kgs)
Source: Industry, CRISIL Equities
Efficient operations and a favourable cycle have improved the profitability of
tea business
Dhunseri mainly produces CTC tea and a small percentage of orthodox tea (about
10%). The company has 11 tea estates; all are in Assam where tea is superior in
quality compared to other parts of the country.
During FY10, Dhunseri sold about 32% of the total volume of tea through auctions,
28% through packet sales and about 40% through private and consignment agents.
The company has long-term association with reputed tea auction houses like J .
Thomas & Co., Contemporary Tea Auctioneers and Caritt Moran & Co. Bulk tea is sold
to them, and they in turn sell the tea to various traders and bulk buyers. Packet tea is
mostly sold in Rajasthan to a fixed set of wholesale buyers, who, in turn, reach the
same to the retail consumers under brand names like Lal Ghoda, Kala Ghoda and
Chote Lal.
In FY10, the companys aggregate area under cultivation was about 3,302 hectares
with an average yield of around 2,265 kg per hectare in comparison with the industry
benchmark of around 1,900 kg per hectare. An established position in the domestic tea
industry along with emphasis on improving efficiency has improved profitability.
Profitability of tea business has
improved over the years
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Figure 11: Higher revenues because of favourable
cycle
Figure 12: Profitability has im proved because of
efficient operations and favourable cycle
646 636589
551501
592 573
667
926
1,067
1,308
92
38
14 9 9
4538
72
134
166
233
0
50
100
150
200
250
-
200
400
600
800
1,000
1,200
1,400
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Revenues PAT
(Rs mn) (Rs mn)
0%
5%
10%
15%
20%
25%
30%
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
EBITDA margin PAT margin
Source: Industry, CRISIL Equities Source: Industry, CRISIL Equities
Tea prices to remain firm due to demand-supply gap
India, Kenya and Sri Lanka, which account for approximately 80% of the global tea
production and more than 50% of global tea exports, faced adverse weather conditions
(drought) in 2009. This lowered the global supply and consequently raised the prices in
India and in the international market in 2009. Against this backdrop, CRISIL Research
expects overall tea prices in India to increase by 5% in 2010 and 3% in 2011 to Rs 109
per kg and Rs 112 per kg, respectively, following a rise of 25% in 2009 and 24% in
2008. Tea prices in North Indian are expected to rise to Rs 121 per kg in 2010 and Rs
124 per kg in 2011 compared to Rs 115 per kg in 2009.
At present, Dhunseri does not have plans to expand its tea business. However,
assuming current levels of production to be sustained and barring any unforeseen
events, Dhunseris tea division is expected to grow at a two-year CAGR of 4% to Rs
1.4 bn in FY12E, driven by higher price realisation. As a proportion of total sales, the
tea business contribution is expected to continue at about 10% until FY12 after which it
is expected to fall owing to significant scale up in Dhunseris PET business.
Setting up an IT park with the prospect of stable annuity revenue
Dhunseri has commenced the setting up of an information technology (IT) complex in
the IT and information technology-enabled services (ITeS) SEZ at Bantala on the
south-eastern fringes of Kolkata. Dhunseri IT Park is being developed on approximately
six acres of land and will consist of a twin tower with a total built-up area of about
719,000 square feet.
The project will be executed in two phases of equal magnitude and we expect both
these phases to be completed by FY13 and FY14, respectively. Consequently, we
estimate an income of Rs 155 mn in FY13 and Rs 302 mn in FY14 from lease rentals.
Tea prices to increase by 3-4%
over the next two years
Contribution of tea business
to total sales is expected to go
down
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Dhunseri Petrochem and Tea Limited
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Key Risks
Timely execution of proposed expansions
Dhunseri is in the process of doubling its domestic PET capacity and setting up a
greenfield PET capacity of 4,20,000 MTPA in Egypt. These expansions are expected to
get commissioned in FY13 and FY14, respectively. The timely execution of these large-
sized expansions remains the key challenge for the company, especially in Egypt
wherein the company has faced significant project delays so far.
Volatility in crude oil prices
The company manufactures PET which is cyclical in nature from PTA (sourced from
MCC PTA India Corp Private Ltd, a subsidiary of Tokyo based Mitsubishi Chemical
Corporation with a plant in Haldia) and MEG (sourced from Mitsui, Singapore). These
two key raw materials account for ~80% of the total operating costs. Historically, PTAand MEG prices have remained volatile and are currently on an upward trend following
a rise in crude oil prices (PTA and MEG are crude oil derivatives). PTA prices are
directly linked to naphtha prices, while MEG prices are linked to ethylene prices, both of
which are volatile in nature.
Hence, the companys EBITDA margins are sensitive to the movement in raw material
prices especially in a down cycle.
Forex fluctuations
The company follows a prudent hedging policy for its export sales. However, thecompany does not hedge for its MEG imports. Further, the company has foreign
currency loan to the tune of Rs 1.3 bn in its book which is un-hedged. Consequently,
the company accounts for huge foreign exchange fluctuations in its book at the end of
the accounting year when it needs to adjust the debt value based on the year-end
exchange rate. The major chunk of the foreign exchange fluctuation is a notional entry
without any cash inflow/outflow. However, debt re-payment and interest payment within
a year are impacted.
The company has witnessed forex losses and gains to the tune of Rs 517.5 mn and Rs
212.3 mn in FY09 and FY10, respectively, which accounts for around 166% and 21%of its PBT in these two years, respectively. Hence, any wide fluctuations in forex rates
would continue to adversely affect Dhunseris net margins, especially as its quantum of
ECBs is set to increase with its capex plans.
Highly dependent on a single supplier for its key raw material
Dhunseri is highly dependent on MCC PTA India Corp to source its PTA requirement.
Consequently, when MCC PTA India Corps operations were adversely affected in
FY10 due to its ongoing expansion, the PET production at Dhunseri declined owing to
lack of PTA supply from MCC PTA India Corp. Production declined by almost 11% from
1.9 lakh tonnes in FY09 to 1.7 lakh tonnes in FY10. Post Dhunseris brownfield
expansion at Haldia, its dependence on MCC PTA India Corp will increase further for
its raw material requirement.
Timely execution and higher raw
material prices to be the key for
future growth
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CRISIL Equities
Dhunseri Petrochem and Tea Limited
11
Rise in labour costs
Tea cultivation is a labour-intensive business and labour costs account for
approximately 25% of total sales, so is the case with Dhunseri. Though we have
factored in a few bps y-o-y rise in labour cost (as a percentage of sales) on account of
the rise in social cost, any significant wage hike will affect the margins of this segment.
Tea prices susceptible to demand-supply economics
The global shortage in tea was primarily on account of dry weather conditions and the
paucity in monsoons last year in key exporting countries such as Kenya, Sri Lanka and
India. However, if these countries receive above average rainfall in the near future after
a drought, there are chances of over-production. Since tea prices are largely
dependent on demand-supply, any significant increase in production in these countries
will lower prices. Given such a situation, profitability of this segment would be adversely
affected.
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CRISIL Equities
Dhunseri Petrochem and Tea Limited
12
Financial Outlook
Figure 13: Revenues to increase in FY11 due to optimum
capacity utilisation
Figure 14: Cost savings in power to improve EBITDA
in FY11, before being subdued by excess global
supply
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
FY09 FY10 FY11E FY12E
(Rs bn)
Petchem Tea
10.3%10.0%
12.9%
10.4%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
FY09 FY10 FY11E FY12E
EBITDA margin
Source: Company, CRISIL Equities Source: Company, CRISIL Equities
Figure 15: PAT estimated to remain stable over the
forecast period
Figure 16: Lower EBITDA to reduce EPS marginally
in FY12
1.7%
6.6%7.1%
6.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
FY09 FY10 FY11E FY12E
PAT margin
Forex gains/(losses)cause huge variance in
PAT margins 5.7
20.9
26.8
22.7
-
5.0
10.0
15.0
20.0
25.0
30.0
FY09 FY10 FY11E FY12E
(Rs per share)
Adj EPS
Source: Company reports, CRISIL Equities Source: Company reports, CRISIL Equities
Figure 17: Dhunseris capex plans to increase its gearing Figure 18: Capex phase to lower returns for the
company
1.4
0.7
0.8
1.5
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
FY09 FY10 FY11E FY12E
(Times)
11.7%
9.2%
13.6%
7.5%
5.5%
15.8% 15.7%
12.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
FY09 FY10 FY11E FY12E
RoCE RoE
Source: Company, CRISIL Equities Source: Company reports, CRISIL Equities
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Dhunseri Petrochem and Tea Limited
13
Management Evaluation
CRISIL Equities fundamental grading methodology includes a broad assessment of
management quality apart from other key factors such as industry, business prospects
and financial performance. Overall, we believe the management is relatively good.
Strong management with good experience
Dhunseri has a strong and experienced top management consisting of two promoter
directors from the Dhanuka family. The management is headed by Mr Chandra Kumar
Dhanuka (chairman) and Mr Mrigank Dhanuka (vice chairman and executive director).
They are ably supported by Mr Biswanath Chattopadhyay (executive director and CEO)
and Mr Brijesh Kumar Biyani (executive director - corporate).
The Dhanuka family has been engaged in the tea business for over five decades and in
the petrochemicals business for around a decade. The top management has rich
experience in both businesses and are well versed with the dynamics of these
segments.
Despite being a promoter-driven company, we believe that Dhunseris management
has a professional approach towards managing the company.
Second line of managementBased on our interactions, we believe that the companys second line is reasonably
experienced. Key managerial personnel have several years of experience in their
respective fields.
Execution of the two large expansion projects remains key
Though the promoter directors have rich experience in the PET business and have
successfully set up the existing capacity, the execution of its large capacity expansions
at different locations will remain critical to the growth prospects of the company.
Top management fairly
experienced with strong domain
expertise
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CRISIL Equities
Dhunseri Petrochem and Tea Limited
14
Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of corporate
governance as well, apart from other key factors such as industry, business prospects,financial performance and management quality. In this context, CRISIL Equities
analyses shareholding structure, board composition, typical board processes,
disclosure standards and related-party transactions. Any qualifications by regulators or
auditors also serve as useful inputs while assessing a companys corporate
governance.
Overall, corporate governance at Dhunseri presents good practices supported by a
fairly experienced board. We feel that the company's corporate governance practices
are adequate and meet the minimum required levels.
Board composition
The board comprises 12 members, of whom six are independent, which is in
accordance with the stipulated SEBI guidelines relating to the Clause 49 of the listing
agreement. Given the background of the directors, we believe that the board is fairly
diversified. We feel that the independent directors are aware of the business and are
fairly engaged in all the major decisions.
Boards processes
The company has the audit and the shareholders grievance committees in place. The
company's disclosures are sufficient to analyse its business aspects. Based on
interactions with independent directors, CRISIL Equities assesses that the quality of
agenda papers and the level of debate of discussions at the board meetings are good.
Other observations
Based on the level of information and details furnished in annual reports, the company
website and other publicly available data, the companys quality of disclosure is good.
Further, we assess that the audit committee is chaired by an independent director, and
it meets at regular intervals.
Dhunseris corporate governance
practices are adequate and meet
the minimum required standards
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Dhunseri Petrochem and Tea Limited
15
Valuation Grading Grade: 3/5
We have used the discounted cash flow (DCF) method to value Dhunseri and arrived at
a fair value of Rs 236 per share for the company. At the current market price of Rs 220
per share (Opening price on November 4, 2010), the stock trades at P/E multiples of
8.2x and 9.7x FY11E and FY12E EPS of Rs 26.8 and Rs 22.7, respectively. Our fair
value of Rs 236 per share gives implied P/E of 8.8x and 10.4x based on FY11 and
FY12 earnings, respectively. We initiate coverage on the company with a valuation
grade of 3/5, indicating that the current market price is aligned with our fair value.
Key assumptions to our valuation
We have made explicit forecasts from FY12 to FY20.
We have assumed cost of equity of 16.0%, considering project execution
challenges and average liquidity in the stock market. We have taken terminal growth rate of 3% beyond the explicit forecast period.
The company has investments worth Rs 900 mn (at book value) invested in the market.
The fair value of the company includes the value of these investments at around Rs 24
per share.
Table 2: Sensitivity analysis of terminal WACC and terminal growth rate
Terminal Growth Rate
WACC 1.0% 2.0% 3.0% 4.0% 5.0%
11.2% 276 312 357 414 49012.2% 228 255 289 331 384
13.2% 189 210 236 267 306
14.2% 157 174 195 218 248
15.2% 132 145 161 180 202
Source: CRISIL Equities
We assign a fair value of Rs 236
per share and initiate coverage
with a valuation grade of 3/5
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CRISIL Equities
Dhunseri Petrochem and Tea Limited
16
Company Overview
Until 2008-09, the Dhunseri Group comprised two manufacturing companies:
1. Dhunseri Tea & Industries Ltd engaged in tea cultivation and marketing
2. South Asian Petrochem Ltd engaged in the manufacture of PET resin
In 2009-10, Dhunseri Tea & Industries and South Asian Petrochem merged together to
form Dhunseri Petrochem and Tea Limited, the flagship company of the Rs 1,250-crore
Kolkata-based Dhunseri Group. The main objective behind the merger was to seek
stable returns by combining relatively predictable cash flows from PET resin with those
from the cyclical tea business and the largely predictable commercial annuity business.
Achieving higher scale of operations, enhancing the groups transparency and
efficiency, and providing superior confidence to domestic and international lenders
were other objectives which drove the merger.
The erstwhile Dhunseri Tea & Industries was incorporated in May 1916 and the current
promoter acquired this company in 1955. Dhunseri Tea & Industries is primarily
engaged in the manufacturing and sale of loose tea and packet tea. The company has
11 tea estates in Assam and produced 10.4 mn kgs in FY10.
The erstwhile South Asian Petrochem Limited was promoted by Dhunseri Tea &
Industries in 1999 for manufacture of PET resins under technical and financial
collaboration with Lurgi Zimmer AG of Germany. South Asian Petrochem became asubsidiary of Dhunseri Tea & Industries in FY09 by virtue of merger of an associate
company with Dhunseri Tea & Industries and acquisition of further stake by Dhunseri
Tea in South Asian Petrochem Limited. South Asian Petrochems PET resin plant is
spread across 35 acres in Haldia, the port town of West Bengal. Plant capacity in FY10
was 200,000 MTPA. Prior to the merger of South Asian Petrochem in FY10, the
Dhunseri Group held about 51% stake in South Asian Petrochem.
Table 3: Companys history and highlights
Year Milestones
1955 S L Dhanuka Group took over management of the company from J ames Finlay & Company
1961 Dhunseri Tea Company was incorporated
1970 Company was renamed Dhunseri Tea & Industries
1980 Company acquired the Namsang and Dilli Gardens in Assam
1991 The company took over Bahadur Tea Company and amalgamated with Dhunseri Tea
1992 The company came out with a public issue
1993 Santi Tea Estate was amalgamated with Dhunseri Tea
1994 The company acquired Santi tea estate, Khetojan tea estate and Khagorijan tea estate
1996 The company promoted South Asian Petrochem Ltd to manufacture PET Resins under
technical and financial collaboration with Lurgi Zimmer AG of Germany
2009Dhunseri Tea & Industries and South Asian Petrochem merged together to form Dhunseri
Petrochem and Tea Ltd
Source: Company, CRISIL Equities
Dhunseri Tea & Industries Ltd and
South Asian Petrochem Ltd
merged together to form Dhunseri
Petrochem and Tea Limited in
FY10
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Dhunseri Petrochem and Tea Limited
17
Annexure: Financials
Income Statement
(Rs mn) FY09 FY10 FY11E FY12ENet sales 12,163 11,401 13,649 13,698
Operating Income 12,294 11,582 13,786 13,835
EBITDA 1,263 1,154 1,781 1,437
Depreciation 267 279 289 294
Interest 830 21 204 148
Other Income 145 160 182 254
PBT 311 1,014 1,471 1,248
Adj PAT 210 769 985 836
No. of shares 11.7 11.7 35.0 35.0
Adj Earnings per share (EPS -Rs) 5.7 20.9 26.8 22.7
Balance Sheet
(Rs mn) FY09 FY10 FY11E FY12E
Equity capital (FV - Rs 10) 117 117 350 350
Reserves and surplus 3,783 5,774 6,403 6,973
Debt 5,354 3,976 5,476 10,976
Current Liabilities and Provisions 2,336 2,506 2,886 2,980
Deferred Tax Liability/(Asset) 268 383 577 742
Capital Employed 11,859 12,711 15,646 21,975
Net Fixed Assets 3,827 5,299 5,152 4,999
Capital WIP 188 436 1,740 8,063
Intangible assets 94 71 57 43
Investments 603 816 716 516
Loans and advances 1,217 1,408 1,676 1,682
Inventory 919 761 906 947Receivables 1,808 1,492 1,775 1,820
Cash & Bank Balance 3,202 2,429 3,625 3,907
Applications of Funds 11,859 12,711 15,646 21,975
Source: Company, CRISIL Equities estimate
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Dhunseri Petrochem and Tea Limited
18
Cash Flow
(Rs mn) FY09 FY10 FY11E FY12E
Pre-tax profit 311 1,014 1,471 1,248
Total tax paid (53) (176) (291) (247)Depreciation 267 279 289 294
Change in working capital (617) 455 (317) 3
Cash flow from operating activities (93) 1,572 1,151 1,299
Capital expenditure (320) (1,975) (1,431) (6,450)
Investments and others 318 (213) 100 200
Cash flow from investing activities (2) (2,188) (1,331) (6,250)
Equity raised/(repaid) 47 246 233 -
Debt raised/(repaid) 1,293 (1,379) 1,500 5,500
Dividend (incl. tax) (45) (163) (266) (266)
Others (incl extraordinaries) (100) 1,139 (90) -
Cash flow from financing activities 1,195 (157) 1,376 5,234
Change in cash position 1,099 (772) 1,196 282
Opening Cash 2,103 3,202 2,429 3,625
Closing Cash 3,202 2,429 3,625 3,907
Ratios
FY09 FY10 FY11E FY12E
Growth ratios
Sales growth (%) 1,221.2 (5.8) 19.0 0.4
EBITDA growth (%) 938.7 (8.6) 54.3 (19.3)
Adj EPS growth (%) (11.6) 266.7 28.1 (15.1)
Profitability Ratios
EBITDA Margin (%) 10.3 10.0 12.9 10.4
PAT Margin (%) 1.7 6.6 7.1 6.0
Return on Capital Employed (RoCE) (%) 11.7 9.2 13.6 7.5
Return on equity (RoE) (%) 5.5 15.8 15.7 12.0
Dividend and Earnings
Dividend per share (Rs) 3.9 13.9 6.5 6.5
Dividend payout ratio (%) 21.5 21.2 20.2 27.2
Dividend yield (%) 1.8 6.3 3.0 3.0
Adj Earnings Per Share (Rs) 5.7 20.9 26.8 22.7
Efficiency ratios
Asset Turnover (Sales/GFA) 2.3x 1.9x 1.9x 1.9x
Asset Turnover (Sales/NFA) 3.2x 2.5x 2.6x 2.7x
Sales/Working Capital 9.5x 8.4x 10.5x 9.4x
Financial stability
Debt-equity 1.4 0.7 0.8 1.5Interest Coverage 1.2 42.2 7.3 7.7
Current Ratio 3.1 2.4 2.8 2.8
Valuation Multiples
Price-earnings 38.5x 10.5x 8.2x 9.7x
Price-book 2.1x 1.4x 1.2x 1.1x
EV/EBITDA 8.0x 8.3x 5.6x 10.5x
Source: Company, CRISIL Equities estimate
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Dhunseri Petrochem and Tea Limited
19
Quarterly results
Dhunseri (Rs mn) Q2FY11 Q1FY11 Q2FY10 q-o-q(%) y-o-y(%) H1FY11 H1FY10 y-o-y(%)
Net sales 3,689 3,568 2,472 3.4 49.2 7,257 5,459 32.9
Raw materials cost 2,492 2,572 1,706 (3.1) 46.1 5,063 3,812 32.8
Raw materials cost (% of net sales) 67.6% 72.1% 69.0% -5pps -1pps 69.8% 69.8% 0pps
Employees cost 129 117 107 10.0 20.3 246 210 16.9
Other expenses 513 480 368 6.9 39.4 993 812 22.2
EBITDA 555 399 291 39.1 90.8 955 625 52.7
EBITDA margin 15.1% 11.2% 11.8% 386bps 328bps 13.2% 11.5% 170bps
Depreciation 85 65 65 30.4 30.9 151 131 14.7
EBIT 470 334 226 40.8 108.1 804 494 62.8
Interest and finance charges 13 83 68 (84.5) (80.9) 96 18 422.8
Operating PBT 457 250 158 82.5 189.3 707 475 48.8
Other Income 40 45 50 (12.1) (20.3) 85 96 (12.3)
Extraordinary Income/(expense) 143 - - n.m. - 143 - n.m.
PBT 639 295 208 116.4 208.0 935 572 63.5
Tax 103 60 18 72.0 455.7 162 51 216.6
PAT 537 236 189 127.6 183.7 772 520 48.4
Adj PAT 394 236 189 67.1 108.3 630 520 21.0
Adj PAT margin 10.7% 6.6% 7.7% 407bps 303bps 8.7% 9.5% -86bps
No of equity shares (Mn) 35.0 35.0 11.7 - - 35.0 11.7 -
Adj EPS (Rs) 10.7 6.4 5.1 67.1 108.3 17.1 14.2 21.0
Source: Company, CRISIL Equities
n.m.: not meaningful
Note: Numbers have been re-classified as per CRISIL Equities standards. Interest and finance charges include losses/gains on account of foreign
exchange fluctuation
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Dhunseri Petrochem and Tea Limited
20
Focus Charts
Global operating rates to firm post 2011 Dhunseri is the second largest player in the
domestic PET market after Reliance
83.3%
84.2%
82.5%
84.3%
86.4%
82.4%
79.0%78.1%
73.5%
75.3%
77.9%
76.2%
76.6%77.4%
80.6%
81.6%
65%
70%
75%
80%
85%
90%
0.0
5.0
10.0
15.0
20.0
25.0
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
2010
E
2011
E
2012
E
2013
E
2014
E
2015
E
Global Capacity Operating Rate
(MMT)
39.3
70.1 88.7 138.2 143.3
59.9
52.8 58.7 78.1
100.5
5.0 30.4
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY
06
FY
07
FY
08
FY
09
FY1
0E
JBF Dhunseri Reliance
(000 MT)
Source: Industry, CRISIL Equities Source: CRISIL Equities
Revenues to increase in FY11 due to optimum capacity
utilisation
Cost savings in power to improve EBITDA in FY11,
before being subdued by excess global supply
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
FY09 FY10 FY11E FY12E
(Rs bn)
Petchem Tea
10.3%10.0%
12.9%
10.4%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
FY09 FY10 FY11E FY12E
EBITDA margin
Source: Company reports, CRISIL Equities Estimate Source: Company reports, CRISIL Equities Estimate
Change in Dhunseris shareholding pattern Dhunseri s stock has had average liquidity
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jun-09 Sep-09 Dec-09 Mar-10 Jun-10
Promoter and Promoter Group DI I Others
-
50
100
150
200
250
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Total traded quantity (RHS) Share price Fair Value
Source: NSE Source: NSE, CRISIL Equities
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CRISIL Independent Equity Research Team
Mukesh Agarwal [email protected] +91 (22) 3342 3035
Director
Tarun Bhatia [email protected] +91 (22) 3342 3226
Director- Capital Markets
Analytical Contacts
Chetan Majithia [email protected] +91 (22) 3342 4148
Sudhir Nair [email protected] +91 (22) 3342 3526
Sector Contacts
Nagarajan Narasimhan [email protected] +91 (22) 3342 3536Ajay D'Souza [email protected] +91 (22) 3342 3567
Manoj Mohta [email protected] +91 (22) 3342 3554
Sachin Mathur [email protected] +91 (22) 3342 3541
Sridhar C [email protected] +91 (22) 3342 3546
Business Development Contacts
Vinaya Dongre [email protected] +91 99 202 25174
Sagar Sawarkar [email protected] +91 98 216 38322
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The Equity Group at CRISIL Research provides a wide range of services including:
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