Will a Backward Integration help JBF Industries to be more Cost Competitive

JBF Industries Ltd. is one of the leading names in the Indian Polyester Industry. The Company manufactures Polyester chip.The company manufactures a wide range of products like Polyester chips, bottle grade chips, partially oriented yarn, fully drawn yarn and polyester textured yarn. The Company was established in 1982, by Mr. Bhagirath Arya as a Yarn Texturizing company. JBF became a public limited company in the year 1986.

The company is undergoing vertical backward Integration, so as to produce PTA (Purified Terephthalic Acid). This will ensure a steady flow of raw material supply, for the manufacturing of the chips in the plant. This move will also help the company, benefit from lower raw material and freight costs, along with lesser working capital requirement thus making the company’s product much more competitive and would help it improving the operating profit as well.

Company’s Financials

What we like about the Company

• Backward integration into PTA – JBF is setting up a 1.25 mn tpa PTA plant in Mangalore SEZ. This backward vertical integration will help the company ensure assured raw material supply and will also improve on the company’s operating profits. The plan for PTA is expected to be functional from 2015, as the work on acquisition of land has been completed. Also the company has begun its construction on the same after achieving financial closure. PTA is one of the key ingredients used as a raw material for the manufacturing of polyester chips. The output from the PTA plant will help JBF meet its total PTA requirements easily.

• Domestic as well as global operations continue to perform well – The Company has a subsidiary, JBF RAK LLC. based out of Dubai. The company expanded its chips capacity in India and UAE by 43,500 tpa and 42,000 tpa, respectively, during FY12. For the domestic operation in India, company continues to focus on the de-risking strategy. Recently after the forward integration into filament yarn, the company is shifting a portion of its fiber grade capacity to bottle grade capacity. In overseas operations as well, the company expanded its film capacity by 35,760 tpa, thus making a rise in the share of specialty grade film.

• Strong demand in Polyester – It is expected that the demand for polyester would grow by 7-8% over FY12-FY17. This can be accounted to the rising per capita consumption of textiles and better competitiveness of polyester, compared to cotton yarn. Thus competition is expected to remain intense and the company will be benefitted by its strategic move in the recent times.

• Growth in revenue and margin – It is expected that the company’s revenue will grow at a rate of 6% (CAGR). Also the EBITDA margin is expected to improve from the current levels, to 10.9% on account of softening of raw material prices. Apart from this, the forward and backward integration move of the company would add to the improvement in the margin subsequently.

Key Risks

• Execution of PTA plant- It is very important that the PTA project for backward integration is executed well on time and the company meets it demand of raw materials, as it effects the growth in revenue and margin critically.

• Currency fluctuation – Company’s new area of operation requires huge capital. Import of raw materials along with the exposure in derivatives imposes a risk on the company’s performance.

The Current market price has strong upside. Applying the discounted cash flow method to value JBF, we see that the current market price of the company has a strong position to reach the levels of around 200.

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