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Growth Fibre

JBF Industries already holds a 55% market share, which is set to become 65% after the company's capacity is increased. And with increased demands for its products, the company is poised to benefit

JBF Industries is well positioned to reap the benefits of capacity expansion in a favourable industry scenario.

Promoted by the Arya Group, JBF Industries was incorporated in 1982. The company is among the leading manufacturer of polyester chips. Though it has a 55 per cent market share, it should extend to 65 per cent with an increase in its capacity at an estimated capex of Rs 160 crore. The firm has global aspirations too. Capitalising on its expertise of manufacturing polyester chips, the company has expanded its product basket by foraying into the manufacture of Polyethylene Terephthalate Resin Polymer Chips (PET) chips and PET films for the packaging industry.

The commercial production of PET chips commenced in June 2007 while that of PET films should commence in Q1FY09. Thanks to a 60:40 joint venture with the Ras Al Khaimah Investment Authority (RAKIA), the manufacturing facilities are located at Ras-Al-Khaimah, UAE, and will primarily cater to the Western market.

Lucrative Product Mix
JBF is also one of the top five manufacturers in the partially oriented yarn (POY) segment. The domestic demand for POY is expected to increase at a CAGR of around 9 per cent over the next five years. POY is used for manufacturing apparel (clothing and knitwear) and non-apparel (upholstery, industrial fabrics, luggage etc). In addition, POY is fast gaining acceptance in other segments such as tyre cords and protective airbags in automobiles. India presently accounts for 4 per cent of the world's technical textile market and its share is expected to grow to 9 per cent by 2010. The demand for POY is expected to come from newer segments such as roads, bridges and airports under construction, which have been attracting huge investments.

PET is used in a wide variety of packaging products such as beverages, food packaging, personal care items, health care and pharmaceutical uses, household products, and industrial packaging applications. The demand for PET chips has grown steadily over the past years driven by the popularity for recyclable, single-serve containers and as a substitute for glass and aluminum. The market for global PET chips is grow at a CAGR of 8 per cent.

Post its capacity additions, the company's consolidated product mix would include polyester chips, POY, PET chips and PET films. Since the manufacturing of all these products are capital intensive in nature, it would be difficult to replicate it by other smaller players.

Favourable Industry Scenario
Polyester chips are used for manufacturing POY. There are not many polyester chip manufacturers who sell to independent POY producers since it is mainly produced for captive consumption. The company's leading position stems from the fact that it supplies to other POY producers. And this demand-supply mismatch in the segment is only expected to continue going forward. With cotton prices increasing and expected to remain firm, the demand for polyester is on the rise. Further, raw material prices are expected to decline due to additional capacity that would come on stream in the coming years.

Locational Advantage
Its current manufacturing facilities are located at Silvassa (Daman and Diu) and Sarigram (Gujarat). The power cost at Silvassa, which is a union territory, is much less when compared to the state electricity board charges. Moreover, most of its clients are located in and around Silvassa, thereby saving transportation and packaging cost. In the UAE, it benefits from the excellent infrastructure, proximity to the American and European countries, availability of raw materials and natural gas in particular at low rates, and zero taxes.

Reduction of Power Costs
Since the cost of power constitutes 4 per cent of the company's net sales, it has installed a 7MW natural gas-based power plant at Sarigram in Gujarat. This should lower the cost of power to Rs 3 per unit against Rs 5 per unit from the state grid. The company will also benefit from a 20 MW gas-based captive power plant in the UAE. As a result of these initiatives, the company's power cost should reduce to 3 per cent of net sales by FY09.

The setting up of a plant in the UAE will offer the benefits of gas at low rates, transportation benefits and zero taxes. Consequently, the operating and net profit margin will improve.

Associated Risks
Polyester is a substitute for cotton. A drop in cotton prices should result in a decrease in the demand for polyester. Though cotton prices are expected to remain firm due to demand-supply gap, the possibility of a bumper crop cannot be ruled out. Equity dilution is another concern.

FinancialsWe expect JBF's sales volumes to increase nearly three-fold during the FY07-09E period. Subsequently, during the same period its revenues should more than double on the back of a 170 per cent CAGR in volume, due to timely expansion of its domestic capacities and foray into global markets. We expect operating profit should rise at a CAGR of 71.82 per cent during this period. Reaping the benefits of capacity expansion and location, we expect the ROCE and RONW to improve significantly by FY09.

Financials
  FY 04  FY 05  FY 06  FY 07
Net Sales (Rs cr) 680.43 739.04 722.15 1476.86
PAT (Rs cr)* 29.93 23.55 38.28 76.56
EPS (Rs) 8.82 9.43 9.84 15.61
RONW (%) 18.00 12.68 15.46 22.27
ROCE (%) 23.89 19.25 13.61 18.97
FY ending March 31 each year
*Net of non-recurring transactions


Due to the commodity nature of JBF's products, volumes will drive the growth of the company. Its plans to increase its manufacturing capacity and the commissioning of the plant at RAK in UAE is expected to fuel its growth and enhance the company's top line.