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Dhunseri Petrochem and Tea Limited

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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 Grade
CRISILs 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 5/5 4/5 3/5 2/5 1/5 Assessment Excellent fundamentals Superior fundamentals Good fundamentals Moderate fundamentals Poor fundamentals

Valuation Grade
CRISILs 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 5/5 4/5 3/5 2/5 1/5 Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company.

Assessment Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP)

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Independent Research Report Dhunseri Petrochem and Tea Limited


A PET growth story Industry: Date: Chemicals November 04, 2010

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 fourfold and take advantage of the growing domestic and global demand for PET. We assign Dhunseri a fundamental grade of 3/5, 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 FY0510. 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, 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 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 greenfield 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) Operating income EBITDA Adj Net income Adj EPS-Rs Adj EPS growth (%) PE (x) P/BV (x) EV/EBITDA (x) RoCE (%) RoE (%)

CFV matrix
Excellent Fundamentals 5
Fundamental Grade

4 3 2 1

Poor Fundamentals

Valuation Grade
Strong Downside Strong Upside

Fundamental grade of '3/5 indicates good fundamentals Valuation grade of '3/5' indicates CMP is aligned

Key stock statistics


NSE Ticker Fair value (Rs per share) Current market price Shares outstanding (Mn) Market cap (Rs mn) Enterprise value (Rs mn) 52-week range (Rs) (H/L) P/E on EPS estimate (FY12E) Beta Free float (%) Average daily volumes * Closing price as on report date DPTL 236 220 35.0 7,693 9,239 227/133 9.7 0.90 37.4% 42,680

Share price movement


400 350 300 250 200 150 100 50 -

-Indexed to 100 FY09 12,294 1,263 210 5.7 (11.6) 38.5 2.1 8.0 11.7 5.5 FY10 11,582 1,154 769 20.9 266.7 10.5 1.4 8.3 9.2 15.8 FY11E 13,786 1,781 985 26.8 28.1 8.2 1.2 5.6 13.6 15.7 FY12E 13,835 1,437 836 22.7 (15.1) 9.7 1.1 10.5 7.5 12.0

Analytical contact
Sudhir Nair (Head, Equities) Arun Vasu Suhel Kapur Email: clientservicing@crisil.com +91 22 3342 3526 +91 22 3342 3529 +91 22 3342 4149 +91 22 3342 3561

Source: Company, CRISIL Equities estimate

CRISIL Equities

Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
Dhunseri Nifty

Dhunseri Petrochem and Tea Limited

Table 1: Business environment


Parameter Revenue contribution (FY10) Revenue contribution (FY12) Product offering Bottle grade PET resin PET and tea PET business 89% 90% Tea business 11% 10% 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 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 Sales growth (FY10-FY12 2-yr CAGR) Demand drivers Growing packaging industry Superior product characteristics of PET Margin drivers Improving efficiency coal-based power plant to replace FO-based plant Firming operating rates globally post FY12 Key competitors Reliance Industries Ltd and JBF Industries Ltd 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 Assam Tea, McLeod Russell, Jayshree Tea, Goodricke Group and Warren Tea Key risks Strong domestic demand for tea which is the countrys staple drink Focus on improving efficiencies 9% Tea prices are expected to grow moderately at a two-year CAGR of 3-4% Production is expected to remain at the same level 4% Caters only to the domestic market

CRISIL Equities

Dhunseri Petrochem and Tea Limited

Grading Rationale
Dhunseri is the second largest domestic manufacturer of PET
Dhunseri is the second largest domestic PET resin manufacturer with a capacity to
Dhunseri has the capacity to produce 200,000 MTPA of PET resin as of FY10

produce 200,000 MTPA (metric tonnes per annum) as of FY10. Reliance Industries Limited (Reliance) and JBF Industries Ltd (JBF) 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, JBF 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


JBF 110,000 18%

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 reactive, economical and freshness-retentive. its distinct characteristics - hygienic, lightweight, unbreakable, non-

Reliance 290,000 49%

Dhunseri 200,000 33%

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
Global operating rates are set to firm post 2011

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.

CRISIL Equities

Dhunseri Petrochem and Tea Limited

Figure 2: Operating rates to be firm post 2011


(MMT) 25.0 20.0 15.0 10.0 5.0 0.0 73.5% 84.2% 84.3% 83.3% 82.5% 79.0% 86.4% 82.4% 77.9% 75.3% 81.6% 80.6% 78.1% 77.4% 76.6% 90% 85% 80% 75% 70% 65%

Figure 3: Global end-user industry for PET 2010E 15.2 MMT


Other drinks, 24% Carbonated soft drinks, 19%

76.2%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010E

2011E

2012E

2013E

2014E

2015E

Food containers, 28%

Non-Food containers, 29%

Global Capacity

Operating Rate

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
(000 MT) 300 250 200 150 100 50 23.9% 19.9% 23.9% 62.5% 50.2% 70% 60% 50% 40% 30% 20% 10% 0% FMCG, 26% Pharma, 20% Personnel Care, 5% Pesticide, 7%

Figure 5: Market segments for PET chips in India (FY10E)


Others, 9%

Liquor, 20%

FY10E

FY05

FY06

FY07

FY08

FY09

Domestic demand

Growth (y-o-y)

Edible Oil, 13%

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
Domestic demand is set to grow at 18-20% over the next five years

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.

CRISIL Equities

Dhunseri Petrochem and Tea Limited

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 JBF have been increasing their sales volume in India.

Figure 6: Growth in domestic PET demand has pushed up PET sales in India
(000 MT) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 99 123 147 221 274 285 302 263 279 284

Figure 7: Reliance caters to more than 50% of the domestic market in FY10
(000 MT) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 39.3 70.1 88.7 138.2 143.3 59.9 52.8 58.7 78.1 100.5 5.0 30.4

FY06

FY07

FY08

FY09

FY10E

Exports

Domestic sales

JBF

Dhunseri

Reliance

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
(Rs/MT) 63,000 62,000 61,000 60,000 59,000 58,000 57,000 56,000 55,000 FY06 55,300 FY07 Domestic realisation FY08 FY09 Export realisation FY10 56,064 57,317 56,680 56,134 60,880 62,013 62,400 60,585 59,489

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.
Dhunseri d-bounded from its EOU status to take advantage of the robust domestic demand

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

CRISIL Equities

FY10E

FY06

FY07

FY08

FY09

Dhunseri Petrochem and Tea Limited

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
10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% FY06 FY07 EBITDA in Petchem FY08 FY09 8.0% 8.3% 8.3% 9.8%

Source: Industry, CRISIL Equities

Coal-based power plant to result in substantial cost savings


Power would be generated through low-cost coal instead of high-cost furnace oil

Until FY10, Dhunseri met its power requirements through furnace oil (FO)-based power plant. In June 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 raw
Dhunseris existing plant is strategically located near raw material source

material 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

CRISIL Equities

Dhunseri Petrochem and Tea Limited

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
Egypt plant would be apt to service international clients

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 for
Proximity to rapidly growing African markets and raw material supplying nations are some of the key benefits for the Egypt plant

shipments 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 from 7.6 mn kg in FY05 to 10.5 mn kg in FY10, constituting almost 3% of the total tea production in India.

CRISIL Equities

Dhunseri Petrochem and Tea Limited

Figure 10: Dhunseri is amongst the top 10 Indian tea producers


(Mn kgs) 12.0 10.0 8.0 6.0 4.0 2.0 7.5 7.8 7.5 7.5 7.6 7.5 7.4

10.4 7.2

9.9

10.5

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

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,
Profitability of tea business has improved over the years

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.

CRISIL Equities

FY10

Dhunseri Petrochem and Tea Limited

Figure 11: Higher revenues because of favourable cycle


(Rs mn) 1,400 1,200 1,000 800 600 400 200 646 92 38 14 9 9 636 667 72 45 38 134 926 166 1,067 (Rs mn) 1,308 233 250 200 150 100 50 0

Figure 12: Profitability has improved because of efficient operations and favourable cycle
30% 25% 20% 15% 10% 5% 0% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 EBITDA margin PAT margin

589

551

501

592

573

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

Revenues

PAT

Source: Industry, CRISIL Equities

FY10

Source: Industry, CRISIL Equities

Tea prices to remain firm due to demand-supply gap


Tea prices to increase by 3-4% over the next two years

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,

Contribution of tea business to total sales is expected to go down

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.

CRISIL Equities

Dhunseri Petrochem and Tea Limited

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 largesized 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
Timely execution and higher raw material prices to be the key for future growth

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, PTA and 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, the company 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.

CRISIL Equities

10

Dhunseri Petrochem and Tea Limited

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.

CRISIL Equities

11

Dhunseri Petrochem and Tea Limited

Financial Outlook
Figure 13: Revenues to increase in FY11 due to optimum capacity utilisation
(Rs bn)

Figure 14: Cost savings in power to improve EBITDA in FY11, before being subdued by excess global supply
14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 10.4% 12.9%

16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 FY09 FY10 Petchem Tea FY11E FY12E

10.3%

10.0%

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
8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% FY09 FY10 PAT margin FY11E FY12E 1.7% Forex gains/(losses) cause huge variance in PAT margins 6.6% 7.1%

Figure 16: Lower EBITDA to reduce EPS marginally in FY12


(Rs per share) 30.0 25.0 20.0 15.0 10.0 5.7 5.0 FY09 FY10 Adj EPS FY11E FY12E 26.8 20.9 22.7

6.0%

Source: Company reports, CRISIL Equities

Source: Company reports, CRISIL Equities

Figure 17: Dhunseris capex plans to increase its gearing


(Times) 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 FY09 FY10 FY11E FY12E 0.7 0.8 1.4 1.5

Figure 18: Capex phase to lower returns for the company


18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% FY09 FY10 RoCE FY11E RoE FY12E 5.5% 9.2% 7.5% 11.7% 15.8% 15.7% 13.6% 12.0%

Source: Company, CRISIL Equities

Source: Company reports, CRISIL Equities

CRISIL Equities

12

Dhunseri Petrochem and Tea Limited

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).
Top management fairly experienced with strong domain expertise

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 management


Based 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.

CRISIL Equities

13

Dhunseri Petrochem and Tea Limited

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
Dhunseris corporate governance practices are adequate and meet the minimum required standards

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.

CRISIL Equities

14

Dhunseri Petrochem and Tea Limited

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
We assign a fair value of Rs 236 per share and initiate coverage with a valuation grade of 3/5

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 11.2% 12.2% 13.2% 14.2% 15.2% 1.0% 276 228 189 157 132 2.0% 312 255 210 174 145 3.0% 357 289 236 195 161 4.0% 414 331 267 218 180 5.0% 490 384 306 248 202

Source: CRISIL Equities

CRISIL Equities

15

Dhunseri Petrochem and Tea Limited

Company Overview
Until 2008-09, the Dhunseri Group comprised two manufacturing companies: 1. 2. Dhunseri Tea & Industries Ltd engaged in tea cultivation and marketing 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 a subsidiary 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 1955 1961 1970 1980 1991 1992 1993 1994 1996 Milestones S L Dhanuka Group took over management of the company from James Finlay & Company Dhunseri Tea Company was incorporated Company was renamed Dhunseri Tea & Industries Company acquired the Namsang and Dilli Gardens in Assam The company took over Bahadur Tea Company and amalgamated with Dhunseri Tea The company came out with a public issue Santi Tea Estate was amalgamated with Dhunseri Tea The company acquired Santi tea estate, Khetojan tea estate and Khagorijan tea estate The company promoted South Asian Petrochem Ltd to manufacture PET Resins under technical and financial collaboration with Lurgi Zimmer AG of Germany 2009 Dhunseri Tea & Industries and South Asian Petrochem merged together to form Dhunseri Petrochem and Tea Ltd

Dhunseri Tea & Industries Ltd and South Asian Petrochem Ltd merged together to form Dhunseri Petrochem and Tea Limited in FY10

Source: Company, CRISIL Equities

CRISIL Equities

16

Dhunseri Petrochem and Tea Limited

Annexure: Financials
Income Statement (Rs mn) Net sales Operating Income EBITDA Depreciation Interest Other Income PBT Adj PAT No. of shares Adj Earnings per share (EPS -Rs) Balance Sheet (Rs mn) Equity capital (FV - Rs 10) Reserves and surplus Debt Current Liabilities and Provisions Deferred Tax Liability/(Asset) Capital Employed Net Fixed Assets Capital WIP Intangible assets Investments Loans and advances Inventory Receivables Cash & Bank Balance Applications of Funds Source: Company, CRISIL Equities estimate FY09 117 3,783 5,354 2,336 268 11,859 3,827 188 94 603 1,217 919 1,808 3,202 11,859 FY10 117 5,774 3,976 2,506 383 12,711 5,299 436 71 816 1,408 761 1,492 2,429 12,711 FY11E 350 6,403 5,476 2,886 577 15,646 5,152 1,740 57 716 1,676 906 1,775 3,625 15,646 FY12E 350 6,973 10,976 2,980 742 21,975 4,999 8,063 43 516 1,682 947 1,820 3,907 21,975 FY09 12,163 12,294 1,263 267 830 145 311 210 11.7 5.7 FY10 11,401 11,582 1,154 279 21 160 1,014 769 11.7 20.9 FY11E 13,649 13,786 1,781 289 204 182 1,471 985 35.0 26.8 FY12E 13,698 13,835 1,437 294 148 254 1,248 836 35.0 22.7

CRISIL Equities

17

Dhunseri Petrochem and Tea Limited

Cash Flow (Rs mn) Pre-tax profit Total tax paid Depreciation Change in working capital Cash flow from operating activities Capital expenditure Investments and others Cash flow from investing activities Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Others (incl extraordinaries) Cash flow from financing activities Change in cash position Opening Cash Closing Cash Ratios FY09 Growth ratios Sales growth (%) EBITDA growth (%) Adj EPS growth (%) Profitability Ratios EBITDA Margin (%) PAT Margin (%) Return on Capital Employed (RoCE) (%) Return on equity (RoE) (%) Dividend and Earnings Dividend per share (Rs) Dividend payout ratio (%) Dividend yield (%) Adj Earnings Per Share (Rs) Efficiency ratios Asset Turnover (Sales/GFA) Asset Turnover (Sales/NFA) Sales/Working Capital Financial stability Debt-equity Interest Coverage Current Ratio Valuation Multiples Price-earnings Price-book EV/EBITDA Source: Company, CRISIL Equities estimate 38.5x 2.1x 8.0x 10.5x 1.4x 8.3x 8.2x 1.2x 5.6x 9.7x 1.1x 10.5x 1.4 1.2 3.1 0.7 42.2 2.4 0.8 7.3 2.8 1.5 7.7 2.8 2.3x 3.2x 9.5x 1.9x 2.5x 8.4x 1.9x 2.6x 10.5x 1.9x 2.7x 9.4x 3.9 21.5 1.8 5.7 13.9 21.2 6.3 20.9 6.5 20.2 3.0 26.8 6.5 27.2 3.0 22.7 10.3 1.7 11.7 5.5 10.0 6.6 9.2 15.8 12.9 7.1 13.6 15.7 10.4 6.0 7.5 12.0 1,221.2 938.7 (11.6) (5.8) (8.6) 266.7 19.0 54.3 28.1 0.4 (19.3) (15.1) FY10 FY11E FY12E FY09 311 (53) 267 (617) (93) (320) 318 (2) 47 1,293 (45) (100) 1,195 1,099 2,103 3,202 FY10 1,014 (176) 279 455 1,572 (1,975) (213) (2,188) 246 (1,379) (163) 1,139 (157) (772) 3,202 2,429 FY11E 1,471 (291) 289 (317) 1,151 (1,431) 100 (1,331) 233 1,500 (266) (90) 1,376 1,196 2,429 3,625 FY12E 1,248 (247) 294 3 1,299 (6,450) 200 (6,250) 5,500 (266) 5,234 282 3,625 3,907

CRISIL Equities

18

Dhunseri Petrochem and Tea Limited

Quarterly results
Dhunseri (Rs mn) Net sales Raw materials cost Raw materials cost (% of net sales) Employees cost Other expenses EBITDA EBITDA margin Depreciation EBIT Interest and finance charges Operating PBT Other Income Extraordinary Income/(expense) PBT Tax PAT Adj PAT Adj PAT margin No of equity shares (Mn) Adj EPS (Rs) 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 Q2FY11 3,689 2,492 67.6% 129 513 555 15.1% 85 470 13 457 40 143 639 103 537 394 10.7% 35.0 10.7 Q1FY11 3,568 2,572 72.1% 117 480 399 11.2% 65 334 83 250 45 295 60 236 236 6.6% 35.0 6.4 Q2FY10 2,472 1,706 69.0% 107 368 291 11.8% 65 226 68 158 50 208 18 189 189 7.7% 11.7 5.1 q-o-q(%) 3.4 (3.1) -5pps 10.0 6.9 39.1 386bps 30.4 40.8 (84.5) 82.5 (12.1) n.m. 116.4 72.0 127.6 67.1 407bps 67.1 y-o-y(%) 49.2 46.1 -1pps 20.3 39.4 90.8 328bps 30.9 108.1 (80.9) 189.3 (20.3) 208.0 455.7 183.7 108.3 303bps 108.3 H1FY11 7,257 5,063 69.8% 246 993 955 13.2% 151 804 96 707 85 143 935 162 772 630 8.7% 35.0 17.1 H1FY10 5,459 3,812 69.8% 210 812 625 11.5% 131 494 18 475 96 572 51 520 520 9.5% 11.7 14.2 y-o-y(%) 32.9 32.8 0pps 16.9 22.2 52.7 170bps 14.7 62.8 422.8 48.8 (12.3) n.m. 63.5 216.6 48.4 21.0 -86bps 21.0

CRISIL Equities

19

Dhunseri Petrochem and Tea Limited

Focus Charts
Global operating rates to firm post 2011
(MMT) 25.0 20.0 15.0 10.0 5.0 0.0 73.5% 84.2% 84.3% 83.3% 82.5% 79.0% 86.4% 82.4% 77.9% 75.3% 81.6% 80.6% 78.1% 77.4% 76.6% 90% 85% 80% 75% 70% 65%

Dhunseri is the second largest player in the domestic PET market after Reliance
(000 MT) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 39.3 70.1 88.7 138.2 143.3 59.9 52.8 58.7 78.1 100.5 5.0 30.4

76.2%

2010E

2011E

2012E

2013E

2014E

2015E

Global Capacity

Operating Rate

JBF

Dhunseri

Reliance

Source: Industry, CRISIL Equities

Source: CRISIL Equities

Revenues to increase in FY11 due to optimum capacity utilisation


(Rs bn) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 FY09 FY10 Petchem Tea FY11E FY12E

Cost savings in power to improve EBITDA in FY11, before being subdued by excess global supply
14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% FY09 FY10 FY11E FY12E 10.4% 12.9%

10.3%

10.0%

EBITDA margin

Source: Company reports, CRISIL Equities Estimate

Source: Company reports, CRISIL Equities Estimate

Change in Dhunseris shareholding pattern


100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jun-09 Sep-09 Dec-09 DII Mar-10 Others Jun-10

Dhunseris stock has had average liquidity


800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 100 50 250 200 150

Aug-09

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Aug-05

Aug-06

Aug-07

Aug-08

Promoter and Promoter Group

Total traded quantity (RHS)

Share price

Fair Value

Source: NSE

Source: NSE, CRISIL Equities

CRISIL Equities

Aug-10

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

FY10E

FY06

FY07

FY08

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

FY09

20

CRISIL Independent Equity Research Team


Mukesh Agarwal Director Tarun Bhatia Director- Capital Markets Analytical Contacts Chetan Majithia Sudhir Nair Sector Contacts Nagarajan Narasimhan Ajay D'Souza Manoj Mohta Sachin Mathur Sridhar C Business Development Contacts Vinaya Dongre Sagar Sawarkar vdongre@crisil.com ssawarkar@crisil.com +91 99 202 25174 +91 98 216 38322 nnarasimhan@crisil.com adsouza@crisil.com mmohta@crisil.com smathur@crisil.com sridharc@crisil.com +91 (22) 3342 3536 +91 (22) 3342 3567 +91 (22) 3342 3554 +91 (22) 3342 3541 +91 (22) 3342 3546 chetanmajithia@crisil.com snair@crisil.com +91 (22) 3342 4148 +91 (22) 3342 3526 magarwal@crisil.com tbhatia@crisil.com +91 (22) 3342 3035 +91 (22) 3342 3226

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