Buy Call For Nakoda Limited with target price of Rs 37 : Ventura Securities

Nakoda Limited Buy Call by Ventura Securities In Phase 1 of its Rs 333 crore expansion that has been completed, Nakoda has established a 1,40,000 TPA Continuous Polymerization Plant (CPP) which will cater to the needs of the downstream expansion POY) besides expanding margins by 190 bps. FDY & DTY stand at 59,500 (+ 205%) & 29,870 (+ 2692%) tpa respectively while production from these capacities is expected to stabilize by the middle of Q1CY2011.

In Phase 2 (capex of Rs 234 crore), the company is further expanding capacities of POY, FDY and DTY to 70,000 (+133.3%), 69, 39,870 (+33.5%) respectively which should commence production by end of December 2011. The Korean acquisition is expected to add another 54,000 tpa of FDY, 32,400 tpa of POY and 21,600 tpa of PET capacity.

On the back of these enhanced capacities revenues to grow at a CAGR of 38.9% to Rs 2 Commensurately we expect the EBITDA margins to expand by 360 bps to 8.6% and earnings to grow at a CAGR of 65.1 South Korean acquisition to provide growth t and secure raw material sourcing

Nakoda through its subsidiary IKPL acquired the plant of Kyunghan in South Korea for a consideration of $40 mn at the bottom cycle. IKPL has one of the lowest cost of capital of $180 per ton and
compares favorably with Korean market leader TK Chemical’s capital cost per ton. In our view, the venture should pay back in a period of 3-4 years

With the Korean demand for fibre reviving, shortages and abundance of raw material (PTA and MEG in a sweet spot. In addition, IKPL can cater to the other high growth
markets of GCC, Europe & Africa. Revenues from IKPL are expected to grow at a CAGR of 136% to Rs 757.2 by CY2012. IKPL’s contribution to revenue is expected to be in the range of 29-30% of consolidated revenues in CY11& CY12; while net margins are expected to be significantly higher than the domestic operations.

IKPL can also help source PTA and MEG for domestic operations during tight supply conditions helping the company over ride the issue of raw material availability.

Increased demand for textiles and shrinking arable land to pressure cotton supplies leading to improved pricing and demand for manmade fibre; notably polyester.

Population growth & declining arable acreage is a limiting factor to the production of cotton and other natural fibres. With the global & domestic textile industry growing at the rate of 5% and 11% respectively, the additional demand would perforce have to be catered to by man-made fibres (MMF). With polyester constituting ~80% of MMF, polyester is increasingly becoming the preferred fibre of choice and scores well on its price competitiveness and high compatibility with natural fibre.

India’s per capita polyester consumption at 1.6 kg, is one of the lowest (and compares favorably with China at 6.1 kg/capita and Global average of 4.2 kg/capita) and is set to surge given the enhanced demand from substitution and industrial consumption. Currently, the domestic cotton polyester usage ratio is at 57:43 and is expected to inch to 40:60 in the medium term, in favour of polyester.

Despite the increasing raw material cost, polyester spreads are expected to remain in an upward trajectory given the widening price gap between polyester and cotton and between polyester and other alternate fibre like viscose/ acrylics. Also with global demand far exceeding operational capacities and significant capacity expansions expected to come on stream only post 2013, the scenario could not have been more favourable. We have assumed prices for POY / FDY / DTY at Rs 86 / 99 / 104 per kg and at Rs 93 / 105 / 109 per kg for CY11& CY12 respectively.

Surat Textile park to provide cushion through assured off take

In a strategic move, Nakoda has acquired an 18.5% stake in the Surat Super Yarn Park (SSYP) for a consideration of Rs 3 crores. SSYP will have a total POY processing capacity of 151,000 TPA and in addition it will house a 20 MW coal based power plant. Nakoda will be investing ~Rs 37.7 crore in setting up 20 texturizing machines by itself within the Park.

The SSYP demand will result in assured offtake of more than the entire POY production capacity of Nakoda. To cater to the forecasted needs of this Textile Park, Nakoda can source an additional 52,500 TPA of POY from other players and thereby augmenting revenues and profits. Further, Nakoda would be directly selling texturised fabric procured from SSYP texturisers and earn marketing margin. However we have not modeled any revenues from the SSYP in our forecast.




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