The stock of Styrolution ABS India (SAI) has appreciated by 20% since our Viewpoint report released on December 17, 2014 at the current market price of Rs608. Also, we had re-iterated our positive stance in February 2015. Our positive view on the stock was primarily based on the fact that SAI would benefit from a sharp fall (by 45%) in styrene prices. The same was reflected in the gross profit margin expansion reported by SAI in Q4FY2015 results.
However, the global styrene prices have risen by close to 30% from the bottom without consummate increase in prices of finished products. Consequently, the spreads and the profitability could come under stress in the coming quarters.
SAI had purchased 100% stake in its group company, Styrolution India (SIN), which manufactures polystyrene at its facility in Dahej. In its latest published annual report SAI presented the consolidated financials together with that of SIN. SIN’s FY2015 operating profit margin was at meagre 0.4% as compared with 5.5% of SAI’s stand-alone operations. Also, SAI’s FY2015 consolidated net profit after tax (PAT) at Rs18.9 crore, lower than the stand-alone PAT of Rs35 crore, implies a significant loss at SIN operations. Although, we expect SIN’s profitability to improve given the lower raw material prices, but margins will remain lower as compared with SAI’s stand-alone operations.
Given the reducing spreads driven by rising prices of styrene and the drag of low margin acquired business on its consolidated performance, we believe it would be better to book profit. The valuations are also not cheap post the downgrade in earnings estimates taking the lower spreads into account. The stock is currently trading at a rich valuation of 16x its FY2017E earnings and leaves limited scope for an upside. We advise investors to Book Profit.
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