Andhra Petrochemicals :- Turnaround Candidate with Multibagger Potential

Andhra Petrochemicals Ltd., incorporated in the year 1984, is a Small Cap company (having a market cap of Rs 305.47 Crore) operating in Chemicals sector.

The Andhra Petrochemicals Ltd. (APL) was promoted by The Andhra Pradesh Industrial Development Corporation (APIDC)  and  The Andhra Sugars Ltd (ASL) in   1984 as joint sector Company. Subsequently the structure of the Company has changed into an assisted sector Company with ASL being the major share holder.

Andhra Petrochemicals' oxo-alcohols facility in Visakhapatnam, in the state of Andhra Pradesh, is the only producer of oxo-alcohols in India and accounts for 30 of the market.

 It produces isobutanol, 2-ethylhexanol and n-butanol.The facility began its operations in 1994 with an initial capacity of 30,000mtpa. Over the years the company enhanced its production capacity to 39,000mtpa. The estimated investment in setting up the facility was about $50m.

Plant expansion :- In March 2007, Andhra Petrochemicals announced its plans to expand the capacity of the oxo-alcohols facility in Visakhapatnam. The expansion was completed in May 2010. The expansion plan increased the plant's production capacity from 39,000mtpa to 73,000mtpa. Andhra Petrochemicals invested about $65m in the expansion.

Financing :-

The expansion project was carried out using loans, internal accruals and debt. About $44m is a term loan and the rest of the investment came from internal accruals and equity.

IDBI Bank, State Bank of India, State Bank of Hyderabad and Andhra Bank are some of the lenders for the project.

Process technology :-

In October 2007, Andhra Petrochemicals announced that it had chosen modern LP Oxo SelectorSM 30 Technology, from Davy Process Technology, a London-based supplier of proprietary process technologies. Davy's technology is considered the most efficient and economical method for the production of oxo-alcohols.

The LP OxoSM process technology is used to manufacture normal and iso-butyraldehydes from propylene. The normal and iso-butyraldehydes are further processed to convert them into plasticiser alcohol, 2-ethylhexanol and butanols for solvent uses.

The process involves reacting propylene with synthesis gas which produces normal and iso-butyraldehydes. The synthesis gas is a combination of carbon monoxide and hydrogen. The reaction is carried out at less than 100°C in the presence of a homogeneous modified rhodium catalyst. The conditions under which the reactions are carried out ensure effective utilisation of raw materials. It also results in low by-product formation and requires less energy.

Different variations of the technology are available depending on the requirements for the production of oxo-alcohols. The technology can also be used to produce higher alcohols such as C11 to C14 from olefins produced from Fischer-Tropsch synthesis.

Facilities :-

The Visakhapatnam plant has a storage facility for raw material and products, steam generation, diesel power generation, a sea water cooling tower and space for raw water storage. The plant also encompasses a significant green belt.

Products and feedstock :-

Isobutanol, 2-ethylhexanol and n-butanol are used in various applications. Isobutanol is used in plasticisers, amino resin, isobutyl, acetate, printing inks, nitro cellulose lacquers, urethane catalysts, pesticides, resins, pharmaceuticals, varnishes and rubber chemicals.

2-ethylhexanol is used for surfactants, acrylates, lube and fuel additives, mining, solvent extractions, agro-chemicals and lubricants. N-butanol is used in plasticisers, adhesives, detergents and acrylates.

The facility uses naptha as feedstock. It is supplied by Hindustan Petroleum's (HPCL) Visakh refinery. HPCL will also meet the additional demand for feedstock after the capacity of the plant is increased through the expansion.

Market growth :-

The demand for oxo-alcohols in India is estimated at more than 100,000t/y. The demand is expected to increase in the future due to the growth of the Indian economy and particularly the petrochemicals sector.

As a result, the demand supply gap for oxo-alcohols is expected to be 7–8% per annum. This potential demand for oxo-alcohols is what triggered Andhra Petrochemicals to expand its plant capacity to tackle competition from increasing imports.

Global Outlook :- 

Oxo Alcohols Market by Type (N-Butanol, ISO Butanol, 2-Ethylhexanol), Application (Acrylates, Glycol Ethers, Acetates, Lube Oil Additives, Resins, Solvents, Plasticizers) - Global Trends & Forecast to 2020 Oxo alcohols: A projected value of 12,601 KT by 2020, signifying firm annualized growth of around 4.4% between 2015 and 2020. Oxo alcohols are prepared by reacting olefins with syn gas (hydroformulation reaction) under low pressure in presence of rhodium catalyst. The resultant aldehyde is hydrogenated to give Oxo-alcohols. Various olefins such as ethylene, propylene, acetylene can be used as raw materials for preparation of different kinds of Oxo-alcohols. The commercially important Oxo alcohols are n-butanol, 2-ethylhexanol, and isobutanol. Currently, Asia-Pacific is the biggest market for Oxo alcohols followed by Europe and North America, which together accounted for more than 90% market share in 2014. China is the biggest market for Oxo alcohols, followed by United States, and is projected to grow at a CAGR of 7% between 2015 and 2020. The European market is comparatively mature with a consumption growth rate well below the average market growth. The European Oxo alcohols market is expected to show the lowest CAGR between 2015 and 2020. On the basis of application, the Oxo alcohols market is further categorized into Acrylates, Glycol Ethers, Acetate, Lube, Resins, Solvents, Plasticizers, and others. Plasticizers are the largest application segment of Oxo alcohols, followed by use in acrylates and acetates industry. On the basis of type, the Oxo alcohols market is further categorized into N-butanol, 2-ethylhexanol, Isobutanol, and others. The growth in end user segment is primarily driven by growing demand from the Asia-Pacific region particularly from China. The major players of Oxo alcohols BASF Petronas (Malaysia), Dow Chemical Company (U.S.), Eastman Chemical Company (U.S.), ExxonMobil Chemical Company (U.S.), Arkema SA (France), Evonik Industries (Germany), The Andhra Petrochemicals Limited (India), Oxea (U.S.), ZAK S.A. (Poland), Ineos (Switzerland), BAX Chemicals (The Netherlands), Qatar Petroleum (Qater), and LG Chem (South Korea).

Financials :-

ANDHRA PETROCHEMICALS LTD. has reported financial results for the period ended September 30, 2017.The company has reported net sales of Rs.147.36 crores during the period ended September 30, 2017 as compared to Rs.56.94 crores during the period ended September 30, 2016.The company has posted net profit of Rs.19.15 crores for the period ended September 30, 2017 as against Rs.(7.67) crores for the period ended September 30, 2016.The company has reported EPS of Rs.2.26 for the period ended September 30, 2017 as compared to Rs.(0.90) for the period ended September 30, 2016.

Future Outlook :-

Company's performance capability is expected to be good as the Propylene supply from HPCL got normalised. However, the Company's performance to a large extent is dependent on international supply and demand for these products and their prices which are influenced 

by crude prices, exchange fluctuations and dumping from the sources other than that covered by Anti-Dumping Duty.

OPPORTUNITIES AND THREATS :-

Estimated demand of Oxo-Alcohols at 2,20,000 MTPA, with healthy growth rate of 8% to 10% per annum, in general, is a good opportunity for the Company with existing capacity of 80,000 MTPA, considering the huge demand-supply gap in the country. As such there are no constraints in the Company's production capability with Hindustan Petroleum Corporation Limited (HPCL) able to meet full Propylene requirement. Sales realization is also expected to improve over time, firstly on account of Anti-Dumping Duties imposed by Govt. of India on imports from certain countries and secondly fructifying Company's efforts of bringing certain other countries and products in this fold, though it may take some time. This appears to be some positive development for the Company. However, downturn in product price scenario internationally and dumping of the products and currency fluctuations may impact the 

Company's performance and recovery process to some extent.

RISKS AND CONCERNS :-

The Company is depending for its major raw material, i.e., Propylene from a single source, HPCL refinery. However, the risk is built in the 

project evaluation. Crude prices, exchange rate fluctuations and political instability in the Gulf area are of major concerns.

I think andhra petrochemicals future seems to be bright because of the latest quarterly results with 19cr profit and 2.26 eps so long term patience investors with time frame of 3-5 years consider andhra petrochemicals around cmp 45 and dips if any for multibagger gains in long term currently scrip in ST group so one needs 100% margins and trading only at BSE. [ Disc : It is safe to assume that I have vested interest in andhra petro so my view may be biased so kindly do your own research before taking any positions, all the best guys and happy investing.]

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