CRISIL Research Ier Report Dhunseri

7/29/2019 CRISIL Research Ier Report Dhunseri

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Dhunseri

Petrochem and TeaLimited

Independent Equity Research

Enhancing investment decisions

In-depth analysis of the fundamentals and valuation

Business Pros ects

Financial Performance

Cor orate Governance

Management Evaluation


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Explanation of CRISIL Fundamental and Valuation (CFV) matrix

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 GradeCRISILs 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 Assessment

5/5 Excellent fundamentals

4/5 Superior fundamentals

3/5 Good fundamentals

2/5 Moderate fundamentals

1/5 Poor fundamentals

Valuation GradeCRISILs 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 Assessment

5/5 Strong upside (>25% from CMP)

4/5 Upside (10-25% from CMP)

3/5 Align (+-10% from CMP)

2/5 Downside (negative 10-25% from CMP)

1/5 Strong downside (


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CRISIL Equities

Independent Research Report Dhunseri Petrochem and Tea Limited

A PET growth story Industry: Chemicals

Date: November 04, 2010

1

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 four-

fold and take advantage of the growing domestic and global demand for PET. We assign

Dhunseri a fundamental grade of3/5, 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 FY05-

10. 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, torealise 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 green-field 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) FY09 FY10 FY11E FY12E

Operating income 12,294 11,582 13,786 13,835EBITDA 1,263 1,154 1,781 1,437Adj Net income 210 769 985 836Adj EPS-Rs 5.7 20.9 26.8 22.7Adj EPS growth (%) (11.6) 266.7 28.1 (15.1)PE (x) 38.5 10.5 8.2 9.7

P/BV (x) 2.1 1.4 1.2 1.1EV/EBITDA (x) 8.0 8.3 5.6 10.5

RoCE (%) 11.7 9.2 13.6 7.5RoE (%) 5.5 15.8 15.7 12.0

Source: Company, CRISIL Equities estimate

CFV matrix

Fundamental grade of '3/5 indicates good fundamentals

Valuation grade of '3/5' indicates CMP is aligned

1

2

3

4

5

1 2 3 4 5

Valuation Grade

FundamentalGrade

Poor

Fundamentals

Excellent

Fundamentals

Strong

Downside

Strong

Upside

Key stock statistics

NSE Ticker DPTL

Fair value (Rs per share) 236

Current market price 220

Shares outstanding (Mn) 35.0

Market cap (Rs mn) 7,693

Enterprise value (Rs mn) 9,239

52-week range (Rs) (H/L) 227/133

P/E on EPS estimate (FY12E) 9.7

Beta 0.90Free float (%) 37.4%

Average daily volumes 42,680

* Closing price as on report date

Share price movement

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Dhunseri Nifty

-Indexed to 100

Analytical contact

Sudhir Nair (Head, Equities) +91 22 3342 3526

Arun Vasu +91 22 3342 3529

Suhel Kapur +91 22 3342 4149

Email: [email protected] +91 22 3342 3561


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CRISIL Equities

Dhunseri Petrochem and Tea Limited

2

Table 1: Business environment

ParameterPET and tea

PET business Tea business

Revenue contribution (FY10) 89% 11%

Revenue contribution (FY12) 90% 10%

Product offering Bottle grade PET resin 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

Caters only to the domestic market

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

Tea prices are expected to grow moderately at

a two-year CAGR of 3-4%

Production is expected to remain at the same

level

Sales growth (FY10-FY12 2-yr

CAGR)

9% 4%

Demand drivers Growing packaging industry

Superior product characteristics of PET

Strong domestic demand for tea which is the

countrys staple drink

Margin drivers Improving efficiency coal-based power plant to

replace FO-based plant Firming operating rates globally post FY12

Focus on improving efficiencies

Key competitors Reliance Industries Ltd and J BF Industries Ltd Assam Tea, McLeod Russell, J ayshree Tea,

Goodricke Group and Warren Tea

Key risks 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


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CRISIL Equities


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Grading Rationale

Dhunseri is the second largest domestic manufacturer of PET

Dhunseri is the second largest domestic PET resin manufacturer with a capacity to

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

Limited (Reliance) and JBF Industries Ltd (J BF) 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, J BF 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

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 its distinct

characteristics - hygienic, lightweight, unbreakable, non-

reactive, economical and freshness-retentive.

Reliance290,000

49%

Dhunseri200,000

33%

JBF110,000

18%

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

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.

Dhunseri has the capacity to

produce 200,000 MTPA of PET

resin as of FY10

Global operating rates are set to

firm post 2011


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CRISIL Equities


4

Figure 2: Operating rates to be firm post 2011 Figure 3: Global end-user industry for PET 2010E

15.2 MMT

83.3%

84.2%

82.5%

84.3%

86.4%

82.4%

79.0%78.1%

73.5%

75.3%

77.9%

76.2%

76.6%77.4%

80.6%

81.6%

65%

70%

75%

80%

85%

90%

0.0

5.0

10.0

15.0

20.0

25.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010E

2011E

2012E

2013E

2014E

2015E

Global Capacity Operating Rate

(MMT)

Carbonated softdrinks, 19%

Non-Foodcontainers, 29%

Foodcontainers, 28%

Otherdrinks, 24%

Source: Industry, CRISIL Equities

MMT: Million metric tonnes


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

Figure 5: Market segments for PET chips in India

(FY10E)

62.5%

23.9%

19.9%

50.2%

23.9%

0%

10%

20%

30%

40%

50%

60%

70%

-

50

100

150

200

250

300

FY05

FY06

FY07

FY08

FY09

FY10E

Domestic demand Growth (y-o-y)

(000 MT)

Liquor, 20%

Pharma, 20%

Edible Oil, 13%

FMCG, 26%

Pesticide, 7%

PersonnelCare, 5%

Others, 9%


MT: Metric tonnes


Although the demand for PET resin in India has rallied in the past five years, India's per

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.

Domestic demand is set to grow

at 18-20% over the next five

years


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CRISIL Equities


5

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 J BF have been

increasing their sales volume in India.

Figure 6: Growth in domestic PET demand has

pushed up PET sales in India

Figure 7: Reliance caters to more than 50% of the

domestic market in FY10

99 123147

221 274

285 302263

279 284

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY06

FY07

FY08

FY09

FY10E

Exports Domestic sales

(000 MT)

39.370.1 88.7 138.2 143.3

59.9

52.8 58.7 78.1

100.5

5.0 30.4

0%

10%

20%30%

40%

50%

60%

70%

80%

90%

100%

FY06

FY07

FY08

FY09

FY10E

JBF Dhunseri Reliance

(000 MT)

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

56,064

62,01362,400

59,489

60,585

55,300

60,880

57,317

56,680

56,134

55,000

56,000

57,000

58,000

59,000

60,000

61,000

62,000

63,000

FY06 FY07 FY08 FY09 FY10

(Rs/MT)

Domestic reali sation Export realisation


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.

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

Dhunseri d-bounded from itsEOU status to take advantage of

the robust domestic demand


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CRISIL Equities


6

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

8.0%

9.8%

8.3% 8.3%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

FY06 FY07 FY08 FY09

EBITDA in Petchem


Coal-based power plant to result in substantial cost savings

Until FY10, Dhunseri met its power requirements through furnace oil (FO)-based power

plant. In J une 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 rawmaterial 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

Power would be generated

through low-cost coal instead

of high-cost furnace oil

Dhunseris existing plant is

strategically located near raw

material source


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CRISIL Equities


7

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

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 forshipments 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 from7.6 mn kg in FY05 to 10.5 mn kg in FY10, constituting almost 3% of the total tea

production in India.

Proximity to rapidly growing

African markets and raw

material supplying nations are

some of the key benefits for the

Egypt plant

Egypt plant would be apt to

service international clients


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CRISIL Equities


8

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

7.5 7.8 7.5 7.5 7.2 7.6 7.5 7.4

10.4 9.910.5

-

2.0

4.0

6.0

8.0

10.0

12.0

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

(Mn kgs)


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,

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.

Profitability of tea business has

improved over the years


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CRISIL Equities


9

Figure 11: Higher revenues because of favourable

cycle

Figure 12: Profitability has im proved because of

efficient operations and favourable cycle

646 636589

551501

592 573

667

926

1,067

1,308

92

38

14 9 9

4538

72

134

166

233

0

50

100

150

200

250

-

200

400

600

800

1,000

1,200

1,400

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Revenues PAT

(Rs mn) (Rs mn)

0%

5%

10%

15%

20%

25%

30%

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

EBITDA margin PAT margin

Source: Industry, CRISIL Equities Source: Industry, CRISIL Equities

Tea prices to remain firm due to demand-supply gap

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,

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.

Tea prices to increase by 3-4%

over the next two years

Contribution of tea business

to total sales is expected to go

down


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CRISIL Equities


10

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 large-

sized 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

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, PTAand 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, thecompany 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.

Timely execution and higher raw

material prices to be the key for

future growth


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CRISIL Equities


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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.


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CRISIL Equities


12

Financial Outlook

Figure 13: Revenues to increase in FY11 due to optimum

capacity utilisation

Figure 14: Cost savings in power to improve EBITDA

in FY11, before being subdued by excess global

supply

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY09 FY10 FY11E FY12E

(Rs bn)

Petchem Tea

10.3%10.0%

12.9%

10.4%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%


EBITDA margin

Source: Company, CRISIL Equities Source: Company, CRISIL Equities

Figure 15: PAT estimated to remain stable over the

forecast period

Figure 16: Lower EBITDA to reduce EPS marginally

in FY12

1.7%

6.6%7.1%

6.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%


PAT margin

Forex gains/(losses)cause huge variance in

PAT margins 5.7

20.9

26.8

22.7

-

5.0

10.0

15.0

20.0

25.0

30.0


(Rs per share)

Adj EPS

Source: Company reports, CRISIL Equities Source: Company reports, CRISIL Equities

Figure 17: Dhunseris capex plans to increase its gearing Figure 18: Capex phase to lower returns for the

company

1.4

0.7

0.8

1.5

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6


(Times)

11.7%

9.2%

13.6%

7.5%

5.5%

15.8% 15.7%

12.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%


RoCE RoE

Source: Company, CRISIL Equities Source: Company reports, CRISIL Equities


15/24

CRISIL Equities


13

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).

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 managementBased 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.

Top management fairly

experienced with strong domain

expertise


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CRISIL Equities


14

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

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.

Dhunseris corporate governance

practices are adequate and meet

the minimum required standards


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CRISIL Equities


15

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

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 1.0% 2.0% 3.0% 4.0% 5.0%

11.2% 276 312 357 414 49012.2% 228 255 289 331 384

13.2% 189 210 236 267 306

14.2% 157 174 195 218 248

15.2% 132 145 161 180 202

Source: CRISIL Equities

We assign a fair value of Rs 236

per share and initiate coverage

with a valuation grade of 3/5


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CRISIL Equities


16

Company Overview

Until 2008-09, the Dhunseri Group comprised two manufacturing companies:

1. Dhunseri Tea & Industries Ltd engaged in tea cultivation and marketing

2. 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 asubsidiary 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 Milestones

1955 S L Dhanuka Group took over management of the company from J ames Finlay & Company

1961 Dhunseri Tea Company was incorporated

1970 Company was renamed Dhunseri Tea & Industries

1980 Company acquired the Namsang and Dilli Gardens in Assam

1991 The company took over Bahadur Tea Company and amalgamated with Dhunseri Tea

1992 The company came out with a public issue

1993 Santi Tea Estate was amalgamated with Dhunseri Tea

1994 The company acquired Santi tea estate, Khetojan tea estate and Khagorijan tea estate

1996 The company promoted South Asian Petrochem Ltd to manufacture PET Resins under

technical and financial collaboration with Lurgi Zimmer AG of Germany

2009Dhunseri 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


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CRISIL Equities


17

Annexure: Financials

Income Statement

(Rs mn) FY09 FY10 FY11E FY12ENet sales 12,163 11,401 13,649 13,698

Operating Income 12,294 11,582 13,786 13,835

EBITDA 1,263 1,154 1,781 1,437

Depreciation 267 279 289 294

Interest 830 21 204 148

Other Income 145 160 182 254

PBT 311 1,014 1,471 1,248

Adj PAT 210 769 985 836

No. of shares 11.7 11.7 35.0 35.0

Adj Earnings per share (EPS -Rs) 5.7 20.9 26.8 22.7

Balance Sheet


Equity capital (FV - Rs 10) 117 117 350 350

Reserves and surplus 3,783 5,774 6,403 6,973

Debt 5,354 3,976 5,476 10,976

Current Liabilities and Provisions 2,336 2,506 2,886 2,980

Deferred Tax Liability/(Asset) 268 383 577 742

Capital Employed 11,859 12,711 15,646 21,975

Net Fixed Assets 3,827 5,299 5,152 4,999

Capital WIP 188 436 1,740 8,063

Intangible assets 94 71 57 43

Investments 603 816 716 516

Loans and advances 1,217 1,408 1,676 1,682

Inventory 919 761 906 947Receivables 1,808 1,492 1,775 1,820

Cash & Bank Balance 3,202 2,429 3,625 3,907

Applications of Funds 11,859 12,711 15,646 21,975



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CRISIL Equities


18

Cash Flow


Pre-tax profit 311 1,014 1,471 1,248

Total tax paid (53) (176) (291) (247)Depreciation 267 279 289 294

Change in working capital (617) 455 (317) 3

Cash flow from operating activities (93) 1,572 1,151 1,299

Capital expenditure (320) (1,975) (1,431) (6,450)

Investments and others 318 (213) 100 200

Cash flow from investing activities (2) (2,188) (1,331) (6,250)

Equity raised/(repaid) 47 246 233 -

Debt raised/(repaid) 1,293 (1,379) 1,500 5,500

Dividend (incl. tax) (45) (163) (266) (266)

Others (incl extraordinaries) (100) 1,139 (90) -

Cash flow from financing activities 1,195 (157) 1,376 5,234

Change in cash position 1,099 (772) 1,196 282

Opening Cash 2,103 3,202 2,429 3,625

Closing Cash 3,202 2,429 3,625 3,907

Ratios


Growth ratios

Sales growth (%) 1,221.2 (5.8) 19.0 0.4

EBITDA growth (%) 938.7 (8.6) 54.3 (19.3)

Adj EPS growth (%) (11.6) 266.7 28.1 (15.1)

Profitability Ratios

EBITDA Margin (%) 10.3 10.0 12.9 10.4

PAT Margin (%) 1.7 6.6 7.1 6.0

Return on Capital Employed (RoCE) (%) 11.7 9.2 13.6 7.5

Return on equity (RoE) (%) 5.5 15.8 15.7 12.0

Dividend and Earnings

Dividend per share (Rs) 3.9 13.9 6.5 6.5

Dividend payout ratio (%) 21.5 21.2 20.2 27.2

Dividend yield (%) 1.8 6.3 3.0 3.0

Adj Earnings Per Share (Rs) 5.7 20.9 26.8 22.7

Efficiency ratios

Asset Turnover (Sales/GFA) 2.3x 1.9x 1.9x 1.9x

Asset Turnover (Sales/NFA) 3.2x 2.5x 2.6x 2.7x

Sales/Working Capital 9.5x 8.4x 10.5x 9.4x

Financial stability

Debt-equity 1.4 0.7 0.8 1.5Interest Coverage 1.2 42.2 7.3 7.7

Current Ratio 3.1 2.4 2.8 2.8

Valuation Multiples

Price-earnings 38.5x 10.5x 8.2x 9.7x

Price-book 2.1x 1.4x 1.2x 1.1x

EV/EBITDA 8.0x 8.3x 5.6x 10.5x



21/24

CRISIL Equities


19

Quarterly results

Dhunseri (Rs mn) Q2FY11 Q1FY11 Q2FY10 q-o-q(%) y-o-y(%) H1FY11 H1FY10 y-o-y(%)

Net sales 3,689 3,568 2,472 3.4 49.2 7,257 5,459 32.9

Raw materials cost 2,492 2,572 1,706 (3.1) 46.1 5,063 3,812 32.8

Raw materials cost (% of net sales) 67.6% 72.1% 69.0% -5pps -1pps 69.8% 69.8% 0pps

Employees cost 129 117 107 10.0 20.3 246 210 16.9

Other expenses 513 480 368 6.9 39.4 993 812 22.2

EBITDA 555 399 291 39.1 90.8 955 625 52.7

EBITDA margin 15.1% 11.2% 11.8% 386bps 328bps 13.2% 11.5% 170bps

Depreciation 85 65 65 30.4 30.9 151 131 14.7

EBIT 470 334 226 40.8 108.1 804 494 62.8

Interest and finance charges 13 83 68 (84.5) (80.9) 96 18 422.8

Operating PBT 457 250 158 82.5 189.3 707 475 48.8

Other Income 40 45 50 (12.1) (20.3) 85 96 (12.3)

Extraordinary Income/(expense) 143 - - n.m. - 143 - n.m.

PBT 639 295 208 116.4 208.0 935 572 63.5

Tax 103 60 18 72.0 455.7 162 51 216.6

PAT 537 236 189 127.6 183.7 772 520 48.4

Adj PAT 394 236 189 67.1 108.3 630 520 21.0

Adj PAT margin 10.7% 6.6% 7.7% 407bps 303bps 8.7% 9.5% -86bps

No of equity shares (Mn) 35.0 35.0 11.7 - - 35.0 11.7 -

Adj EPS (Rs) 10.7 6.4 5.1 67.1 108.3 17.1 14.2 21.0


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


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CRISIL Equities


20

Focus Charts

Global operating rates to firm post 2011 Dhunseri is the second largest player in the

domestic PET market after Reliance

83.3%

84.2%

82.5%

84.3%

86.4%

82.4%

79.0%78.1%

73.5%

75.3%

77.9%

76.2%

76.6%77.4%

80.6%

81.6%

65%

70%

75%

80%

85%

90%

0.0

5.0

10.0

15.0

20.0

25.0

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

Global Capacity Operating Rate

(MMT)

39.3

70.1 88.7 138.2 143.3

59.9

52.8 58.7 78.1

100.5

5.0 30.4

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY

06

FY

07

FY

08

FY

09

FY1

0E

JBF Dhunseri Reliance

(000 MT)

Source: Industry, CRISIL Equities Source: CRISIL Equities

Revenues to increase in FY11 due to optimum capacity

utilisation

Cost savings in power to improve EBITDA in FY11,

before being subdued by excess global supply

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0


(Rs bn)

Petchem Tea

10.3%10.0%

12.9%

10.4%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%


EBITDA margin

Source: Company reports, CRISIL Equities Estimate Source: Company reports, CRISIL Equities Estimate

Change in Dhunseris shareholding pattern Dhunseri s stock has had average liquidity

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jun-09 Sep-09 Dec-09 Mar-10 Jun-10

Promoter and Promoter Group DI I Others

-

50

100

150

200

250

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Total traded quantity (RHS) Share price Fair Value

Source: NSE Source: NSE, CRISIL Equities


23/24

CRISIL Independent Equity Research Team

Mukesh Agarwal [email protected] +91 (22) 3342 3035

Director

Tarun Bhatia [email protected] +91 (22) 3342 3226

Director- Capital Markets

Analytical Contacts

Chetan Majithia [email protected] +91 (22) 3342 4148

Sudhir Nair [email protected] +91 (22) 3342 3526

Sector Contacts

Nagarajan Narasimhan [email protected] +91 (22) 3342 3536Ajay D'Souza [email protected] +91 (22) 3342 3567

Manoj Mohta [email protected] +91 (22) 3342 3554

Sachin Mathur [email protected] +91 (22) 3342 3541

Sridhar C [email protected] +91 (22) 3342 3546

Business Development Contacts

Vinaya Dongre [email protected] +91 99 202 25174

Sagar Sawarkar [email protected] +91 98 216 38322

CRISILs Equity Offerings

The Equity Group at CRISIL Research provides a wide range of services including:

) Independent Equity Research) IPO Grading) White Labelled Research) Valuation on companies for use of Institutional Investors, Asset Managers, CorporateOther Services by the Research group include

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CRISIL Research Ier Report Dhunseri

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