Andhra Petrochemicals Limited (APL) is an Indian company established in 1984, primarily involved in the manufacturing of oxo-alcohols. The company was promoted by the Andhra Pradesh Industrial Development Corporation (APIDC) and The Andhra Sugars Ltd (ASL) to support industrial development in the region, particularly in Visakhapatnam, Andhra Pradesh. The company’s initial project focused on producing 30,000 tons per annum (TPA) of oxo-alcohols in collaboration with Davy McKee from the UK
Key Products and Operations
Andhra Petrochemicals specializes in the production of various oxo-alcohols, including:
- 2-Ethyl Hexanol
- Normal Butanol (NBA)
These products are essential raw materials used in various industries, including plastics, coatings, and detergents.
Stock Performance Overview
• Current Price: ₹70.58
• Market Capitalization: Approximately ₹679.41 Crores.
• Price-to-Earnings (P/E) Ratio: 9.71, indicating it may be undervalued compared to industry
standards
• 52-Week High/Low: ₹126.90 / ₹70.15, showing significant volatility over the past year
Key factors influence the stock price of Andhra Petrochemicals Ltd. Here’s an overview of the main determinants:
- Commodity Price Fluctuations
The profitability of Andhra Petrochemicals is significantly affected by the spread between oxo-alcohols and their feedstock costs, particularly propylene. A decline in product prices due to subdued global demand can lead to reduced operating margins, as seen in FY2023 when margins dropped sharply. Although there has been a recovery in margins since Q2 FY2024, ongoing volatility in global demand remains a concern
- Supplier Dependence
The company relies heavily on Hindustan Petroleum Corporation Limited (HPCL) for its key raw material, propylene. This dependence exposes Andhra Petrochemicals to risks associated with supply disruptions, which can impact production capacity and operational efficiency. While the company has managed to diversify its supplier base somewhat by sourcing from BPCL and GAIL during high demand periods, the costs associated with these alternatives are higher
- Regulatory Environment
Andhra Petrochemicals benefits from trade protection measures like anti-dumping duties on imports of certain chemicals, which helps maintain its market position against foreign competitors. The duopoly in the domestic oxo-alcohol market with Bharat Petroleum Corporation also provides a competitive advantage
- Financial Health
The company’s financial stability is bolstered by a strong liquidity profile, with significant cash reserves and no long-term debt. This positions Andhra Petrochemicals favorably for potential capital expenditures and operational needs. However, any major debt-funded expansion could negatively impact its ratings and stock price if it strains cash flows.
Growth Drivers
1. Market Position and Demand
Monopoly and Duopoly Dynamics : APL is currently the only producer of oxo-alcohols in India, which gives it a significant competitive advantage. Despite the entry of Bharat Petroleum Corporation Limited (BPCL) into the market, APL continues to benefit from a strong demand-supply imbalance, as domestic demand for oxo-alcohols far exceeds supply. This situation is further enhanced by anti-dumping duties imposed on imports, making local products more attractive.
2. Capacity Expansion
Increased Production Capacity : APL has recently expanded its production capacity from 30,000 MTPA to 73,000 MTPA, marking a 150% increase. This expansion allows the company to operate at full capacity utilization levels, which is crucial for maximizing profitability. The plant’s modernization has also incorporated state-of-the-art technology, enhancing operational efficiency and output quality.
3. Economic Factors
Costlier Imports : The depreciation of the Indian rupee and rising global crude oil prices have made imports more expensive. This economic environment has shifted demand towards domestic producers like APL, allowing the company to achieve better price realizations for its products. The company reported significant growth in sales and production volumes in recent years, reflecting this trend.
Positives
Andhra Petrochemicals Ltd. (APL) presents several positive factors that can enhance its stock appeal, especially considering the current market dynamics. Here are the key positives:
1. Strong Financial Performance
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Robust Earnings Growth : APL has reported significant increases in net profit and sales, with a notable profit rise of 194.20% in recent quarters, reflecting strong operational performance and effective cost management.
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Healthy Capital Structure : The company maintains a solid financial position with no long-term debt and substantial cash reserves (approximately ₹350.15 crore) along with liquid investments (around ₹64.46 crores. This financial stability supports ongoing operations and potential growth initiatives.
2. Market Position and Demand
- Duopoly Advantage : APL operates in a duopoly market for oxo-alcohols in India, with limited competition from Bharat Petroleum Corporation Limited (BPCL). This market structure allows APL to capitalize on high domestic demand for its products, which significantly exceeds supply.
- Capacity Utilization : Current capacity utilization is reported above 100%, indicating strong demand for its products and the potential for further revenue growth as the company explores additional capital expenditure plans.
3. Positive Economic Indicators
- Favorable Pricing Environment : The prices of key products, including isobutanol and n-butanol, are at multi-year highs, which bodes well for revenue generation in the upcoming quarters.
The anticipated improvement in earnings could lead to a re-rating of the stock.
- GST Benefits : The implementation of GST has provided APL with input tax credits on key raw materials, enhancing its cost structure and improving margins significantly since its introduction.
Negatives
1. Recent Financial Performance Decline
- Quarterly Loss : APL reported a loss of ₹3.63 crore in the quarter ending September 30, 2024, after three consecutive profitable quarters. This unexpected downturn raises concerns about the company’s ability to maintain consistent profitability.
- Underperformance Compared to Market : Over the past year, APL’s stock has returned only 10.17%, significantly lagging behind the broader market’s return of 35.61% (BSE 500). Additionally, over three years, the stock has declined by 45.2%, while the Nifty Smallcap 100 index gained 47.26%.
Downgraded Ratings
- Sell Rating by Analysts : The stock has been downgraded to a ‘Sell’ by MarketsMOJO due to poor long-term growth prospects, with operating profit growing at a meager annual rate of 1.01% over the last five years. Technical indicators suggest a bearish trend, which may deter potential investors.
Low Institutional Ownership
- Minimal Mutual Fund Investment : Only 0.04% of APL’s shares are held by domestic mutual funds, indicating a lack of confidence among institutional investors regarding the company’s future performance and valuation.
Risks
1. Financial Performance Volatility
- Quarterly Loss : APL posted a loss of ₹3.63 crore in the quarter ending September 30, 2024, after three consecutive profitable quarters, raising concerns about its ability to sustain consistent profitability.
- Declining Returns : The company’s return on equity (ROE) has dropped to 11.9%, which is lower than its three-year average, indicating declining efficiency in generating shareholder returns.
2. Market Underperformance
- Stock Returns Lagging Behind Peers : Over the past three years, APL’s stock has declined by 45.2%, significantly underperforming benchmarks like the Nifty Smallcap 100 (47.26% gain) and BSE Commodities (16.69% gain).
- Weak Price Trend : Technical analysis indicates a weak price trend, with expectations of further declines in the short term.
3. Downgraded Ratings and Poor Growth Prospects
- Analyst Downgrade : MarketsMOJO downgraded APL to a “Sell” due to poor long-term growth prospects, with operating profit growing at a meager annual rate of 1.01% over the last five years.
Above is a snapshot of the stock and based on this I am keen to invest based on its strong market potential and expansion. I am cognizant of the co.s financial challenges and risks of dependence on a single supplier but as a long term play it is a risk and I keen to explore.
Keen to have your thoughts on this and potential of petrochemical industry in a 3–5-year window.
Holding - NIL
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