My Next Pick: Garden Silk Mills (NSE: GARDENSILK; BSE: 500155) - CMP Rs.77
Long Term Price Target: Rs.200
The latest results are excellent, almost Rs.5 in EPS for just one quarter. Pricing for Polyester Yarn has increased significantly in the global market. Demand is very good. Even though the name of the company is "Garden Silk Mills", they are primarily (80% of their revenues) into manufacturing various kinds of Polyester Yarn.
I read Reliance Industries latest 2006-2007 annual report and they mention the following in Page number 22 which is EXTREMELY POSITIVE.
Polyester (PFY, PSF, PET)
Global Polyester market
The year 2006-07 was a challenging one for the polyester
industry. Rising crude oil prices impacted an increase in the cost
of raw materials while a bumper cotton crop accompanied by
subsidised cotton prices exerted pressure on polyester margins.
Stand-alone polyester producers across the world were affected
substantially during the year.
Capturing maximum value addition
We, being fully integrated polyester producers making our own
Paraxylene (PX), Purified Terephthalic Acid (PTA) and Mono-
Ethylene Glycol (MEG) from crude oil, were best positioned to
face the market uncertainties of the year. The integrated margin
of the polyester value chain from naphtha in the second quarter
of 2006-07 was the highest in nearly a decade.
We have chosen to produce across the entire value chain from PX
to polyester to capture maximum value addition and to reap
savings in packing, logistics and inventory costs. We are now
poised to benefit yet again with the start of a new cycle with a
higher base of polyester capacity. Polyester profitability has
bottomed out in 2006 and integrated polyester margins (from PX
to polyester) are most likely expected to expand through 2008.
The following facts reinforce our view on the chain margins.
Demand growth to outpace capacity growth: Asian annual
polyester capacity additions are likely to slow from 23% in
2003 to 6% in 2007 and 2008 while the demand is expected
to remain healthy at 10%.
Underestimation of the Chinese domestic demand: Rising
income levels and industrialisation of hitherto poor regions
in Western China have increased domestic demand for
textiles. The textile industry in China is also expected to
focus on the domestic market and the domestic textile
consumption share is expected to jump from 65% in 2005 to
73% in 2008.
Feedstock constraints: Limited PX capacity addition will
tighten the overall polyester demand which bodes well for
the overall integrated polyester margins.
In addition, there are four major catalysts emerging which could
drive polyester chain margins up:
Relatively low inventory across the chain may lead to
restocking.
2008 Beijing Olympics to drive additional demand in China.
Removal of residual quotas in 2008 on China by the EU
could also boost the demand.
Slowdown in new capacity additions in China.
Demand outlook
The demand in Asia is estimated to grow by 2.4 million tonnes or
by 6% in 2007 and 2008 while capacity will increase by only 1.7
million tonnes. The ability of polyester producers across Asia to
successfully pass through higher costs in 2006 gives an early
indication of the emerging strength of the sector. The slow-down
in the new polyester capacity expansions accompanied by
increase in the demand is expected to improve the capacity
utilisation in polyester operations. The industry is at an early stage
of a multi-year up-cycle.
Key reasons for an expected turnaround:
Shift to net incremental demand over supply between 2000 and
2005: Polyester production has undergone a shift in
geographies since 1980. It moved from the west to Japan first
and later to Taiwan and Korea. Today, the worlds top ten
producers barring some exceptions are either in China or
India. We top the world list as the largest polyester fiber and
yarn manufacturer. Since growth in both the demand and
the consumption will occur principally in Asia, it is a given
that most of the fiber and yarn required will be produced in
Asia. China and India are clearly destined to be the polyester
hubs of the world.
A combination of relatively high profitability, readily
available capital and the emergence of homegrown
technology led to an investment boom that saw peak
capacity addition in 2003-05. Over those three years, almost
12 million tonnes of effective polyester capacity was added in
Asia, mainly in China, while polyester production grew to
around 7 million tonnes during the period. Along with this
increased capacity came a lot of new polyester players right
from downstream textile producers who were backintegrating
to traders.
The older players in China faced a margin squeeze as newer
players with larger scale and more efficient processes came
on-stream. In addition, polyester assets in Korea, Taiwan and
Indonesia had production costs that were US$ 40-70/tonne
higher than the new players in China. Currently, polyester
capacities in these high-cost economies are being shut down.
The polyester majors in Korea and Taiwan are closing down
non-viable high- cost production units. Both these countries
have witnessed more than a million tonne of capacity shut
down from 2003 to 2007. During the same period, polyester
production has reduced by around 1.8 million tonnes in
these countries suggesting further capacity closures. Such
closures are expected to improve margins of existing
polyester companies. Even the more efficient producers
found it difficult to justify new investment that led to low
margins during these years.
Lack of investment on unattractive returns: Only one new
polyester player is expected to enter in 2007 compared to an
average of nine in the previous expansion peak in China
during 2003-2005. Lack of new investments would slow
down new capacity additions leading to improvement in
polyester margins.
Obsolete batch capacities: A fact to be noted is that during the
last period of high profitability, 3 to 4 million tonnes of
batch capacities were built. These units are smaller and
operate more opportunistically.
More than 10 million tonnes of polyester capacity are
perceived to be of batch and small polymerisation capacity
globally. These capacities are outdated and uneconomical in
the current competitive environment. These capacities will
be phased out over a period of time while a small percentage
may opt for production of high value-added, specialty
products for survival.
Feedstock constraints: Bottlenecks have not just been at the
PX level but are also at the refining level. The majority of
the new refining capacity is from Asia mainly the Middle
East, China and India. These capacity constraints will mean
that the PX from the refineries will continue to compete
with gasoline production. This trend is expected to continue
until 2009 given that the new global PX capacity is growing
at only around 2 million tonnes per year.
Globally, the PX capacity has been able to run at slightly
below 90% even during the tight years. This is due to the
fact that the PX capacity is impacted by any mechanical
breakdown at the refinery or scheduled maintenance which
may last for a few weeks. From an Asian perspective, the
region has been a net importer of PX since 2002 and will
continue to do so in the foreseeable future.
To sum up, the limitation in PX production may prove to be
negating any overcapacity in both PTA and polyester.
Cotton prices are expected to remain firm in the year ahead with
limited growth in crop production thereby leading to a higher
cotton-price environment. This typically has a positive impact on
the polyester business both from a demand perspective (higher
polyester blending) and pricing perspective.
With the challenge of the polyester overcapacity expectedly
behind us, the demand growth globally is robust and is driving the
per capita consumption of all fibers. The per capita consumption
of all fibers is expected to cross 11.2 kgs. by 2010 from the current
level of 10 kgs. During the same period, the polyester per capita
consumption is expected to increase to 5.4 kgs from 3.8 kgs
Indian market scenario
Textile exports from India to the developed countries have
increased in the post quota regime. A rise in the domestic textile
consumption with the aid of a high GDP growth and changing
lifestyle patterns is helping the consumption of polyester. The
emergence of retail boom is boosting the demand for innovative
products from the end consumers who have not experienced such
products earlier.
Long Term Price Target: Rs.200
The latest results are excellent, almost Rs.5 in EPS for just one quarter. Pricing for Polyester Yarn has increased significantly in the global market. Demand is very good. Even though the name of the company is "Garden Silk Mills", they are primarily (80% of their revenues) into manufacturing various kinds of Polyester Yarn.
I read Reliance Industries latest 2006-2007 annual report and they mention the following in Page number 22 which is EXTREMELY POSITIVE.
Polyester (PFY, PSF, PET)
Global Polyester market
The year 2006-07 was a challenging one for the polyester
industry. Rising crude oil prices impacted an increase in the cost
of raw materials while a bumper cotton crop accompanied by
subsidised cotton prices exerted pressure on polyester margins.
Stand-alone polyester producers across the world were affected
substantially during the year.
Capturing maximum value addition
We, being fully integrated polyester producers making our own
Paraxylene (PX), Purified Terephthalic Acid (PTA) and Mono-
Ethylene Glycol (MEG) from crude oil, were best positioned to
face the market uncertainties of the year. The integrated margin
of the polyester value chain from naphtha in the second quarter
of 2006-07 was the highest in nearly a decade.
We have chosen to produce across the entire value chain from PX
to polyester to capture maximum value addition and to reap
savings in packing, logistics and inventory costs. We are now
poised to benefit yet again with the start of a new cycle with a
higher base of polyester capacity. Polyester profitability has
bottomed out in 2006 and integrated polyester margins (from PX
to polyester) are most likely expected to expand through 2008.
The following facts reinforce our view on the chain margins.
Demand growth to outpace capacity growth: Asian annual
polyester capacity additions are likely to slow from 23% in
2003 to 6% in 2007 and 2008 while the demand is expected
to remain healthy at 10%.
Underestimation of the Chinese domestic demand: Rising
income levels and industrialisation of hitherto poor regions
in Western China have increased domestic demand for
textiles. The textile industry in China is also expected to
focus on the domestic market and the domestic textile
consumption share is expected to jump from 65% in 2005 to
73% in 2008.
Feedstock constraints: Limited PX capacity addition will
tighten the overall polyester demand which bodes well for
the overall integrated polyester margins.
In addition, there are four major catalysts emerging which could
drive polyester chain margins up:
Relatively low inventory across the chain may lead to
restocking.
2008 Beijing Olympics to drive additional demand in China.
Removal of residual quotas in 2008 on China by the EU
could also boost the demand.
Slowdown in new capacity additions in China.
Demand outlook
The demand in Asia is estimated to grow by 2.4 million tonnes or
by 6% in 2007 and 2008 while capacity will increase by only 1.7
million tonnes. The ability of polyester producers across Asia to
successfully pass through higher costs in 2006 gives an early
indication of the emerging strength of the sector. The slow-down
in the new polyester capacity expansions accompanied by
increase in the demand is expected to improve the capacity
utilisation in polyester operations. The industry is at an early stage
of a multi-year up-cycle.
Key reasons for an expected turnaround:
Shift to net incremental demand over supply between 2000 and
2005: Polyester production has undergone a shift in
geographies since 1980. It moved from the west to Japan first
and later to Taiwan and Korea. Today, the worlds top ten
producers barring some exceptions are either in China or
India. We top the world list as the largest polyester fiber and
yarn manufacturer. Since growth in both the demand and
the consumption will occur principally in Asia, it is a given
that most of the fiber and yarn required will be produced in
Asia. China and India are clearly destined to be the polyester
hubs of the world.
A combination of relatively high profitability, readily
available capital and the emergence of homegrown
technology led to an investment boom that saw peak
capacity addition in 2003-05. Over those three years, almost
12 million tonnes of effective polyester capacity was added in
Asia, mainly in China, while polyester production grew to
around 7 million tonnes during the period. Along with this
increased capacity came a lot of new polyester players right
from downstream textile producers who were backintegrating
to traders.
The older players in China faced a margin squeeze as newer
players with larger scale and more efficient processes came
on-stream. In addition, polyester assets in Korea, Taiwan and
Indonesia had production costs that were US$ 40-70/tonne
higher than the new players in China. Currently, polyester
capacities in these high-cost economies are being shut down.
The polyester majors in Korea and Taiwan are closing down
non-viable high- cost production units. Both these countries
have witnessed more than a million tonne of capacity shut
down from 2003 to 2007. During the same period, polyester
production has reduced by around 1.8 million tonnes in
these countries suggesting further capacity closures. Such
closures are expected to improve margins of existing
polyester companies. Even the more efficient producers
found it difficult to justify new investment that led to low
margins during these years.
Lack of investment on unattractive returns: Only one new
polyester player is expected to enter in 2007 compared to an
average of nine in the previous expansion peak in China
during 2003-2005. Lack of new investments would slow
down new capacity additions leading to improvement in
polyester margins.
Obsolete batch capacities: A fact to be noted is that during the
last period of high profitability, 3 to 4 million tonnes of
batch capacities were built. These units are smaller and
operate more opportunistically.
More than 10 million tonnes of polyester capacity are
perceived to be of batch and small polymerisation capacity
globally. These capacities are outdated and uneconomical in
the current competitive environment. These capacities will
be phased out over a period of time while a small percentage
may opt for production of high value-added, specialty
products for survival.
Feedstock constraints: Bottlenecks have not just been at the
PX level but are also at the refining level. The majority of
the new refining capacity is from Asia mainly the Middle
East, China and India. These capacity constraints will mean
that the PX from the refineries will continue to compete
with gasoline production. This trend is expected to continue
until 2009 given that the new global PX capacity is growing
at only around 2 million tonnes per year.
Globally, the PX capacity has been able to run at slightly
below 90% even during the tight years. This is due to the
fact that the PX capacity is impacted by any mechanical
breakdown at the refinery or scheduled maintenance which
may last for a few weeks. From an Asian perspective, the
region has been a net importer of PX since 2002 and will
continue to do so in the foreseeable future.
To sum up, the limitation in PX production may prove to be
negating any overcapacity in both PTA and polyester.
Cotton prices are expected to remain firm in the year ahead with
limited growth in crop production thereby leading to a higher
cotton-price environment. This typically has a positive impact on
the polyester business both from a demand perspective (higher
polyester blending) and pricing perspective.
With the challenge of the polyester overcapacity expectedly
behind us, the demand growth globally is robust and is driving the
per capita consumption of all fibers. The per capita consumption
of all fibers is expected to cross 11.2 kgs. by 2010 from the current
level of 10 kgs. During the same period, the polyester per capita
consumption is expected to increase to 5.4 kgs from 3.8 kgs
Indian market scenario
Textile exports from India to the developed countries have
increased in the post quota regime. A rise in the domestic textile
consumption with the aid of a high GDP growth and changing
lifestyle patterns is helping the consumption of polyester. The
emergence of retail boom is boosting the demand for innovative
products from the end consumers who have not experienced such
products earlier.
