Analysts at Keynote Capitals remain positive on I G Petrochemicals Limited, even as the company’s December quarter results failed to impress. The analysts said that they are looking beyond “short-term hiccups.”

The I G Petrochemicals Analyst: Chirag Maroo for Keynote Capitals maintained the “buy” rating but revised down the price target to ₹793 from ₹819. The revised target reflects an around 68% upside from the stock's current market price of around ₹470.

The I G Petrochemicals Thesis: The brokerage said that in the December quarter, IGPL experienced a decline in revenue by 5.8% year-over-year and 2.7% quarter-over-quarter, primarily attributed to a price correction in Phthalic Anhydride (PA). As per the brokerage, this decline led to a contraction in both gross and EBITDA margins by 960 and 1066 basis points (Bps) respectively, compared to the previous year. EBITDA margins turned negative during this period, reaching -1.2%.

The analysts attributed the negative EBITDA margins for Q3FY24 to a negative spread between PA and OX prices. However, management reports indicate an improvement in this spread to $100-150 currently, suggesting the potential for better margins in the fourth quarter of FY24 if sustained.

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Meanwhile, the brokerage also highlighted that the prices of Maleic Anhydride (MAN) have seen slight improvements sequentially but continue to trade at a discount of 10-15% compared to historical averages. This disparity is primarily due to excess capacity in China, expected to be absorbed post-January 2025, leading to subdued MAN prices until then.

IGPL’s recent expansion efforts include the commercialization of the brownfield expansion of the PA-5 plant in February 2024, which increased PA capacity by 53,000 MTPA, MAN by 1500 MTPA, and BA by 300 MTPA. As per the analysts, this expansion has the potential to generate ₹500 crore in revenue at optimal utilization, with over 50% of PA being utilized in-house for downstream manufacturing of plasticizers.

Additionally, the company has announced a greenfield capacity expansion for Plasticizers worth Rs. 1.65 billion, slated to be operational by September 2025. This expansion aims to diversify the company’s revenue streams away from PA and reduce concentration risk, with a net revenue potential of Rs. 5 billion and an Internal Rate of Return (IRR) exceeding 20%.

Price Action: IGPL's share price was up 0.44% to trade at ₹469 in early trade on Thursday.

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