June 26, 2012 (JS Research)
International PTA-Px margins have exacerbated further in 2Q2012 despite the sharp decline in Paraxylene (Px) prices. Since May, Px prices have plunged by 18% following the declining trend in international oil prices. However, PTA prices too plummeted by 20% in the same period, consequently leading to eroding margins. International PTA-Px margins have averaged around US$89/ton in June, below the breakeven level. Not surprisingly, LOTPTA in 2012 year to date has underperformed the market by 42%. We maintain our ‘Hold’ recommendation on the stock with a target price of Rs8.3. At current levels, the stock trades at a 2012E and 2013F PE of 14.52x and 8.34x respectively.
Resistance of Px prices finally broken!
Px prices which were fairly sticky in 1Q due to relatively tight supply in the region have taken a battering in 2Q. Initially the prices fell due to weak PTA demand but more recently falling international oil prices (WTI down 25% since May) has played a major role. Px which is extracted from Naptha (crude oil derivative), has tumbled 18% since May to US$1266/ton.
Considering lower world oil consumption owing to the gloomy global economic outlook, oil prices may stay relatively subdued. This may in turn keep Px prices relatively tame as well in the near term.
Fall in Px prices fails to propel margins
Declining price trend of Px should have come as a major relief to PTA producers as Px is used as feedstock for PTA. Unfortunately, for PTA manufacturers, PTA prices have plummeted more sharply (down 20% since May) to US$930/ton. As a result international PTA-Px margins have averaged around a dismal level of US$89/ton in June. The decline in PTA prices has come on the back of falling PTA demand in China with the downstream polyester market worsening in tandem with fresh economic concerns in Europe and USA . Moreover unfavourable factors like depressed cotton prices have further aggravated the situation. With massive planned expansions expected to come online in the next couple of years in both China and India , PTA prices are likely to remain under check.
Recommendation: ‘Hold’
LOTPTA’s stock has underperformed the market by 42% in 2012 year to date as deteriorating core fundamentals of the company hampered its stock price. With the recent attrition in international PTA-Px margins, a reversal in the stock price trend remains unlikely. The recent budget too was disappointing for the company as the proposal to increase import duty on PTA was ignored. Hence, we maintain our ‘Hold’ stance on the stock with a target price of Rs8.3. However, further deterioration in PTA-Px margins remains a downside risk to our investment thesis.
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