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Panama Petrochem Ltd (PPL) was established in 1982. With four manufacturing plants across India today, PPL is one of the leading manufacturers and exporters of more than 80 variants of petroleum specialty products. The products are vital for various industries like inks and resins, textiles, rubber, pharmaceuticals, cosmetics, power, cables and other industrial purposes. PPL has four manufacturing units in India with a state of art technology and facilities located at Ankleshwar (Gujarat), Daman (Union Territory), Daman (Gujarat) and Taloja (Dist. Raigadh). PPL has also unfolded its range of manufacturing facilities through establishment of Panol Industries RMC, FZE a wholly owned subsidiary of the Company situated at Ras Al Khaimah, UAE. The company caters to the GCC and MENA regions and enjoys logistic advantage as it is situated on the port and has direct dedicated pipeline arrangements.

Investment Rationale

Newer products, geographical expansion and capacity addition to drive volumes

PPL had a consolidated manufacturing capacity of 240000 TPA in FY23. The company has added 30000 TPA capacity in 1H FY24 and is in a process of consolidating operations from this newer production line. PPL is operating at near full utilization level and is expected to add 30000 TPA capacity/ year for next couple of years. Currently PPL is present in western region of the country and is planning to add capacity in the southern region predominately for textile related oils. PPL is already in process of getting approval of its products with the clients in the region. The entire investment for expansion will be done by internal accruals. PPL has consistently developed products and added newer industries to its basket. Currently PPL is in an advanced stages of discussion with various clients for its new specialty oils used in oil drilling industry which can add volumes further.

Improving realization, increasing contribution of value-added products to drive margin expansion

Before Covid 19, PPL was engaged in manufacturing low margin products (EBITDAM ranging from 6-8%). With the focus on developing new products, PPL introduced high margin products in FY20 which received good response from the clients. Since then, EBITDA margin of PPL have improved to 13-14% level and ROCE has improved to 35% in FY23. Value added products contributed less than 45-50% in FY19 to 68% in FY23. With continued focus on higher margin products, we expect contribution of value-added products to reach ~85% in FY25 thereby implying significant potential to improve margins.

Outlook & valuation

The Revenue/EBITDA/PAT of PPL has grown at a CAGR of 31%/ 80%/101% while EBITDA margin stood at 13-14% in the same period. EBITDA margin in 1H FY24 fell to 10.8% mainly due to geopolitical tensions. Volumes in exports and the wholly owned subsidiary in UAE have seen adverse impact. Many orders got postponed or even renegotiated at a lower realization. Going forward, with improvement in geopolitical scenario and increasing contribution of high margin products, we expect margins to stabilize over 13% level. PPL is debt free and has consistently paid 20-25% of its earnings as a dividend resulting a healthy dividend yield of 2.5-3%. At CMP of 336, PPL is trading at 7.2x its FY25 EPS of Rs 47, we assign 10x multiple and recommend buy with a target of Rs 466.

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