Panama Petrochem Ltd (PPL) is a leader in specialty oil industry, which is likely to grow along with the economy. We believe that rising demand from user industries like mining, telecom, power, textile, pharmaceuticals and cosmetic, is likely to drive demand for PPL’s products in the long term. PPL is foraying into high growth and high margins products like mining oil, transformer oil and cable jelly oil, which is likely to drive the top line and bottom line growth for FY08E-FY10E. With estimated net revenue and earnings growth (on estimated fully diluted equity) of 51% and 41% respectively for a period of FY07A-FY10E and healthy ROCE and ROE of 39% and 28% for FY09E, we recommend a BUY on PPL with a target price of Rs.252 based on DCF approach. Currently the stock discounts our FY08E and FY09E earnings at 6x and 4x respectively and 2.3x and 2x on EV/EBITDA basis respectively.

User industries to drive revenue growth

PPL supplies its specialty oil products to wide range of industries including pharmaceuticals, ink, cosmetics, textiles, power and very soon will foray into telecom, mining which are high growth industries. Indian economy is growing at a growth rate of 9% and is likely to grow in the range of 8-9% for next 3-5 years. We believe as PPL supplies its specialty oil products across the industries, it would be beneficiary of rising demand from these industries. We expect PPL’s traditional products like ink oil and coning oil would grow at a CAGR of 20% and 50% respectively over a period of FY07A-FY10E and its new products like mining oil, transformer oil and cable jelly oil would contribute approximately 6-12% each to FY10E net revenue. With the heavy investments announced in industries like mining, power and telecom industries we believe PPL would be indirect beneficiary of these investments.