Kiri Dyes and Chemicals: Simply Colourful

Kiri Dyes and Chemicals appears to be a good investment bet, considering its growth prospects from backward integration

COMPANY: KIRI DYES AND CHEMICALS

ISSUE SIZE: Rs 46.88-56.25

CRORE PRICE BAND: Rs 125-150

DATE: MARCH 25-APRIL 2, ’08

KIRI DYES and Chemicals (KDCL) is a Gujarat-based manufacturer of dyes and dye intermediates and caters to textiles, leather, paint and printing ink industries. It has a total production capacity of 10,800 tonnes per annum (tpa). It’s coming out with an initial public offering (IPO) to fund its proposed backward integration project to produce raw materials. Post-expansion, the share of chemicals and intermediates will go up in KDCL’s total revenues vis-à-vis revenues from dyestuff.

BUSINESS:
KDCL mainly manufactures reactive dyes, which are used in cotton-based fabrics and represent the single largest dyestuff produced globally, accounting for over 25% of total production. It operates four manufacturing units — three in Ahmedabad, which manufacture dyestuff, and one in Vadodara, which produces intermediates.

KDCL was traditionally a dyes manufacturer, but started manufacturing intermediates such as vinyl sulphone and H-acid in FY07. These intermediates accounted for a quarter of its total revenues in the first half of FY08. Nearly half of its turnover comes from exports, with Turkey, Korea, the US and Bangladesh accounting for two-thirds of its total exports turnover. To facilitate exports, KDCL has converted one of its Ahmedabad units into an export-oriented one, which enjoys tax exemption on export income till FY10. InNovember ’07, KDCL entered into a 40:60 JV with Zhejiang Lonsen Company to manufacture all types of dyes. Under the JV, a 20,000-tpa plant will be set up in India, which is scheduled to begin commercial production by end-’08.

The growth in the $23-billion global market for dyes, pigments and dye intermediates, has slowed down and is expected to hover around 2% over the next decade. This has increased competition in the industry and eroded its pricing power. India leads the production of reactive dyes in Asia. It currently exports nearly Rs 3,500 crore of dyestuff, 60% of which is contributed by dyes.

EXPANSION PLANS:
KDCL proposes to set up a 180,000-tpa greenfield intermediate chemical plant and a 2.9-mw co-generation power plant at Vadodara at a capital cost of Rs 43.8 crore. This will help it to secure raw materials at a reasonable cost, besides providing it with another source of revenue.

FINANCIALS:
For the half-year ended September ’07 (H1 FY08), KDCL reported a net profit of Rs 8.9 crore and revenue of Rs 97 crore. Between FY03 and FY07, its profit witnessed a CAGR of 20.8%, against a revenue growth of 10%. It has consistently improved its operating margins over the past few years, which stood at 15.8% during H1 FY08. Its debt-equity ratio fell to 1.31 on September 30, ’07 from 1.76 as on March 31, ’07. Its operating cash flows also turned positive during H1 FY08 after staying negative for a couple of years. This was due to a substantial fall in its debtors, coupled with rise in current liabilities.

VALUATIONS:
We expect KDCL to report an EPS of Rs 11.9 for the year ending March ’08 on post-issue equity of Rs 15 crore. Based on current market conditions and the company’s expansion plans, the forward EPS for FY09 and FY10 is 16.3 and Rs 21, respectively. At the lower and upper price bands, the P/E works out to Rs 7.6 and Rs 9.2, respectively, based on FY09 expected EPS. KDCL issued 12.5 lakh equity shares to pre-IPO investors at an average price of Rs 115.5. Considering this and the proposed IPO, the promoters’ holding will come down to 66.57%. Thanks to the current market meltdown, a number of comparable dyestuff and chemical companies are available at cheap valuations. For example, Atul is trading at a P/E of 6.8, Aarti Industries at 6.4, Bodal Chemicals at 4.1 and Metrochem Industries at 13.3. KDCL is currently passing through a phase of high growth and hence, its valuations appear reasonable.