IOL Chemicals: Expansion to change fortunes

THE stock of Punjab-based IOL Chemicals has grossly underperformed the market in the past one year, falling nearly 50% despite a 65% jump in the Sensex — the primary reason being its weak performance in the first half of FY10. However, going by the company’s December ‘09 quarter results, there could be a change in fortunes. For the past couple of years, IOL Chemicals was implementing expansion and backward integration projects with a capex of Rs 256 crore, which it completed only recently. The company set up a 6,600-tonne per annum (TPA) plant to manufacture isobutyl benzene (IBB), which is the key intermediate in manufacturing ibuprofen. With a capacity of 3,600 TPA of ibuprofen, the company is already the second largest in the world and plans to raise its capacity to 6,000 TPA by mid-FY11 to emerge as the world’s largest producer of this anti-inflammatory drug. Over the past nine months, the company has set up plants for mono-chloro acetic acid (MCA) and acetyl chloride, which are the other key raw materials in the manufacture of ibuprofen and use IOL’s other products — acetic acid and acetic anhydride — as inputs. In addition, it has also set up a 13-MW captive power plant, using coal or rice husk as fuel. IOL Chemicals, earlier known as Industrial Organics, is a turnaround story. In FY03, the company’s net worth had turned negative. But thanks to equity infusion, there was a turnaround. Since then, its net worth has grown at a cumulative annualised growth rate (CAGR) of 87%. The debt-to-equity (D/E) ratio, which was 6.1 at the end of FY04 came down to 1.6 by the end of FY08. It moved up to 2.2 by end of FY09 due to the expansion project. The company is repaying close to Rs 35 crore of debt annually, which can reduce the D/E ratio to one by the end of FY11. IOL Chemicals’ performance during the first half of FY10 was impacted by low acetic acid prices, which forced it to run its 50,000-TPA acetic acid plant below capacity. The company was using nearly 80% of its acetic acid production for captive consumption in FY09, which could go up to 100% in view of the new derivative capacities commissioned. However, its December ‘09 quarter showed a multi-fold profit growth that went unnoticed by the market due to the weak sentiment. The company’s capital investment programme for the past couple of years is expected to bring in additional revenues and profits in the coming quarters. The prospects for the company’s scrip, which is trading below its book value and at a price-to-earnings (P/E) multiple of 7.7, appear to be reasonably bright.

Dolphin Offshore: Staying Afloat

Addition of new assets, graduation to main turnkey contractor and healthy E&P outlook in India make Dolphin Offshore an attractive investment

Although the scrip has more than tripled since we last covered it in July 2008, the growth trajectory of Dolphin Offshore still remains strong making its valuation fair. With new assets joining its fleet, the company is expanding its capabilities that can generate healthy returns over the next two-three years. BUSINESS: Dolphin Offshore (DOL) is a marine engineering company supporting the offshore petroleum industry. The company currently owns 14 vessels and has two major vessels on order to be delivered later in 2010. The company, which started as a diving support company 30 years back, has now scaled up to undertaking turnkey contracts for fabrication, offshore engineering, inspection, maintenance, modification, repair works for the offshore E&P petroleum companies. Historically, ONGC has remained the principal client for the company. The company’s plans to set up a shipbuilding and ship repair unit in Gujarat have taken a backstage due to environmental concerns. Hence, the company is trying to tie up with a fabrication yard for its captive consumption. GROWTH DRIVERS: Although the global E&P industry has slowed down considerably in the past couple of years following the economic crisis, it continues to thrive in India. ONGC, particularly, is busy revamping its Mumbai High assets and has budgeted Rs 15,000 crore for the purpose. It will also spend Rs 7,000 crore for developing small and marginal fields in the western offshore. In the first quarter of 2010 itself, ONGC is expected to tender out contracts worth around Rs 3,300 crore. DOL has just taken the delivery of one workboat in December 2009 and is set to get its construction barge by March 2010 and another workboat by September 2010. DOL has established itself as an efficient EPC contractor by executing several ONGC turnkey contracts. This enables it to aspire for bigger and more complex jobs in the future with better margins. The outstanding order book, which is currently at Rs 257 crore, is expected to increase. FINANCIALS: For the 12-month period ended December 2009, the company posted an identical 52% growth in operating revenues as well as net profit with operating margins stable at 19%. Over the past five years, its net sales have increased at a CAGR of 31.7%, while the net profit grew at 56.4%. It is currently carrying a debt of around Rs 100 crore, three-fourth of which represents working capital. Payment delays by debtors are one of the greatest problems faced by the company as its average debtor velocity stood at six months during FY2009. VALUATIONS: At the current market price, the scrip is trading 9 times its consolidated net profit for the past 12 months. Other companies in the industry, such as Garware Offshore (11.1), Great Offshore (7.8), Aban Offshore (15.5), are trading at similar levels. DOL is expected to end FY11 with a net profit of Rs 78 crore. The current price discounts the estimated FY11 earnings 7.4 times. CONCERNS: Global economic recovery that can refuel the E&P binge of the global majors remains a key concern for the company’s growth. Due to the contractual nature of work, which again is dependent on monsoon and weather conditions, the company’s earnings could witness great swings from quarter to quarter.

Kiri Dyes: Dystar Takeover

AHMEDABAD-BASED Kiri Dyes & Chemicals’s (KDCL) successful acquisition of Dystar for an enterprise value of Rs 1,350 crore has catapulted the company in the global league. The acquisition gives Kiri Dyes an annual turnover of Rs 5,000 crore, with a 21% global market share in textile dyes. The deal was financed through e65 million of debt and e35 million of FCCBs issued by Kiri’s subsidiary in Singapore. The company also took over current trade payables worth around Rs 650 crore. With this, Kiri’s consolidated debt rose to Rs 600 crore with the annual interest burden working out to close to Rs 45 crore. The buyout entailed purchase of 17 manufacturing facilities out of Dystar’s 19 along with all brands, patents and intellectual property rights. KDCL’s balance sheet is set to expand more than 11 times, considering the addition of Rs 3,200 crore worth of assets as part of this deal. Dystar, earlier owned by BASF, Bayer and Hoechst in 30:35:35 proportion, was acquired by Los Angelesbased private equity firm Platinum Equity in August 2004. In September 2009, the company had to file for bankruptcy due to liquidity problems. While the acquisition expands Kiri Dyes’ horizon multi-fold, it now has the responsibility of turning it around while managing a heavy financial burden. The company has already rationalised manpower at the Dystar units and plans to optimise manufacturing and sourcing by exporting more from India. Kiri Dyes has been preparing for an acquisition for quite some time now. In August 2009, its board had approved raising Rs 250 crore through qualified institutional placements or FCCBs or GDRs. Simultaneously, it increased the limit of FII investment to 49% from earlier 24%. The company also raised its borrowing powers from Rs 300 crore to Rs 700 crore. Kiri Dyes’ scrip hit an all-time high of Rs 877 before closing at Rs 810 on BSE on Thursday. The current valuation is around 12 times its estimated FY11 profits, assuming a 2% net profit margin on a consolidated sales. However, considering the uncertainties involved, investors should wait for the actual numbers before taking an investment call.

Kirit Parikh Committee Report: Europe Shows Price Hike May Not Hit Growth

THE report submitted by the expert group headed by Mr Kirit Parikh on a viable and sustainable system of pricing of petroleum products if accepted by the government could boost the prospects of state-owned oil firms. This is because deregulation of petroleum prices at a time when energy prices are moving northwards globally will certainly translate into a secular rise in domestic fuel prices. However, the hike may not necessarily crimp growth, at least going by the experience of Europe. Several European countries, including the UK and Germany, have adopted a high fuel price policy which has actually resulted in curbing its unproductive usage. In fact, the UK and Germany now consume 12-15% less oil compared to what they were burning over four decades ago in the 1970s. In Europe, petrol today costs the equivalent of a little over Rs 85 per litre while diesel range between Rs 66 and Rs 87 a litre—substantially higher than the pump prices in India. The higher fuel prices are mainly due to higher taxes imposed on fuels. Nearly 65% of the petrol price in Europe represents taxes as against 48.5% in India. Similarly, taxes on diesel amount to around 55% in Europe as against 24.6% in India. No wonder these recommendations will dent the already fragile monthly budgets of households and may generate a huge outcry. However, the burden of under-recoveries that had grown out of proportion over last five years needs to be eased before it threatens India’s economic growth. This pain in the short term is actually a necessary evil to ensure that the country retains its ability to invest for future growth. The Kirit Parekh’s recommendations are not much different in spirit from what the Rangarajan committee had suggested way back in February 2006. "Decontrol prices" is the primary motto of both these recommendation reports. Considering the country’s fiscal deficit, the fiscal health of the oil companies and the keen interest that the Prime Minister’s Office has been taking in this report, most of the recommendations are likely to get adopted soon, perhaps with some moderation.

Kabra hopes to gain from rising demand

Shares Up 50% Since Mid-Dec Against 5.6% Fall In Sensex

DEFYING the overall weakness in the stock market in the past couple of weeks, the shares of Kabra Extrusiontechnik (KETL) traded near its all-time high to close at Rs 188.5 on February 2, 2010. Although the superb December 2009 quarter performance was one key element in the latest upsurge, the scrip has substantially outperformed markets in the past one month. KETL shares have gained 50.3% since mid-December as against a 5.6% fall in Sensex.
KETL recorded a handsome 572% jump in its December 2009 quarter profit at Rs 6.5 crore, although its sales grew only 42% to Rs 49.1 crore. The company was able to maintain prices of its plastic extrusion machinery although the raw material costs eased. KETL is a debt-free company with healthy operating cashflows. The company’s cash and equivalent investments have grown at a cumulative annual growth rate (CAGR) of 49.7% between FY05 and FY09.
After steadily growing profits at a CAGR of 34% for five years, the company had reported a fall in profit in FY09. Even in the first half of FY10, the company’s performance was only marginally better than the year-ago period. Against this background, the sharp jump in its third quarter profits hints at improvement in the future prospects of the company.
The plastic extrusion machinery industry is closely linked to the plastic consumption, which is growing fast in India. The demand for conventional PVC pipes is growing in double digits due to increasing irrigation activity as well as new applications in construction and infrastructure segments. Similarly, pipes manufactured from HDPE are gaining popularity in applications such as telecom ducting, water supply and natural gas distribution. Additionally, the consumption of packaging films is growing in industries such as food processing and healthcare. All these factors augur well for KETL, which had faced some sluggishness in net sales in the past three years.
To benefit from the increasing demand, KETL is planning an aggressive investment of Rs 85 crore over the next 24 months. This will not only expand its capacities, but also improve the efficiencies.

Kabra Extrusion: Hopes to gain from rising demand

Shares Up 50% Since Mid-Dec Against 5.6% Fall In Sensex

DEFYING the overall weakness in the stock market in the past couple of weeks, the shares of Kabra Extrusiontechnik (KETL) traded near its all-time high to close at Rs 188.5 on February 2, 2010. Although the superb December 2009 quarter performance was one key element in the latest upsurge, the scrip has substantially outperformed markets in the past one month. KETL shares have gained 50.3% since mid-December as against a 5.6% fall in Sensex. KETL recorded a handsome 572% jump in its December 2009 quarter profit at Rs 6.5 crore, although its sales grew only 42% to Rs 49.1 crore. The company was able to maintain prices of its plastic extrusion machinery although the raw material costs eased. KETL is a debt-free company with healthy operating cashflows. The company’s cash and equivalent investments have grown at a cumulative annual growth rate (CAGR) of 49.7% between FY05 and FY09. After steadily growing profits at a CAGR of 34% for five years, the company had reported a fall in profit in FY09. Even in the first half of FY10, the company’s performance was only marginally better than the year-ago period. Against this background, the sharp jump in its third quarter profits hints at improvement in the future prospects of the company. The plastic extrusion machinery industry is closely linked to the plastic consumption, which is growing fast in India. The demand for conventional PVC pipes is growing in double digits due to increasing irrigation activity as well as new applications in construction and infrastructure segments. Similarly, pipes manufactured from HDPE are gaining popularity in applications such as telecom ducting, water supply and natural gas distribution. Additionally, the consumption of packaging films is growing in industries such as food processing and healthcare. All these factors augur well for KETL, which had faced some sluggishness in net sales in the past three years. To benefit from the increasing demand, KETL is planning an aggressive investment of Rs 85 crore over the next 24 months. This will not only expand its capacities, but also improve the efficiencies.

Emmbi Polyarns IPO: Plastic Dream

Emmbi’s success depends upon how fast it can develop the market for its innovative products. Although risky, investors may consider the IPO

EMMBI Polyarns, a manufacturer of woven polymer products, is raising nearly Rs 40 crore through an initial public offer of equity shares. The funds will be used to increase its production capacity three-folds by the end of 2010. The company has developed some innovative products in the areas of geo-textiles and water conservation. Post issue, the stake of the promoter group would fall from 100% to 45%.
Long-term investors with risk appetite may consider subscribing to the issue. Risk-averse investors should wait another couple of quarters to check the company’s earnings growth before taking a call.

BUSINESS:
Set up in 1994, Emmbi Polyarns (EPL) is promoted by first generation entrepreneurs of Appalwar family. The company has set up a manufacturing facility in Silvassa for woven polymer packaging products such as, flexible intermediate bulk carriers (FIBC or Jumbo Bags), woven sacks primarily used in industrial packing and other similar products like container liners, canal liners, flexi tanks, car covers and protective irrigation system.
The company tripled its exports in three years to Rs 22.5 crore in FY09. The export growth helped EPL boost its topline and bottomline growth, while its domestic sales stagnated. Its domestic customers for packaging products include Hindustan Unilever, ITC, Godrej Industries and Tata Chemicals, besides others. The company typically works on monthly supply contracts with its industrial clients and takes 65 days on average to collect outstanding credit sales.

GROWTH DRIVERS:
The company’s products in water conservation including pond liners, canal liners, and flexi tanks are all lowcost alternatives for the farmers. These products may find great demand in the domestic market with rising concerns over water management. The company has also developed specialty packaging materials such as paper or aluminiumlined packaging or anti-corrosive packaging for specific uses in tea, cement or automobile industries. Usage of disposal bags for asbestos, nuclear or hospital waste is well accepted in overseas markets and is likely to find increasing demand domestically. The added capacities will come handy in catering to rising demand for the company’s packaging as well as innovative products.

FINANCIALS:
In the last four years the company’s net sales grew at a cumulative annual growth rate (CAGR) of 36.7%, while the net profit grew at 42%. The company has consistently expanded its operating profit margins from 8.5% in FY05 to 13% in FY09 and 14.1% in the first half of FY10. EPL’s reported profit in the first half of FY10 at Rs 1.2 crore is 89% of the profit for whole of FY09. EPL’s current debtequity ratio stands very high at 2.4 but will fall below 0.5 post the IPO. The company’s operating cash flows were negative in two out of last five years.

VALUATIONS:
The annualised earnings for FY10 will translate in an EPS of Rs 1.4 on post issue equity of Rs 17.4 crore. The issue price is 28.6 to 32.1 times the EPS on lower and upper bands, respectively. P/Es of companies in similar business such as Jumbo Bag, Karur KCP, and Jai Corp form a wide range of 5-95.

CONCERNS:
Although the company’s products are innovative the concept selling and brand building will take time. Being a familymanaged small company the project execution and managing increased complexities of the business have their own inherent risks.

IPO details:
Price Band: Rs 40-45 per share
Net issue size:
Rs 38.3-43.1 crore
Date: Feb 1 - 3