Anubhav Sahu Moneycontrol Research
Recent corporate quarterly earnings have thrown up some interesting results from the chemicals sector. This is first edition of a series highlighting such names.
Andhra Petrochemicals: Sole producer of oxo alcohols Andhra Petrochemicals is the sole producer of oxo alcohols in India, which in turn is used to predominantly manufacture PVC plasticisers. With a manufacturing capacity of about 73,000 tonne per annum (tpa), the company caters to about one-third of domestic industry needs, the rest being imported. It manufacturers commercially important oxo alcohols like Butanol, 2-ethylhexanol, Iso-Butanol, which find major application in the production of plasticizers, coatings, adhesives and lubricant additives.
Quarterly results: Sharp increase in margin The company reported a 44 percent year-on year (YoY) and 45 percent quarter-on-quarter (QoQ) increase in sales led by higher product prices and improved capacity utilisation. Favourable business dynamics have been aided by anti-dumping duty imposed in 2016, leading to moderation in imports. Operating performance has improved significantly with earnings before interest, tax, depreciation and amortisation (EBITDA) margin at 29.7 percent in Q1 FY19 compared to 15.8 percent in Q4 FY18 and 12.6 percent in Q1 FY18. Sequentially, increase in raw material cost (31 percent QoQ) lagged revenue growth. The company also benefitted from operating leverage.
Production cycle has revived Domestic capacity and production trends of oxa alcohols suggest that the production cycle has revived on account of improved end market prospects, trade protection and steady supply of raw material. The last factor assumes importance as the financial performance of Andhra Petrochemicals weakened earlier due to an accident at an Hindustan Petroleum Corporation plant in FY15, leading to disruption in supply of key raw material propylene.
India oxo alcohols: Capacity and production
Favourable factors Andhra Petrochemicals benefitted from the Goods & Service Tax (GST) regime as it is able to claim input tax credits on key raw materials: naphtha and low sulphur heavy stock (LSHS). These benefits were earlier not available in the Value Added Tax (VAT) regime as majority of company’s sales were inter-state sales.
Liquidity profile and credit rating have improved significantly due to cash accruals in recent quarters and deleveraging. Rating agency ICRA in its rating upgrade noted that net gearing has reduced to 0.5 times compared to 1 time in FY17.
The stock has rebounded strongly from the recent lows and is hovering near its 52 week high. However, it is trading at sub-10 times its trailing 12 month earnings. Its improved prospects deserve attention.
Chembond Chemicals: Multi-segment growth story Chembond Chemicals, a Mahape-based company with more than 40 years of experience, has a business interest in water treatment (37 percent of sales), industrial technologies (14 percent), construction chemicals (7 percent), animal nutrition (7 percent) and polyamides (1 percent).
Under water treatment, the company offers chemicals, equipment and microbial solutions for industrial water treatment. While margin in the chemical business was impacted last fiscal due to a sharp rise in input cost, recent takeaways from peers suggest the business is stabilising. Equipment business, however, recorded robust earnings growth.
Its industrial technologies division is witnessing strong demand for adhesives, coatings and sealants. The company also provides industrial wipes (used for painting automobiles), aerosols for maintenance, repair and overhaul (MRO) services. It also provides industrial hygiene solutions for the food processing industry thorough a joint venture with Germany-based Calvatis.
In the animal nutrition space, Chembond Chemicals caters to dairy and poultry end markets and has recently witnessed a business improvement backed by new products, better reach and enhancement of technical reach.
Additionally, the company is among the pioneers in the areas of polyamides (nylon) sourced from bio-renewable materials. Here it competes with multi-national companies such as Arkema, BASF India, Rohdia Speciality Chemicals India. In FY19, the management is hopeful of scaling up this segment, leading to change in revenue mix.
EBITDA jumps 2 times in Q1 FY19 In Q1, sales jumped 25 percent YoY backed by better traction in product volumes. Operating margin improved 366 bps on account of lower raw material cost leading to an over 2 times increase in EBITDA. Profit before tax improved by a moderate 23 percent due to decline in other income, while in the base year it benefitted from investment gains.
Favourable factors:
1) Strong credit rating (Crisil A-/Stable) backed by healthy balance sheet, collaboration with global majors and diverse product mix.
2) Exposure to rising sectors of the economy backed by pertinent R&D investments (Rs 6 crore in the last 4 years) and product launches.
3) About 29 percent of revenue till recently accrued from low margin contract manufacturing for Henkel Adhesive Technologies. This contract has recently ended and frees up capacity at its Tarapur plant for expansion in other segments.
4) Increased promoter confidence is seen in its buying out its MNC JV partner (eg: Chembond Solenis Water Technologies) and inorganic acquisitions (acquired Phiroze Sethna in November last year, which manufacturers sealants for the auto industry).
Risks to monitor: Intense competition in the relevant specialty chemical segments dominated global majors and high working capital requirements.
While the stock has recently corrected 17 percent from its 52-week high in a 1-year time frame, it has re-rated to 23 times 12-month trailing earnings. Potential growth in end markets of animal nutrition, polyamides, construction and water treatment chemicals makes it a stock to watch out for.
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