Himadri Specialty’s recent announcement on growth plans, ramp up in new product launches and the additional benefit arising from the imposition of anti-dumping brings in improved earnings trajectory, which investors should take note of.
Medium-term growth plans
The company has announced its medium-term growth plan (next five years) aiming at addition of 2 lac tones capacity (Rs 1,000 crore investment) in the carbon black business. It is noteworthy that the company’s current capacity is at 1.2 lac tones commanding about 17 percent market share in domestic market.
In the first phase, as we noted in our earlier note, the company is aiming at capacity enhancement of 60,000 MT (Investment of Rs 300-400 crore), wherein commercial production is expected to start in Q1 FY20. Our understanding is that bulk of the new capacity would be for specialty carbon black having usage in tyre specialty, wires & cables, moulded rubber goods, plastics and carbon fibres. This expansion should put the company amongst the top five specialty carbon black companies in the world.
In the press conference related to this announcement, company mentioned that 40 new grades of carbon black (next three years) would be introduced and revenue potential of new product lines could be in the range of Rs 2,500-3,000 crore.
Anti-dumping duty on SNF (Sulfonated Naphthalene Formaldehyde)
Himadri Specialty is the largest domestic producer of SNF (60 percent market share and Installed capacity of 68,000 MT) which is used to improve the concrete mix (better flow, lower cement consumption) having application in construction, chemical industry. While demand potential is huge considering that penetration of concrete ad mixtures is just ~10 percent in Indian market vs. 50 percent in global markets, cheap imports mainly from China had adversely impacted domestic manufacturers over the years. Partially on account of this, Himadri Specialty was operating at sub-optimum capacity of about 55-60 percent.
Now, Ministry of Finance has notified that an anti-dumping duty (ranging from USD 217- 397 per ton) would be imposed on the import of SNF (Sulfonated Naphthalene Formaldehyde) for a period of five years which is expected to improve company’s topline as well as margins. As the Chinese prices are in the range of USD 500 -900 per ton, duties can constitute about 40-45 percent of the prevailing rates in China.
With the new details, we have made couple of changes in our near term projections. We expect an incremental capacity utilisation of 10 percent for SNF which can fetch revenue to the tune of Rs 30 crore in FY19 based on prevailing median international market rates. We have not accounted for margin improvement due to lack of information on the product mix.
Additionally, a 20 percent capacity utilisation for phase 1 of capacity expansion of carbon black can add to the topline to the tune of Rs. 150 crore in FY20 based on company’s expectation for full revenue potential from new product lines. Based on this, stock is currently trading at 16.1x FY20e earnings, which remains attractive in our view, given the barriers to entry created by product innovation, R&D focus and vertical integration.For more research articles, visit our Moneycontrol Research Page