Anubhav Sahu Moneycontrol Research
Himadri Specialty Chemical (HMSI) is an integrated specialty carbon entity and one of the leading manufacturers of coal tar pitch (CTP), carbon black and SNF (Sulphonated Naphthalene Formaldehyde).
Driven by improving fundamentals for its end markets (aluminum manufacturers and tyre companies) and forward integration to high margin products, Himadri is staring at a healthy earnings growth, going forward.
What makes it more interesting is its recent foray into developing inputs for the lithium-ion batteries, whereby it can participate in the promising space of electric vehicles, as well.
Installed capacity (‘000 MT)
Source: Moneycontrol research
Largest manufacturer for the coal tar pitch (CTP)
Himadri is the largest manufacturer of the coal tar pitch in India with a market share of 70 percent. Wherein coal tar pitch business (CTP, napthalene/SNP) constitute 73% of the volume sold (Q1 2018). Coal tar pitch is derived from the processing of coking coal and finds application in aluminum (85 percent) and graphite (15 percent) industries.
Indian aluminum industry is witnessing a capacity expansion of more than one million tons and is expected to reach 4 million tons (from 2.75 million tons) by the FY19. This would translate to an incremental demand of 0.125 million ton per annum for the CTP.
To partially meet this incremental demand, company plans to debottleneck (spend Rs 20 crore) the plant to increase capacity to 500,000 tons (from 400,000 tons). This is expected to commence by Q3 2018.
Use of anodes for the extraction of Aluminum
Use of graphite electrodes in electric arc furnace for the steel production
Largest manufacturer of SNF
Himadri also produces naphthalene-based super plasticizers (SNF), a by-product of coal tar pitch manufacturing, used mainly in the construction industry and for improving application properties of cement. With a capacity of 68000 tons, Himadri is the largest manufacturer of SNF in India.
One of the largest manufacturers of carbon black
Source: Moneycontrol research
Himadri is the third largest manufacturer of carbon black (27 percent of Q1 2018 volumes) in India commanding a market share of 17 percent. This is a forward integration for the company as carbon black is mainly used as a reinforcing agent in rubber (tyres). In addition, it has a varied application in plastics, printing inks, coatings, sealants etc.
Indian tyre industry revenue (Rs billion) trend
Source: Company reports
Its key end market of tyres is witnessing a capacity expansion of about 15 percent in FY18. Domestic tyre industry is expected to grow by 12 percent CAGR in the period 2017-2020 E.
Potential upside from electric vehicles
Himadri is one of the few companies in the world (only one in India) which can manufacture high-quality advanced carbon material having applications in the manufacture of lithium-ion batteries. Lithium-ion batteries are used across all portable electronic devices as well as hybrid and electric vehicles.
Currently, the company is running a pilot (5 tons per month) to manufacture anode material for lithium-ion batteries which might be ramped up in FY19.
Robust quarterly performance and guidance
Himadri posted a solid quarterly result in Q1 of FY18) when sales grew 77 percent YoY (year-on-year) driven by volume growth (+25 percent YoY) and better pricing realization (+42 percent YoY).
EBITDA margins improved to 22.2 percent (vs 20.1 percent in Q1 of 2017) on account of better product mix, productivity and improvement in realisation (absolute EBITDA/ton improvement of Rs 3000/-). There is higher contribution of better margin products like carbon black and SNF, which also aided the performance. The management sounded confident of sustaining this margin for the rest of the year.
Supply demand imbalances in the aluminum industry - key to watch for
As aluminum industry is the key end market, Himadri is exposed to the supply-demand imbalance in the global aluminum industry. Further, any delay in the commercialization of new product lines (lithium ion batteries) can weigh on the stock performance.
Improving return ratio points towards a turnaround
Source: Moneycontrol research
Company’s debt (Rs crore) exposure has decreased over the years
Source: Moneycontrol research
Financial projections and valuation
In the last few years, company has witnessed a topline growth of 11 percent CAGR (FY14-17), aided by improvement in end markets and capacity expansion. Going forward, we expect this to accelerate owing to better prospects of its markets like aluminum and tyres, along with better realizations and higher capacity utilization (currently 64 percent). We estimate a sales CAGR of 24 percent during 2017-19E.
Margins are expected to improve by 310 bps on the back of a better product mix and improved realisation. The management has no major capex plans. This coupled with the effort to de-leverage the balance sheet should result in reduction of interest expense. We expect earnings CAGR of 70% during FY17-19E.
The company is currently trading at a 12 month trailing multiple of 29x, which is at a premium to the industry average of 24x. However, for a turnaround entity like Himadri, it would be pertinent to look at medium-term earnings potential.
Source: Moneycontrol research
On our estimated forward earnings, the valuation works out to 15.4x 2019E earnings, which is attractive in the specialty chemicals space. While in the last one year, the stock has majorly outperformed the broader indices, it has lagged behind its peer group. Given the earnings outlook, we consider Himadri to be an interesting investment opportunity.
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