Vikas Ecotech may benefit from regulatory push for substitutes to lead-based products

Having said that, competitive intensity, mainly from China, and the challenges in sourcing raw material, are some of the key factors the company needs to monitor.

Company description

Vikas Ecotech (Market cap: Rs 799 crore), incorporated in 1984, is one of the leading manufacturers in India of specialty additives (18 percent of FY17 revenue) and polymer compounds (49 percent of FY17 revenue).

The rest of the business pertains to trading (22 percent now vs 64 percent in FY13) and recycling of PVC products.

While the share of trading in overall business has reduced over the years, recycling has gained traction. Company is in the process of de-merging the trading and recycling businesses, with an intention to create two separate entities focused on high margin segments (additives/compounds) and high volume (trading/recycling).

The company caters to a diverse range of industries (agriculture, automobiles, cables, footwear, packaging) through its manufacturing facilities at Shahjahanpur in Rajasthan, Noida in Uttar Pradesh, and the Kandla SEZ in Gujarat.

Some of its marquee customers include Mexichem, Supreme Industries, Baerlocher Italia Spa, Prince Pipes, Havells, Relaxo, SRF, JHS and Biotique.  International peers operating in similar segments are Galata Chemicals, PMC and Songwon

Product range

Specialty additives – Organotin Stabilizers constitutes the major chunk

Organotin Stabilizers (Methyl Tin Mercaptide) is the biggest revenue earner for the company (approximately 90 percent) to its specialty additives division.

The rest of the specialty additives revenue comes from plasticizers (ESBO) and flame retardant (ATH). While the company’s flame retardant is another high margin product, Vikas Ecotech's flagship is Methyl Tin Mercaptide.

The “lead-free” opportunity: Methyl Tin Mercaptide

Methyl Tin Mercaptide is a heat stabilizer that helps in preventing goods made of PVC from damage due to heat during both manufacturing and usage.

Lead-based stabilizers have so far been the most extensively used heat stabilizers, but are now being phased out across the globe due to growing heath concerns, awareness and resultant regulations.

Consequently, there has been a sharp decrease in the consumption of lead-based stabilizers in developed regions like Europe.

In India, following a National Green Tribunal order, the Ministry of Environment & Forest (MoEF) has drawn up a 6-month roadmap to effectively phase out lead-based stabilizers.

The MoEF has also been directed to ask industries to publish caveats with each PVC pipe product that contains lead, about its harmful effects on health.

This crackdown on lead-based stabilizers is expected to aid the acceptance and sales of Methyl Tin Mercaptide. It has extensive global approvals for food contact applications and potable water pipes.

#planned expansion depicts long term plans. Immediate focus is 3kT expansion for Organotin Stabilizers

Opportunity

Currently, Indian demand for Organotin stabilizers is estimated to be around 7,000 tonnes, which is approximately 7-8 percent of the total demand for heat stabilizers in the country.

Lead-based stabilizers now cater to 75-80 percent of the domestic demand. So when the government decides to enforce the phasing out of lead-based stabilizers, it can open up a huge opportunity for the company.

Vikas Ecotech currently has a capacity to manufacture 3 kT (3,000 tonnes) and is expecting to double it in 6-9 months, after its Dahej plant commences operations.

Balance sheet needs further repair

Two years ago, the company's balance sheet was quite leveraged, with a debt to equity ratio of 1.6 in FY15. Since then, the debt to equity ratio has been brought down to around 0.77.

But the company's receivables continue to be a problem. They have historically been on the higher side, with the company's debtor days currently at 178 against an industry average of 90-120.

This number has recently spiked up due to higher exposure to small and medium enterprises, a segment that is grappling with GST compliance and requires a higher credit period.

Also, the company needs to incentivize its trade channel partners, who are facing competition from Chinese products, in order to bring the debtor days figure down to a comfortable level.

Sources said that Vikas Ecotech is working on bringing the number down to 120 days over the next two years.

Valuation/ recommendation

Our projections consider the following assumptions:

• Limited volume growth, although the company has excess capacity for the prevalent demand for Organotin


• EBITDA margin contraction, as challenges in sourcing key raw materials from China to manufacture Organotin (2 Ethylhexyl Thiogycolate) still remain.

Based on this, the stock is currently trading at 18.5x 2019e earnings, which is in line with its global peers. Having said that, there is an upside risk to projections coming from the potentially accelerated phasing out of lead-based polymer additives in PVC products.

If and when this happens, the company's stock price could be re-rated. Other triggers for better earnings growth or market share can come from the acceptance of anti-dumping duty on Chinese imports.

Overall, we are positive on the business, which appears to enjoy a moat backed by technical knowhow. However, since the balance sheet is not very strong, we find it suitable only for those investors with a high risk appetite and a long-term investment horizon. Follow @anubhavsays

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