20 Microns - potential multibagger


(ragsingh0305) #1

Hi,
I would like initiate a discussion on 20 Microns Ltd, a specialty inorganic chemical company. It’s a 160 crores Mcap company with annual revenue of 410 crores and has EBITDA margin in the range of 13%-14%. It has seven manufacturing facilities and sizable part of revenue is derived from domestic market. For more detail about the business one can visit the website - http://www.20microns.com/ 17

Historical sales and profit
image

End Markets:
image
In paints and coatings they have come up with a prodcut named Lithoma which is somewhat substitute for TiO2. TiO2 is a key raw material for paint companies, but the prices are very volatilie and supply of TiO2 is unpredictable.

Asset Base
9 captive mines that has mineral reserves for 25 years
- Annual sales is 4 lakh tonnes while mineral reserve is 100 lakhs tonnes

Geographical diversity; Export market -14%, domestic: 86%

Key customers: ITC, Pidilite, Asian Paints, Berger, Akzo Nobel, nerolac,

Competitive Advantage - Niche specialty chemical player with no major competition, good entry barrier given long term mining leases. consistent growth in revenue and profit in recent historical years.

Valuation:
(all figures in crores)
EBITDA of about 55, Mcap -160 + debt of 130 resulting in EV/EBITDA of around 5.3x, manageable. This is comparison of specialty chemicals EV/EBITDA of 10x-12x

Growth Opportunity and Key triggers:

  1. Consumption play like paints and coatings, food ingredients (though I dont have exact break up)
  2. Reduced Debt to 130 from 155 in last two years
  3. Started generating free cash flows

Negatives

  1. Promoters holding at around 43%, of which 55% are pledged
  2. Debt seems to be slightly on the higher side = Debt to EBITDA = roughhly 2.5x
  3. No major investors as of now

Conclusions
Seems to be undiscovered story with reasonable degree of moat around the business, no direct competition, multiple use of the products and hence no concentration risk in terms of products or customers.

Would be great to get the views/opinions of the member in the forum, given their expertise and profound knowledge of the subject, thanks!


(ragsingh0305) #2

A few key slides from company’s presentation

All this shows that the company has products, assets, and infrastructure in place and if they could properly utilized these assets they can scale their profitability and cash flows.

As of March 31, 2017, their net tangible assets (including capital-in-progress) is about 154 crores


(Investor2025) #3

Hii

We r working in a same sector it has a good reputation in mining industry and they r known for their innovations .
I request forum members to have look at numbers and pls share ur views .
I know the senior management and promotors of the company since long time.

Disclosure: Not invested tracking position


(ragsingh0305) #4

Thanks for the update…
Are you working in 20 microns or any of the company to which it supplies the products.

Furthermore, if you could clarify, what do you exactly infer to in greater detail about their reputation.

Also, your detail view on the promoter and senior management will be greatly appreciated as you have the right source of info (being closer to that industry), thanks!


(prabhatg1) #5

As starting point … I can find below points from Screener
Cons:

  • Though the company is reporting repeated profits, it is not paying out dividend

  • Company has low interest coverage ratio.

  • Promoter’s stake has decreased

  • The company has delivered a poor growth of 6.42% over past five years.

  • Company has a low return on equity of 7.42% for last 3 years.

  • Promoters have pledged 55.56% of their holding


(ragsingh0305) #6

Hi,

I agree with the promoters pledging which i mentioned as one negative point. Promoters stake has decreased but only by about 1% which I assume is not significant. Promoters still hold about 43.5%. On dividend, probably it is at investments stage and hence not paying dividend…they did significant capex last fiscal year.

Anyways, thanks for bringing those points.


(Dinesh Sairam) #7

The company seems to be generating decent Cash Flows, but I’m not sure why they’re not making an active effort to repay Debt (Paying off 5%-10% of Debt is nothing, when the D/E is 1.50).

We can clearly see that Interest Expense is almost 50% of Operating Profit. So Debt seems to be a very big red flag here. This is especially alarming in the light that the company has a ‘D’ rating for both its Long Term and Short Term loans from ICRA. A ‘D’ Rating indicates an almost-insolvent level of operations: https://www.icra.in/Rating/CreditRatingScale


(ragsingh0305) #8

On D rating - I think that was in 2014, when their Debt to EBITDA or interest coverage was quite sub-standard. The company seems to have moved beyond that point. The EBITDA has doubled to closer to 60 crores from 2014 level of about 30 crores. The Debt has remained at same level.
Though there is scope to reduce debt levels, it does not seems to be an alarming factor with Debt to EBITDA of about 2.4x. I personaly believe Debt to EBITDA is a much better measure than D/E.

As I mentioned earlier they have been investing in the business and hence we saw modest debt reduction in last two years.


(ragsingh0305) #9

http://www.moneycontrol.com/stocks/reports/20-microns-board-to-consider-final-dividend-11498121.html

Company’s results to be announced on 24th May. Possibly the company could declare dividend this time.


(ragsingh0305) #10

Results are out today…a satisfactory one…substantial increase in profits YoY and modest increase QoQ.
FY 2018 financials/valuations (in crores)
Revenue: 434
EBITDA: 62 (margin 14.3%)
Net Income: 19
EV/EBITDA: 4.7x
PE: 9x

  1. Debt has come down to 119 cr…EBITDA margin has been continuously on the uptrend in last few years (_please note that lower crude oil prices has no contribution in improvement in EBITDA margin, as this is inorganic chemical)…
    Company has announced dividend, i guess for the first time
  2. Will analyse the cash flow statement post filing of annual report.

Will really appreciate the views of the fellow members.


(ramanhp) #11

The promoter holding has reduced but in a television interview, management claimed that they are restructuring the promoter holding and will soon will see an increase.
On high debts, they are re-negotiating with the banks and credit rating agencies to reduce the Interest costs which is at 12% right now.


(ragsingh0305) #12

Could you please let us know the source of this info, thanks.


(ragsingh0305) #13

v good results for Q1 2019


(Shyam) #14

Seems the company is very good in containing the expenses. The growth is a bit slow, but stable. Generally follows the trend, and it looks to be a good long term bet.

Disc: Tracking, might initiate a position soon


(Investor2025) #15

Indeed very good company and Q1 results also good…
Company generates decent cash flows but something is still missing, the way stock price behaves makes u less confident to go and buy the stock.
May be long term debt or tax figures !!


(Shyam) #16

Note: Below observation is purely from the historical figures.

The debt to equity ratio is slowly reducing over the last decade. Current ratio has improved a bit.

I don’t see a significant reduction in debt going forward given that their ROA has been hovering around 4% max. On the other hand, the debt would likely increase to acquire new assets as this is a capital intensive business.

What really matters in this company is their consistent earning growths, a very stable margin and pricing power.

Sources for historical ratios:

http://www.ratestar.in/company/20microns/533022/20-Microns-Ltd-207635