I attended Analyst Meet of Bodal Chemicals at BKC, Mumbai on November 28, 2016. Find enclosed my notes on same. Please note that I hold investment in the company and my view may be biased. I have increased my holding during last 30 days. Anyone interested in the company shall do his/her own due diligence. Also, the extract from my side may also not be true reflection of what was discussed during the meeting due to lake of my understanding/miscommunication.
The presentation made during the meeting can be downloaded from following link.
1) Slide 6 & 7: The competitive position of the Indian Dyestuff industry has increased significantly due to increased labour cost, lower export intensive in China and stringent pollution norm. During early 2000s, the Indian player lost majorly in domestic market due to competition from Chinese players. In 1996, verdict of Gujarat High court closed many dyestuff units. Common effluent plant was implemented to reduce pollution impact. That increased cost of production for the Indian players. Over the period, pollution and environment norm improved which has reduced now for Indian player specifically due to pollution environment. Chinese player entered Dyestuff in 2000s which benefited from relax pollution norm. With current concern from China, and expected compliance of pollution norm in China would further increase in cost for the players. It would also restrict new supply from China. Recently, largest Chinese player with 30% market share in global was asked to closed down due to pollution related issue. The company would require 10-15 times scale of effluent treatment as compared with Bodal due to scale and would hence increase cost of production.
2) Slide 8: The company acquired 100 acre land at Padra, Vadodra which has manufacturing capacity of raw material, dye intermediate and dyestuff. Post expansion, the company became the largest dye intermediate and most integrated players in dyestuff player in India. During 2006-10, due to debt funded expansion, Chinese dumping and lower capacity utlisation, the company approached lenders. The restructuring scheme was approved under CDR in 2012 where by only principal repayment rescheduled over longer period without any reduction/waiver of loan at lender end. The company came out of CDR in 2014-15, which was among quickest exit from CDR for a player without waiver of principle by the lender.
3) Slide 10: Basic Chemical capacity utilisation 90-95%, Dye intermediate: 80% for Dyestuff is around 75%
Nearly 70% production is from Vadodra plant (unit VII).
4) Slide 12: Due to integrated plant, the company save on logistic cost, better placed to face market vagaries and better utilisation from bye product. The company used HCL generated from Vinyl Suphone which is used in some other products. The company get benefit of higher value addition from bye product which improve margin for the company. Padra plan consume every day 150 tpd of sulphuric acid which company save vis a vis other players. Steam recovered from sulphuric acid production is used in turbine which is used as captive power in manufacturing of chemicals.
5) Slide 13 &14: Widest product range in Dye industry. Wide product range gives Stability in product margin. 30% revenue is from export, 375 customers from 45 countries. Such diversified customer based provide revenue visibility and stability to top line.
6) Slide 16: For last 12 quarter, the company has generated more than 15% EBITDA. Current EBITDA margin is around 20%,
7) Slide 17: Marginal long term debt and future expansion from internal accruals and not being funded by debt. In FY13, more than 250 Cr Term loan which is reduced to nil in FY16. Under CDR, through internal accruals, the company payment and exit from CDR is largest in history since 2003 when CDR was formed.
8) Slide 18: Trion related capex already incurred and production is expected to start in second half of FY17. LABSA commercial production stated in March 2016. With Rs 5 Cr capex, LABSA capacity would be doubled. LABSA was manufactured under Bodal 100% subsidiary which is now merged in Bodal. Henceforth, LABSA number would be reflected in Bodal. Liquid dyestuff is used Paper. Currently production is exported in Australia and Korea. Dyestuff facility expansion from 2200 tpm to 6000 tpm. In first phase 8000 tpa, increasing total dyestuff capacity to 25,000 tonnes per annum.
9) Slide 19: Projection of EBITDA for Trion and Liquid Dyestuff is very conservative as per management.
All expansion would be funded from internal accruals and no new debt would be taken. The company reduce debt depending on cashflow situations despite proposed capex/expansion plant.
a) Total Capex expected to be around Rs 28 Cr on Dyestuff expansion + Rs 5 Cr Capex for LABSA. So total capex of Rs 33 Cr. In addition, maintenance capex of around Rs 15-20 cr per annum. Hence, total capex of Rs 70-75 Cr over next 2 years.
b) In case of LABSA, EBITDA margin are lower than other business. The management consider the lower capex related to LABSA. The major player from global market closed down facility. The management consider it right diversification from the present business. There is also limited competition in the area which would give stable margin to the company. Very few LABSA players have in-house sulphuric acid which Bodal which improve its competitiveness.
c) Promoter holding: Promoter comprise two group. One Suresh Patel and family which is core promoter and other are partners of firm when the company started business. The core promoter increased their stake from 44-50% over period. Bansi Patel was professional, who has retired and hence existing through market. Another Mr Ramesh Patel resigned in October 2012 and he is also existing from the market. Partial sell of Ramesh Patel was purchased by core promoter.
d) CDR and debt restructuring: The company has undertaken Rs 250 Cr debt funded expansion which was completed in 2011-12. At that time, market was not remunerative due to dumping from Chinease players. Further the company suffered the forex losses. In view of these factors, the company approach lender to reschedule debt to be paid over 10 years as against original repayment schedule of 3-6 years. The lender approved the CDR scheme and company successfully exited after repaying loan from internal accruals. After this episode, the company is fully hedged on all its forex exposure and also did not intend to do expansion funded with debt. Hence, in future, the company not likely to face problem it faced in past.
e) New Product sales: Till October 2016, Total LABSA sales is around Rs 24 Cr and Liquid Dyestuff sales is around Rs 15 Cr. Trion production is yet to be started.
f) Sales growth driver: During Q2FY17, value of sale growth was 30%, of which volume accounted from 13% growth and realisation increase resulted in 17% growth. The company's products and raw material are linked to crude and it operate as conversion margin over the input cost. Hence, during FY16, due to decline in Crude prices, the company sales decline. However, EBITDA and Net profit margin and numbers increased.
g) Impact of V Sulphone and H Acid price: While some other players has shown major jump in profit, as
V Sulphone and H acid accounted from Significant share in revenue. Bodal has relatively lower proportion of these product in overall sales. Hence, the variation prices in these product has relatively lower impact on profitability of Bodal vis a vis other players. Further, even in case Chinese players restart production, the company has considered Dyestuff Intermediate EBITDA margin of around 15% vis 18% currently reported by the company. Dyestuff manufacturing operate at DI + Conversion margin which are relatively stable over period, Hence, even with restart of the Chinese production, the management is confident to achieve the projection of medium term. Further, Chinese Player Hublyon is not likely to start dyestuff production before 2017 and dyestuff intermediate before 2018 given the large effluent plant they need to commence. That in management view, would assist Indian player to manage margin at least for 15-18 months.
h) Distribution network/MNC contract manufacturing: The company used direct marketing as well dealer network in reaching customer which change with product/application and region. For textile dye, it used dealer network, while in some other products it directly market to customer. The company also intend to increase marketing spend to increase brand awareness of dyestuff. However, Hubei Chuyuan (Largest player of Dyestuff in China) may not start production in CY2016. Even in CY2017, when it start production, it would be first for Dyestuff and would take further time to set up effluent treatment plant before resume Dyestuff intermediate production. Around 3% sales is contract manufacturing for BASF which provide stable margin and does not intend to increase currently.
i) Demonetisation impact: Of 70% local sales, around lower than 20% dyestuff sold in local market may see marginal impact. Balance 50% is dyestuff intermediate which is not affected by this event. Overall, the company does not expect any major negative impact due to demonetisation. The company intend to exports whatever is reduction in domestic market for Dyestuff. Further implementation of GST would also improve Bodal competitiveness vis unorganised local players. Nearest competitor Jay Chemical and Colour Tex which are not listed. The product offering of Bodal is very large as compared with the peers.
j) REACH: The company intend to comply with REACH regulation of EU which would be implemented by 2019. It has already applied to EU for compliance of certain products.