Camlin Fine Science Limited --- Looks interesting but some way to go


(Aveek Mitra) #1

CFS — Please check the financials and ratios from stock screener.

Till very recently a single product company, product is TBHQ which helps extending shelf life of food products. For them, RM supply was a major challenge … They overcame it by buying a closed and loss making Italian company from Borregaard which gave them access to di-phenol technology to manufacture main RM which is BQ (Hydroquinone). Incidentally there are only 4 players in the world with this technology. And they paid Rs. 18 Cr. to buy 8000 T capacity. By spending another 4 cr last year, with de-bottlenecking and use of some indigenous technology, they increased capacity by another 4000 T … So, by paying Rs. 22 Cr. they are having an asset generating Rs. 300 Cr. revenue with huge scope for margin improvement.

The production of HQ gives rise to another low value down stream product Catechol… But further downstream of Catechol comes high value / high demand product like TBC, Guiacol, Veretrol, Guafenesin and Vanilin (synthetic vanilla) thus adding to wider product portfolio and de-risking the business with visible possibility of improving the margin level. Incremental capex for the downstream is low (as it is more a technical breakthrough) so incremental asset turn would be high.

Now company is planning a HQ plant in India with investment of Rs. 170 CR without stretching B/S much with mix of QIP and debt… They are doing it in 3 phases as per my information. At full utilization level, at today’s cost, total sales would be above Rs. 2000 Cr. by 2019. The land and regulatory approvals are in place. Meanwhile, company has already started producing more of downstream blends customised for end customer. If they can continue increasing the blending capacity then margin expansion would be huge (not factored in yet, optionality) with reduction of sales of TBHQ and Catechol. Already a new sales force is in place in different countries and they are doing customised blending through converters in China and elsewhere.

Overall, by FY 19 if the present plan works out, there would be complete transformation in the company from single low margin chemical company to a custom manufacturer of specialty chemicals for ready to eat / cook food sector… They have always walked more than half way (backward integration, blend development, deployment of new marketing team, on ground expansion work etc)

I think Vanilin has a huge and growing market with Solvay as the main manufacturer with plants around very costly western locations. The other listed player Evolva is a loss making biosciences player based out of Switzerland and has pioneered Vanillin from Yeast fermentation. Incidentally the company is valued at 500m USD (in the Swiss exchange) with revenues of just usd 10m and losses for 2014! Solvay in its annual report mentions Borregaard, Jiaxing, Thrive, Wanglong, Liaoning Shixing, Camlin, Anhui Bayi as present and potential competitors. None of the others mentioned by Solvay has huge capacity plan apart from Camlin… (As far as I could gather)

My scuttlebutt tells there were family issues for the promoter which has recently been settled. Recent promoter selling of stock was a result of that and possibly have no bearing on company performance.

The story would take time to unfold but I think it is positioning itself well for a lucrative space of food preservation and flavouring. The technology of HQ manufacture is a moat in my understanding.

The listing of SH Kelkar has given us some idea of the possible valuation of the company as I feel Camlin FS is the only comparable company to SH Kelkar.

It is not a recommendation and views invited.

Disclosure: Invested. Presently <5% of total portfolio.


#2

Good write-up! I too have this in my portfolio and convinced about earnings visibility. My only concern is how durable is their moat. Low cost advantage could be pretty replicable by Chinese players. Front end business build-up will be key monitor-able especially when there is no history.


(DAGARWAL) #3

But isn’t it looking expensive at such a high pe and growth to come in future with some uncertainity…
Should we wait for some correction to enter into or wait for building the story in future ??


#4

I think it is trading at 16-18x FY16 which is not expensive IMO for business which is generating superior returns. Q2 was weak optically and being in B2B biz brings qoq volatility. Hope is that they transform into customer facing business overtime. It will be better one develops conviction before plunging into this. It is difficult to answer when to buy.


(DAGARWAL) #5

Money control is showing pe at 42… And aren’t the debt levels too high … Is it expected to come down soon .??


#6

Forget MC look at Screener.in and consolidated nos.


(saket ) #7

Had started digging into it but was put off by lowering promoter holding from 52% in Jun’15 qtr to 40% in Sep’15 qtr.


(ASHISHGUPTA) #8

according to me paying greater than 10 PE for a commodity business is foolishness as it is not a business in which you can increase demand or capacity in a day.

and as and when profitability of a segment increases other player come in fore.


(ASHISHGUPTA) #9

also there are other such players that are in better condition than they are, like manali petrochemical.


(Aveek Mitra) #10

Few answers to the issues already raised…

  1. Ashis Gupta … It is not a commodity business as I have clearly mentioned in my original post. technology availability is limited. It was indeed a commodity business earlier but the value transition is already visible if you closely follow the story. If you give comparison then give reason please (Manali vs. Camlin FS).

  2. Promoter stake decreasing ---- Yes it is indeed not an encouraging sign but the reason for the sale is a family issue and wife of Mr. Dandekar sold her stake in open market in a botched up block deal. The stock price is depressed for the sudden spurt of volume in market. If anyone thinks positive about the story then he / she may take it as an opportunity to buy or if thinks otherwise can give a complete miss. The question may be put that why the managing promoters didn’t lap up the stocks to which their response may possibly be they didn’t have the money to buy it at that point of time. I am just conjecturing it. Let’s see how the next round of funding is done.

  3. China competition — The chance is limited. Check how many Chinese companies are exporting food grade / pharma grade items in developed world … However competition is a things which can not be rules out in future just like any other business.


(Nishant Kandoi) #11

Thank you for your detailed analysis. I had run a screener in which around 11 good companies were screened in. Camlin fine was one of them. Had no idea why it got through the screener. Then I was about to make criterias such as debt/equity and financial leverage ratio as well as promoter holding percentage more stringent to come up with a narrower screen to eliminate Camlin fine, until I bumped into this thread.


(Amit Aggarwal) #12

Thanks Aveek.

I have made an attempt to analyse how much cash company is generating for last 5 years. The table below has data from screener and ARs (consolidated).

Few questions that come to my mind:

  1. The company has struggled to generate FCF in last 3 out of 5 years. This could be on account of expansion. What is your opinion regards FCF and how do you see company generating cash in the future as it is cash what counts in the end.
  2. There is a huge variation in tax calculations for last 5 years. Do you know the reasons behind this ?

These are some quick observations and I will dig deeper and raise further queries/questions as needed. Thanks for your time.

Cheers,
Amit


(LALIT LODHA) #13

Regarding stake sale much has been distributed within Dandekar family and some in big investors like Ashish Kacholia and Urjita Jagdish Master who holds nearly 1% each.Nothing serious.


(Aveek Mitra) #14

Thanks Amit for putting a succinct note.

Regarding your questions I have few pointers…

  1. This company has to be looked into 3 phases… Before purchase of Italian facility (prior to 2012), after purchase of Italian facility (in 2012) and this year onwards (after making the Italian facility viable with higher outputs) … This raw material availability is critical for any success in the business. Earlier they produced commodity type items and were always susceptible to vagaries of its availability. And also, they didn’t have the capacity to convert it on regular basis to any higher value added products. One of the key things to measure in their reporting is how much of their sales is directly from Italian facility (broadly and roughly the Consolidated - Standalone sales figure) … As it reduces, more value added products they are selling (in other words, not selling HQ in open market). Till the Dahej plant comes into operation, this data may give a broad guideline of the progress in value addition front. The variable FCF over the period was mainly due to variability of product mix they sold to final market. They “claim to have” overcome this problem and it needs to be monitored at least every six months through improvement in EBITDA margin and incremental asset turn.

  2. On tax issue, they had unabsorbed losses from overseas facility and also they have a detailed note on this available on BSE / NSE website. Request you to go through the same to understand future taxation issues.


(Amit Aggarwal) #15

Thanks Aveek for sharing the pointers. I am studying all the details.

Regards,
Amit


(Aveek Mitra) #16

One point I missed to add in the story which may help you all to understand the business better. A key customer for Camlin FS type company is KEMIN (www.kemin.com) … What now Camlin FS is trying is manufacturing products which directly competes with KEMIN on cost / performance / supply. Hope it helps,


(Kiran K) #17

@aveekmitra

  1. Can you please help us to understand why the sales would be around 2000 Cr in FY19. It looks like Dahej plant output is expected only in FY19 and to achieve 2000 Cr sales, CFS needs to grow at very high rates

  2. Can you please throw some light on FY16 Q2 results? Though CFS appears to be in commodity space, it caters to FMCG segment. Any reason why FY16 Q2 results are down ?

HDFC report on CFS. Its quite old one, but gives information about CFS
http://hdfcsec.com/Research/ResearchDetails.aspx?report_id=2980139

Nirmal Bang: Initiating coverage

Disclosure: No position, tracking

Thanks,
Kiran


(Aveek Mitra) #18

Kiran … The Rs. 2000 Cr. figure was told in the last AGM as their cherished target for financial year FY 2020. Dahej plant output is expected from FY 2018 onwards as per management. Also, they expect the higher % of conversion to Vanillin which sales at more that double the price of HQ and Guaiacol would fetch them better Top and Bottom Line. At present they are also looking for acquisition of vanillin conversion facility in Latin America and USA. In my understanding the growth would come in spurts and not incremental as lot would depend on successful and timely implementation of Dahej facility without substantially diluting the equity.

I don’t really monitor QoQ performance so have no view on Q2 2016 result. However, I am little disappointed at low EBITDA improvement in standalone level. However, the overall thesis remains intact as compared to six months of H1 2015 when they sold Rs. 89 Cr worth of HQ in open market, in H1 2016, they sold only 36 Cr worth of HQ in openmarket. I guess, we need to watch for few more quarters so see how the margin improvement is shaping up.

The story, as I mentioned in starting my thread, would take time to play out.


(aditya) #19

I was just wondering how much of a threat the natural antioxidants can pose to the market size of synthetic antioxidants where CFS is market leader.The natural antioxidants although r expensive to produce which is the only reason the synthetics are being used,but the customers preference to use natural preservatives can prove to be a dent on the long term prospects of CFS.The product mix change of CFS can still prove to be a worthwhile investment, but there can be a slow and steady erosion in the antioxidant market share. Having said that the price advantage can still play a crucial role in the non-food biz and it can only make things better.

Disc: Planning to invest after doing a through analysis of market size and numbers


(Aveek Mitra) #20

Check if natural Vanilla is available in abundance, nature of its price compared to Vanillin and the issues related to manufacture of natural Vanilla … You may start from Wikipedia entry for Natural vanilla.