ValuePickr Forum

Chembond Chemicals- A Perfect Misvalued Bet

One of the promoters, Ashwin Nagaewadia sold around 83760 shares in open market today. Does anybody know who the buyer is and what is the need for selling such a huge qty of shares in the open market.

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Todays quarterly results will give us a better idea of things to come,

There is other income of approx 200 lacs this qtr. Results good QoQ , but last qtr historically better.

Chembond Presentation for Q4:
http://chembondindia.com/pdf/corporate-presentation/CCL%20Presentation%20-%20Quarter%204,%202018-19.pdf

Sales breakup:

The operations seems to have stabilized and one can see GM & EBITDA margins improving every quarter for the last three quarters. GMs have moved up from 44% to 49% and EBITDA from 6% to 10% in last three quarters after the toll business moving out. The slowdown in the construction segment in Q4 is probably due to elections. Animal nutrition is another -ve, I expected this business to grow significantly but it had a degrowth this year. Another thing one needs to assess is how the material technology business is panning out since it also has a significant inorganic part coming from PSPL.

Overall the company looks set for a very good growth path next year.

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Ashwin Nagarwadia spends time in the US and i think he is a NRI hence due to some compliance reasons he has had to dispose off some qty in regards to that. His intention was not to sell in the market and here anyways in this case promoters bought his stake out. This was the sole purpose to sell at this stage.

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Any updates from the AGM will be appreciated.

What feel does one get from management ( talks and body language)?

Any updates on the polymer division will be appreciated

Thanks

Chembond Chemicals
AGM FY19 Notes

We have decided to divide our business into seven segments:

  1. Water
  2. Material Technologies
  3. Animal Nutrition
  4. Construction
  5. Polymers
  6. Industrial Hygiene - Calvatis
  7. Trading

Polyamides Segment

  1. When will the 1500 MT plant start its commercial productions? Can you give us an idea in terms of how we are going about booking our capacities for this project?
    We have our pilot plant running. The next stage would have been a 1000 tonnes plant. Currently, we are focused on achieving utilisation of our existing pilot capacities.
    Current utilisation of pilot plant: 50%.
    We can go up to 60 tons comfortably.
    At the same time, market dynamics are changing. Because one of the crude derived monomers has been in a short supply over the last 6 months. There had been an incident in US plant. The HMDA prices have shot up which is a one-off and because of that, we would not be comfortable starting up a 1000 tonnes capacity plant at the current margins. HMDA for years used to be very stable. So, until some new capacity comes on stream, which they say would be around 2020 or 2021, till then it might remain volatile like this.
    RM:
  • HMDA is being imported into the country. This monomer is made by 3 companies in the world: 2 in US and 1 in Europe.
  • Sebacic acid (a derivative of castor oil) is being exported from here but then is coming back from China at very low prices. Most of the suppliers of sebacic are rather interested in exporting it due to duty drawback advantages.
    We are:
  • watching the prices of these monomers
  • filling up our existing capacity
  • Simultaneously working on other polyamides
    We have done the engineering but we haven’t started the project of 1000 tonnes. The reasons are:
  • One is the raw materials mentioned above.
  • We were waiting for EC approval. Around 2 weeks ago we have been informed that the site is in the red zone and will not be approved despite getting project report verified and tested by a leading university So, we will look for another site for this project. All Zones in Gujarat except for Dahej, Villayat are right now in the red category which means that there is no expansion allowed. So, only renewables are being managed by them right now.
    Project Development:
  • Products have been converted into monofilaments and they have already been supplied to 3 customers. Out of them, 2 have become regular customers who are consistently buying. We expect this trend to catch momentum.
  • We are going ahead with the project. But most probably, we would first invest in a monofilament and packaging client before we go in for an intermediate plant at the approved capex which was done last year.
  • The land portion will be significant in the upcoming capex. For the new land, we might end up buying more than we require as they sell those not on sq. m. basis but on the basis of parcel.
  • New capacity will probably come around Gujarat and Rajasthan. Rajasthan accounts for 10-15% of castor produce and Gujarat accounts for 85% of it.
  • Our focus initially was on Nylon 6,10 because that is green and is preferred by one large industry in India – the oral care industry. And it is currently being imported into the country. But due to the spike in HDMA prices, other nylons as well like 6,6 which use this monomer.
  • We also have other products that will complement the polyamides (Nylon 6,10). We also make some grades of:
    a. Engineering polymers (Nylon 6,6) – Big consumer: Automotive Industry which has switched to Nylon 6 which is cheaper.
    b. Additives for ABS polymers
    c. Nylon 6,12 – also used in brush bristles, tubing, injection moulding, coating etc.
    It is a relationship business. So, certain suppliers are happily supplying to global companies who are manufacturers of these filaments and polymers. They don’t want to risk their business relationships with them. So, if they want to entertain us, it will not be at the cost of their existing customers.
    About Nylons:
  • There are a few options available to customers. So, if it is not 6,10, they can use 6,12. If it’s neither of these, they can go to the extreme case of going to some conventional fibres.
  • Cost-plus doesn’t work in nylon. If the customer like automotive industry feels it (Nylon 6,6) is expensive, they will switch over to cheaper grades like Nylon 6.
  1. What is the market size of polyamides in India? If it is possible, could you share the details of the market size with respect to end-user industries? Like Bristles market you mentioned in AGM to be around 4500 tonnes. Also, is the entire demand currently imported?
    Assessment of the market size: It is not just the market for monofilament. It is of various sizes and different colours. We started with attempting to supply a particular size. The customers are now having newer requirements. So, we are adapting to those changes. We are finding out vicinities where we have the capability to make that kind of fibre in different shades.
  2. What is basically preventing global players like BASF to set up a manufacturing facility in India, since they have huge production base for polyamide 6 and 6.6 in the Asia Pacific including 100,000 tonnes which they set up in China in 2015 and since India is the largest castor oil producer in the world?
    They already have sufficient capacity there. They want to utilise that facility. They will make some other chemicals here. So, all of them are working on that model. On one particular location, they will scale up into global capacity in that product line in that country. We are able to compete with them but we are not happy with the margins. If we want to make and sell, we can sell but the profit won’t be significant for us to scale up our capacity.

Toll

  1. In last AGM, you mentioned that you will be starting with the toll segment on your own. Since the operations have been shut down in June, we have not come across any growth in revenue whatsoever. Could you give us an update on our stance in this segment?
    Our non-compete ended in May 2018 and we restarted the production in August 2018. So, currently we are at a capacity utilisation of 20% and it takes 35% utilisation to reach the breakeven levels.

  2. Do we have any running expenditures right now in Toll segment?
    Tarapur plant where we used to do toll manufacturing of about 1000 tonnes for Henkel, is now being utilised at 20-30%. Variable costs have stopped but yes there are some fixed costs. We have felt it prudent to continue those costs because we want to cater to this business and we see the good potential.
    Previous utilisation levels may take about two years.

  3. Are we going to do toll business through chembond material technologies that do defence and MRO already, or on standalone basis?
    We started this under chembond material technologies (protochem earlier). (I couldn’t understand this part. Doubt: Sales given in Chembond material is 16.21 crores and Loss before tax is 1.03 crores. But segmental sales of toll itself is Rs. 24.1 crores. So, it couldn’t be a part of material technology subsidiary this year).
    Metal treatment is operating under Chembond Material Technologies (Protochem Industries earlier). The industrial coatings will also become part of this subsidiary now and the subsidiary earlier named as chembond industrial coatings was renamed as Chembond Biosciences ltd. which will have animal nutrition as a primary operation.

Industrial Technologies

  1. Since the acquisition of PSPL and Gramos, how have the two subsidiaries grown?
    In PSPL, we look more at gross margins. So, GM has been difficult for most of the year because of the crude and PVC crisis. But that has now come back to comfortable levels. PBT has come down because of two things:
    a. RM costs
    b. The delayed effect of passing on those costs to the customers
    c. We are investing heavily in product development and R&D. This company was kind of stuck for almost 7-8 years. There was no development happening, no up-gradation of the plant. We acquired it for access into those markets. We have invested in R&D, safety and testing facilities. New Product development capabilities did not exist before us.

Animal Nutrition

  1. Any specific reason for why was there a de-growth in this segment this year despite having such a lower base? The expectation was that this segment will grow faster than the rest of the company.
    AR 2019: “The Animal Health & Nutrition business passed through a turbulent year with the poultry industry recording poor growth due to higher feed prices and other regional issues. Sales to some corporate customers were also lower due to a change in strategy.”

  2. There are tons of players in this segment out there. So, what are we offering that differentiates us?
    We have a couple of niche products.
    One is we are manufacturers. We have our own fermentation capacities. So, we make our own enzymes and probiotics. We will start making prebiotics. This is a very big part of the animal nutrition business.
    Secondly, we have a very good Vitamin D molecule called Alpha D3. So, its absorption is better. Vitamin D3 in higher doses damages the kidneys. Our alpha D3 doesn’t do that. It had some trials conducted and their findings have been very favourable.
    The formulation is not very easy. This is a very powerful substance. Chembond, for the past 5 years has been associated with Alpha D3. Others have tried to sell Alpha D3 but have not been very successful.

  3. What kind of growth can we expect from this segment in the next 2-3 years?
    This year, it is growing in double digits and margins are going to be better.

  4. In AR you said, that you have invested in new segments in animal-like aqua. Can you please elaborate on what kind of investments have we done in it?
    The investments have been done in people.

Water

  1. If we look at the financials of Chembond water technologies there has been a decreasing trend in the EBITDA margins of the company from 16-17% in 2012-13 to 11-12% in 2016-2017. Any specific reason for this? Could you give us the range within which you expect the future EBITDA margins to be?
    Yes, Margins are getting back. So, GM has been maintained. Some of the investments that we made into people, lab facilities and some O&M contracts have to lead to a decrease in the bottom line. The margins aren’t really so much of a worry in this segment.
    We lost OPAL but we just won MRPL again which is a 3-year contract. On infra side, opportunities exist but I think the framework is not yet ready from the government’s side. Timeline is a bit of question mark.
    From our existing product line, two areas – coagulation and preservation are more focused.
    We can assume 10-11-12% sales growth in this segment. While the opportunities grow, not everything that is an opportunity is in our domain of expertise. Second, we are not the only ones. As there will be more projects coming into this space, more bees will be attracted to this segment. I don’t want to be euphoric and make claims. So, we are ready – in terms of our team, distribution, some strengths than most of our competitors.
    Volume growth will happen but value growth may not happen.
  2. Any Reason for increase in sales of clean water and a huge jump in PBT margins from 3-5% to 16-25%?
    We have been maintaining our stance in the equipment business to stay away from large corporates. Our target is an industrial consumer and our approach is to solve their problem rather than giving them a product.
    We have combined two distribution into one and selling the chemicals as well as equipment through the same channel. That’s why you would observe such growth in numbers.

Industrial Hygiene - Calvatis

  1. Sales increased from 1.4 crores to 4.2 crores with PBT margins at 23%. How scalable is this?
    Indian JV restricts us to go all over the world. We procured some clients and replaced Ecolab. We have been approved by another international brewery. We will keep adding customers from snacks and food industry.

Others

  1. What can we attribute the increase in employee cost to this year from 43 crores to 51 crores?
    The increase in other expenditure and employee cost is majorly contributed by the material technologies and some by polymers and animal health.
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This is how the nos for various segments look this quarter. Hygiene chemicals is the calvatis subsidiary.

The YoY picture says that the topline growth of 12% (without toll) is steady. Animal nutrition is a seasonal play which is heavy Q3/Q4 and hence not much to infer from. The major growth is coming from industrial technology where they are adding newer clients. This should also be the segment where maximum operating leverage comes from. The mgmt said this segment will break even at 35% capacity utilization which they should be reaching by year end.

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