Dai-Ichi Karkaria Limited

Stock Opportunities Untested - but worth a good look
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http://www.bseindia.com/xml-data/corpfiling/AttachLive/3C82816C-83D8-44E9-B212-F6CA4AB40C4D.PDF

The report suggests on a equity capital of 7.45 Crore, the company is making twice as much of profit. EPS 21+. Debt free. Dividend from joint venture is 6.19 crore. And yet this small cap appears under a p/e ratio of 20.

This kind of performance is sustainable over next few years?

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Latest Q4 results shows company has drawn down debt of 3 Cr against the total tied up term loan of 50 Cr. Next lot of 42 cr is on the way.
I dont understand , how a company whose net worth is 141 cr, can build Dahej plant whose total estimated project cost is 168Cr, means almost as same as its total networth.?

http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/3c82816c-83d8-44e9-b212-f6ca4ab40c4d.pdf

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The company has large liquid investment in MF and equity as well as large office space which may be realised for expansion if needed. Refer to my AGM notes for more details.

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Annual Meeting on 17 July 2017 - Is there a conference call participation possible? Please if any one can provide phone numbers?

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Annual general meeting a meeting at a fixed venue which is attended by Board of company, key official of the company and shareholder. Sharholder can ask question to the management. However, it is not a conference call. You can evote for all resolution during the stiuplated timeline. But not possible to participate by call as of now.

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Dhiraj I have started looking at Dai-ichi now, and as you are tracking this company for long and I hope you are going to the AGM as well.Could you please share your thoughts on below points:

  1. Could you please help me understand ,what is the Kasarwadi`plant compensation all about.i see that there was 1.9 cr in 15’ and 12lakh in 16’ as compensation from mah gov.Can you let me know if all the excess land has been given to gov or there is still land that can be monetized.
    Also,as seen below is Capex(61lakh) on this plant,could you give some idea which product line it caters to.
    image.png1143×269 23.2 KB

    2)As i understand from your notes as well as from AR,for standalone…all the productlines apart from Oil field chemicals are at almost full utilization.Any idea of how much can the full scale revenues be in 2-3 years.

    3)As mentioned in your notes,the target is to have 200 cr sales for JV for 17 FY,but it managed only 109 cr.What is the outlook in next 2-3 years in your opinion.Can we say its due to partial utilization of capacity,as you have mentioned that its not related to the crude price,as the pat margins have fallen by half from last year.

    4)“During October 2012, Dai-Ichi purchased a plot of about 11 acres for Rs 4.98 crore in Dahej for future expansion of its operations”
    Any idea if this entire land is being used for expansion or there will be surplus land after the expansion by FY18’
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Also in case of Standalone there has been growth in oil field segment from 48 cr to 55 cr but in JV there has been declined in oil field chemical. So questions are: Are oil field chemical applications in Standalone and Consl. are different and what they are doing to bring back the growth in consl and margins. Dahej capex is also towards oil chemical apart from other chemicals, so how they are going to utilize the capacity, if oil scenario is subdued. I think if we can get grip on oil fields chemical segment in S.A./ Consl/ at upcoming capex at Dahej then visibility will be very clear.

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For all,
below is the environmental clearance report regarding the Dahej Expansion.This might be helpful for analysis.(Attaching link as the file couldn’t be uploaded due to size)
http://environmentclearance.nic.in/writereaddata/FormB/EC/EIA_EMP/05102015R4XVPZAWdaichiupload05102015.pdf
@Siddarthmohta Yes there is some ambiguity between the oil field chem from Standalone and JV.
What I unerstand is that JV sells to indian crude producers only.Ex-BP,Cairn etc. So these I presume are upstream chemicals.Meanwhile the standalone may include downstream chemicals as well.
Request @dd1474 to share his thoughts,please.

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@tarungupta

Find enlcosed my reply to your queries to the best of my understanding of the company:

  1. The company has operational plant at Karaswadi. The Compensation was for small parcel of land acquired by the Govt for Road construction.
  2. Please refer to my AGM notes in 2016. Relevant extract your reference[quote=“dd1474, post:58, topic:937”]
    Dahej Plant:Dahej plant shall be on stream from Sep 17 with cushion of couple of month. So realistically start by December 17. DIK would spent further Rs 100 Cr by Sep 17. The company would use Rs 40 Cr of investment and balance would arrange term loan. Nearly 50% of capacity at Dahej plant would be for oil. The management when asked about Oil becoming obsolete, replied that they do not see same happening at least for a decade. Balance 50% of capacity of Dahej would be for other applications. DIK also want to increase products in personal care industry as that is stable high growth end use sector from Dahej plant for which research is underway. Dahej would be mutlipurpose plant (expect for oil chemicals capacity), which can easily be migrated to other end uses. DIK has competitive advantage of being in India which provide access to input at cheapest cost. After total capex of Rs 170 Cr in Dahej plant, DIK would expect peak turnover of Rs 300 Cr which would be achieved from 3-4 years of commencement of Dahej plant.
    [/quote]
  3. In my opinion, it has more to do with crude price decline. In my understanding, the capacity utilisation is moderate to provide for couple of growth. It is more due to decline in crude price which may also have lower volume demand from India. Please note that JV only supply to Indian Crude explorer and does not export as per information provided in AGM. Hence, there may be decline in volume as well as compared with FY2016. So clearly management did miss sales projection by wide margin for JV business in my opinion. Having said that, one need to assess whether there was industry chellange or poor execution of management. I would personally consider it more industry chellange then management incapabilities. However, one need to apply its own understanding on analysis this fact and take final view. I may have ownership and familiarity bias due to my positive experience with management.
    Disclosure: I hold share in comapny and hence may have bias.
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Looks like first institutional meet for Dai Ichi Karkaria Ltd.

http://www.bseindia.com/corporates/anndet_new.aspx?newsid=e3a83cab-39fb-4248-9b9b-b449c9b255bd

Disc - Invested.

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On 17th July, Monday, Dai-ichi Kakaria AGM is there. Company in its annual report has mentioned that Dahej plant it will be able to mgf a wider range of products with better yields, quality, productivity and conversion costs. Also plant is located in a chemical zone so this will help in reducing transportation and handling costs. From the commentary, it looks margins from Dahej plant is significantly higher and can reach at 20% in 2-3 years.

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Hello,

If anyone is planning to attend the AGM on Monday, I have a few questions lined up :

  1. What are the main chemicals (with areas of application) that the company intends to manufacture in the Dahej Plant ?
  2. Are there any niche products, which have limited competition, in the current portfolio or in the future product line from Dahej ? If yes, what would be the % share of the same in top-line ?
  3. What is the increase in the top-line that the company sees in the next 2-3 years after Dahej plant becomes fully operational ?
  4. With more focus worldwide on Electrical vehicles now., there is surely going to be a negative impact on crude price & demand in the long run. Does the company still remain optimistic on oil-field chemicals towards the long run ?

Regards,

Mukesh

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Hi Mukesh,
I will be attending the AGM tomorrow. Have added my equations to the list we have.

Let us see how much time we get,

Regards,
Raj

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Note from AGM on July 17 2017, based on discussion with Mrs S F Vakil in reply to queries of various shareholders. Please note that I have invested in the company and my views may be biased. There is also possibility of some misunderstanding at my end while writing notes. Future investor are expected to do there own due diligence.

Dahej Expansion: Dai Ichi is expecting spent Rs 168 Cr on Dahej Expansion. Of these nearly 60-70 Cr would be spent on Land and building/utilities while Balance Rs 100 Cr is on Equipment/Plant. The mean of finance for the project are from Internal accruals, Divestment of certain liquid investment and loan from Axis/HDFC Bank for 5 year tenure (Debt of around 100 Cr). The company aim to reduce interest cost minimum.

It has Three major plants being under implemtation for Dahej. The first one is for oilfield chemicals which is expected to commence production from November 2017. The second plant is Ehtoxylation (thanks @ananth for correcting my error in first draft) which supply to textile chemicals which is expected to commence from February 2018. Final plant which is multi purpose plants which would commence from March 2018. Full capacity would be achieved for first plant and second plant within 3-4 years, whiile the multipurpose plant is expected to reach 85-90% level within 18 months of commencement.

The company would also be shifting Kasarwadi Reactor (part of the plant is dated and would be discarded once Dahej plant in operational). Objective to move to Dahej to get into Pertroleum complex with continuous supply of Ethylene from RIL.

Dahej plant has imported technology for Ethoxylation which has been introduced first time in India (Technical support from Swiss company which is world leader in the area). The company expect real impact of Dahej plant to come from FY19 and FY20. It has three type of production processes. This advanced technology may help company in exports.

It plans to working with partner to get long term contract for enhaced production. The product strategy would be predominatly with Oil. However, the company intend to launch new products in Agri and Construction chemcials. Superplasticier are used in Bridges which need higher strength concrete. Over period, Chemcial share in total sales expected to increase from 7% currently to 10% in medium term and 15% in long term. The company supply also construction chemical to cement company which it expect to get good business. Oil chemicals include whole range of chemical to produce crude.

2-3 blocks are kept vaccant for future expansion. Currently 3 plant are implemetation and the company can can add two more plant in future depending on demand.

In FY19, total incremental depreciation and Interest charge would be Rs 10.5 Cr and Rs 9.5 Cr per annum respectively. Interest cost would reduce by Rs 2 cr per annum with repayment over 5 years.Depreciateion would be stable at Rs 10 Cr under SLM for next 5 years.

From April 2018, the company would have only two plants, Dahej and Kurkumbh (very small plant with 11-12 Cr sales). Kasrwadi plant would be shifted and would be closed over a period.

Total sales Rs 300 cr which would achived over 5 years. It inlcude Kasarwadi shifted capacity as well.

Land at Kasarwadi usage would be considered by Board at appropriate time. The company has not done valuation of land. This is freehold land. Karaswadi has around 15 Acres land.

Kurkumbh In past, it attempted to have JV with Foreign partner for Acrytronile which was not success. Hence, Kurkumbh could not reach to large scale. The company is open if it can get appropriate parnter supplying Acrytronile, it may consider JV in future, but nothing is currently under discussion. Kurkumbh Land is MIDC leashold land, with 9 acre land.

Crude Price Dai ichi gets two benefits from lower crude prices. Lower crude prices also reduce raw material as same being crude derived. Lower price of crude also make crude attractive resulting in higher volume vis competitive products.

JV Nalco: JV in oilfield business servicing Oil production. The company has been working with Nalco for 5 years it was earlier with Becker. While the crude prices are under pressure for last couple of years, it may increase and stabilise over 3-4 years period to USD 70 levels. Despite crude price volatility, due to specialist process and product, Dai Ichi is relatively insulated from the volatility. During FY17, One the large customer (Probably Cairn), give contract for Oil chemicals to competitor which adversely impacted performance of the company. However, given the superior product quality, the company expect same business to come back in FY18. Shell and British Gas are other two major customers for Nalco JV. There were request about product mix sales between various group for the JV. The MD was reluctant to share this information as it was bound by confidentiality with JV partner. The company has won same tenders in past 16 years due to which the managment is optimistic to get business back. There are few chemical company which can considered to comeptitors.

JV buy raw material worth Rs 8 Cr from Dai Ichi Karkaria. Most of raw material are sourced from Nalco champion. Commoditised products are sourced from Large players.

Process: Global player like Crane invite worldwide tender. Tehcnical evaluation is promient parameter and then they are compared on price. Indian refining player generally give more wieghtage to price.

Wage settlement: Majority workers have accepted. Some has not accepted and matter is under Supreme Court. Over a period, many workers have retired which reduce work force size to less than 50. As per MD, the company is exempted from Union activities in case no of workers are lower than 50, which is now being the case. Hence, do not see major issue with respect to legal suit in Supereme court. Salary in P&L provide for all wage related laiblities.

Other discussion points
The company is moving to SAP along with GST from July 2017 which has resulted in increased efforts for the company. Overall GST is good for the sector.
Digitalisation of the company would be managed by MD’s daughter Ms Meher.
The company does not have any accident in past histrory. The company has undertaken safety audit.
From FY18, Sales of Nalco JV would be added only profit share would be added in line with Indi AS.
The company is fighting two cases, one for Octroi and Wage suit which resulted in higher legal charges.
The worli peropery is currently used by company as the current place was not sufficient with increased activities. the rent were also not good. so the company using its CJ Tower property as its office.
Concentration from Oil chemical is high. The company would try to diversify from construction and agriculture sector.
The company has rectruited 2-3 people which would be working from Dahej and focus would be to develop new products.
The new plant has flexiblity to change product mix. The company can increase paint related products. In case of textile chemical where it is not remunerative, the company may slowly change product mix in favour of other products.
FY18, sales projected is around Rs 160 Cr (from Karaswadi plant with limited contribution from Dahej). In FY19, Kasarwadi would be close while Dahej would increase utilisation, so expect Rs 170 Cr sales. The estimate are conservative considering teething problem and also time taken to develop new market and customer. Hence, the company is conservative in project.

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Hi,
Plant 2 would be used for paints and construction, not textile. Company is gradually bringing down textile contribution (down from 25% to 17% this year). Since it’s profitability is low.
Two areas where company has introduced new products is in agri and personal care area. Contribution from these areas - construction chemicals, agri andd personal care will increase over next few years.

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Very good summary Dhiraj. Thanks.

Was there any financial projections made in the meeting ?

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As Dhiraj mentioned. MD gave guidance of FY18 - 160cr, FY19 - 170cr

FY19 will have additional expense of 9-11cr (interest costs) and 9-10 cr (depreciation charges), due to Dahej capitalization.

No guidance was given on JV because its a more tender driven business.

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@Nirav8 @ananth
Thanks Nirav and Ananth for correction in my notes. Appreciate your effort :ok_hand:

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poor results continue.

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I feel the company performance would continue to remain affected while it is implementing new plant at Dahej. Other income from rent in Mumbai property is not incurred as same being occupied by the company to accomodate increased manpower. While the company has not given Consolidated nos, in my opinion, same would have also affected adversely due to difficult market condition of oil exploration.
The result may continue to remain lack luster as from September/December onward with commencement of capacity even fixed cost of Dahej plant resulting in higher Interest and depreciation cost which has been capitalised.
The company is likely to face headwind unless came out with real innovative new products.

Discl: I continue to hold my share and my view may be biased due to my holding.

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