Dai-Ichi Karkaria Limited

(Dhiraj Dave) #81

Poor results from Dai Ichi Karkaria.
Net sales declined by 6% to Rs 31.67 Cr during Q2FY18
Operational Net profit (PAT-Other income) declined by 30% to Rs 0.80 Cr during Q2FY18
Net profit declined by 65% to Rs 3.11 Cr during Q2FY18 mainly due to decline in other income from Rs 7.66 Cr in Q2FY17 to Rs 2.31 Cr during Q2FY18. While no details are provided, in my understanding the decline in other income is mainly due to lower dividend income from Champion JV.

One more interesting point to observe is while Capital WIP progress increased from Rs 32.26 Cr (Standalone) as on March 31 2017 to Rs 66.28 Cr during Sep 30 2017, which indicate increase of around Rs 34 Cr during six months, same appear to finance more from borrowed fund then divestment of investment.

As on March 31 2017, the company has total fiancial investment of Rs 33.56 Cr (Current Rs 29.36 Cr, Non Current Rs 4.20 Cr). However, same as on Sep 30 2017 is Rs 40.03 Cr (Current Rs 33.26 Cr and non-current Rs 7.67 Cr). Total borrowing (Long term+short term) has increased from Rs 3.62 Cr as on March 31 2017 to Rs 47.42 Cr (almost by 44 Cr). during the six months.

There is one more addition of other current assets of Rs 14 Cr which has no explation.

The Dehej expansion commencement may also increase in overhead and fixed cost of interest/depreciation in for around 1-2 quarters after commencement. Hence, my expectation of financials would see further pressure on profit in medium term, unless major improvement in margin observed. Increasing Crude prices shall have positive impact of company propsect.

Overall, the company is moving in right path for long term, but would continue to show poor-moderate financial in near future.

Discl: I have investment in the company and my view may be biased. Investors shall do their own due diligence before investing.

(Dhiraj Dave) #82

Good results by Dai Ichi Karakria

Standalone net sales during quarter increased YOY by 50% (partially may be due to higher input cost drived from higher crude prices) and Net profit YOY increased by 64%. The growth in net profit is commendable in context of higher operating cost (Point 6 in Notes accounts indicate commencement of Phase I at Dahej plant as on December 31 2017) and also lower other income by Rs 50 Lakhs YOY.

It would interesting to observe growth in Depreciation and interest charge during Q4FY18 and scale up of operations at Newly started plant. While, higher overheads may adversely affect performance for 1-2 quarter, in medium term, scaling up of Dahej plant and also improving Crude oil outlook (more than 50% revenue are linked to Crude oil sector and also JV) shall be key positive for the company performance in medium term.


Thank you Dhiraj for your repeated updates.
Good to see Dahej transition is taking shape.

The big story remains the 15 acres land parcel in Kasarwadi. It’s an exceptional parcel in terms of size and access on main Pune-Mumbai road even though it’s opposite a STP. Prices in surrounding areas for finished residential/commercial spaces are conservatively around 7000 per sq feet.

For example ICC Devi tech park has space available on lease at 55 rs per month .
This is from listing of JLL http://property.jll.co.in/office-lease/pune/pimpri/icc-devi-gaurav-tech-park-ind-p-0007pq
At a cap rate of 8% , this works out to be 8250 per sq feet. and cap rate of 9.5% means 7000 p sqft.

Now pune has traditionally had a low FSI/FAR multiplier. ICC devi tech park might have a FSI of 1-1.3.
This road now falls as part of both Rainbow BRTS and Pune metro plans.
The FSI available for Transfer oriented Development could be 3.0 as area should fall under both plans. Again this assumes road width of 60 ft. I am not sure if service road and NH width can both be added up to make FSI 4.0

Assuming prices of 5500 p sqft for X 3 FSI X 43560 (sqft per acre) x 15 Acres. You could come up with with a valuation of 1078 crores for this land. final FSI could be substantially higher than legal limit depending on developers ability to manage planning permissions.
My margin of safety assumes a valuation of just 600-700 crores.

Above link shows location for the land for anyone keen on doing valuation.

Disclosure: Invested and please feel free to do your own napkin math for the land valuation.

(Dhiraj Dave) #84

After good results in Q3FY18, Dai-Ichi Reported weak numbers for quarter 4Fy18. The dividend per share declined from Rs 3 per share FY17 to Rs 2.5 per share during FY18.

In standalone FY18, while the operating profit (Sale-RM-Emp-other cost) reamined almost same at around Rs 17.44 Cr as compared with Rs 17 Cr. The increase in sales Rs 24 Cr during the years did not contributed much to borrom line. This may be due to lower operating rate has Dahej plant which has commneced operations during FY18 only and fixed cost would have gone up significantly. It would take a while for the company to increase operating rate and benefit. Second reason may be due to higher crude prices which may have ressulted in increase in RM cost which the company would try to pass on to end users with Leg.

The decline in other income (I assume mainly non-operaiting and from investment), decline from Rs 12.15 Cr in FY17 to Rs 3.54 Cr during FY18. Since the company incurred almost 82 Cr Capex (Net Fixed block+Cap WIP as on MArch 31 2018 was Rs 136 Cr as compared with Rs 52 Cr as on MArch 31 2017, difference being assumed capex for Dahej plant), the liquid investment were utilised and did not contributed to income. This was communicated by managment during FY17 AGM.

After operating profit, the depreciation charge increase was in line with commecement of Dahej plant. Despite increase in total debt by Rs 67 Cr (from Rs 3 Cr as on MArch 31 2017 to Rs 70 Cr as on March 31 2018), there is no increase in interest charge which may be due to capitlisation of interest or substantial borrowing happen at end of quarter.

The share of associate profit indicate drop more than 60% drop from Rs 4.02 Cr during FY17 to Rs 1.67 Cr during FY18. This would be mainly driven deterioration in margin for Nalco Champion JV. The decline in profit at JV would also indicate lower dividend income during FY19 for Dai-Ichi.

While compared with Q3FY18, operating result indicate some deterioration. While sales declined by around 5 Cr during Q4 as compared with Q3, operating cost did not decline commensurately. This could be due to stabilisation of Dahej plant. I considered this decline as the negative development in Q4FY18 results.

Overall, the profit of during FY19 are hings mainly on scaling of opeation at Dahej plant. The increase in Crude oil price is positive news in my view as nearly 50% sales and Champion Nelco 100% sales are linked to Crude Oil exploration. While raw material cost would also increase, I assume that company would be able to pass on same over next of couple of quarters.

In case the company is not able to scale up and staibilise the production at Dehej, we may continue to see higher depreciation (on capitilsation of Rs 40 Cr Capital WIP) and inerest (2.5% of Rs 60 Cr being interest for quarter at around Rs 1.5 Cr), would furthter continue to adversely affect financial for next couple of quarter.

While results are not great, operationally peformance has not deteriorated and Dahej plant is stabilising operational. I expect results continue to remain under pressure due to higher fixed cost. However, medium term, I expec the company succesfully resume path of profitable growth. Dahej Greenfiled cost are also accrued while futher capex would be brownfield and that shall provide higher growth at moderate cost over next 3-5 years.

Discl: I hold share of company with no trade in last 3 months. My view may be biased due to my investment and investor shall do their own due diligence before investing.

(Aashav Patel) #85

As per AR FY18, Interest cost related to the plant is added in CWIP.
Please see below image

Correction: Depreciation is charged off the P&L

Link for FY18 AR:

(Yogansh) #86

Hi @aashav23,

Dep of 4.47 Cr has been charged off to the P&L. As per the note, depreciation on leasehold which is Nil for FY18 and was 23 Lac for FY17 was capitalized. Hope this helps!

Yogansh Jeswani

(Aashav Patel) #87

Will be attending AGM… If any specific questions, do let me know…

(sachinabhyankar) #88

Thanks Aashav. It will be good to know how the NALCO JV is doing? What are the growth/export prospects? How is Dahej plant ramping up? Whats managements view on annual growth?

(Dhiraj Dave) #89

Note from AGM on August 8 2018, based on management replies 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. Investors are expected to do there own due diligence.

Dahej Plant:
The company planned Dahej expansion 8 years back. It would around 3 years to get environment approval. If Dahej expansion would not have planned, it could have been major issue to growth aspiration of the company. Karaswadi plant is nearly 5 decades old with limited potential to do expansion given that neighborhood has become residential area. Hence, the company took decision for major expansion at Dahej.

Dahej expansion Phase I was related to oil related chemicals. The second phase would involve MPP plant. Part of MPP is operational and the company expects it to be fully operational from October 2018.

The company is also working on development of pilot plant at Dahej which is expected to start operation in 10-15 days. The research team would be moved from Pune to Dahej once pilot plant is operational and it also intend to add further local research manpower to the current team.

Dahej plant can achieve total revenue of around 300 Cr at full capacity. In FY19, Cap utilisation is expected to be around 66%, which is expected to improve to 88% in FY20 and further to 100% in FY21.

Dahej plant has Buss technology which is superior as compared with peers in India. Buss technology provide molecular weight exactly same as required by client and hence performance is superior. Product manufacture under Buss technology also has better Dioxane level.

The company intends to repay debt for Dahej plant from internal cash generation over 5 year’s period. The term loan is availed from HDFC Bank and Axis Bank. The company may explore liquidating other assets (like Clariant Shares and Karaswadi Land) at appropriate time. Karaswadi land is currently mortgaged to bank and hence cannot be liquidated immediately.

Dahej plant also has provision for future expansion. In case Nalco or other MNCs partner intends to have JV with the company, the company can use this land and infrastructure for such potentials.

With state of art Dahej plant, the company intend to increase production of complex product (higher development time in reactor of around 24-48 hours) as against straight products which can be produce with 8 hours reactor time. While same would reduce volume of the company, margin in such product is significantly higher and limited competition.

China Impact
Generally Chinese products are commodities nature while Dai Ichi focuses of specialized chemicals. Hence, there is limited competition from Chinese players to Dai Ichi. However, in textile application, some Dai Ichi products are substituted by Chinese products.

Segment wise breakup
Oil related chemicals (FY18 volume growth 60%) are major segment and would continue to account for around 35-40% of sale standalone Dai Ichi. Dai Ichi intends to leverage its relationship with Nalco and maintain share of Oil chemicals in total revenue. During FY19, Oil chemical may decline to 30-35% but in medium term it would go to 40%.
Construction related chemicals (FY18 volume growth 32%) account for around 10% of revenue. Dai Ichi currently not supplying to projects but currently has relationship with only Cement companies. As product develops and well accepted in market, it intends to move to project business as well.
In Paint industry, after running products for almost 5 decades, Dai Ichi is developing couple of new product in association of leading paint companies. These products shall replace old products of the company over period of time.
In Agriculture segment, the company is working on a new bio-pesticide product with a large South based company in Agrochemicals business. The south based corporate would provide technical while the company would supply emulsifier which intend to be exported to US and Germany market. The initial response is encouraging and the margin is very high.

Relationship with Nalco
The company intends improve its relationship with various players in international market and strengthen relationship with Nalco Champion. It is putting efforts to become preferred partners to Nalco Champion global operation. The increased business from Nalco would be function of cost competitiveness and quality of Product Company can provide.

The company is exploring if it can supply to Middle East requirement of Oil chemicals from India which currently supplied from EU and US facility of Nalco Champion. However, in order to get these supply order, it need to become cost competitive which is again major challenge due to higher input cost in India for some of the chemical. For instance, Ethylene, RM for EO, is cost around $ 1.2/kg in India as against $ 0.7/kg in US.

The company is also in process to jointly develop product with Nalco. The current research team of Dai Ichi is active co-operation with Nalco Champion is in process to develop couple products which may have impact on growth prospect of the company. Dai Ichi intends to conduct field trial of jointly developed product from October 2018. It expects same being contributing to company growth from FY20.

The company is also intend to explore with Nalco to become JV Partner for Kurkumbh plant as Nalco also have presence in Water chemicals and Kurkumbh has potential to provide flocculants. However, there is no major lead in this area.

Nalco Champion JV
Nalco Champion JV is in process to bid for very large tender of Rest 850 Cr to be supplied over 3 years period. This also indicates potential for JV business in India.

(bkasal) #90

Thanks, Dhiraj bhai for update.

In nutshell company is working on multiple front. Hope it materialize and add to PBT.

Disc: Small % holding.

([email protected]) #91

Hi Dhiraj,

Thanks for summarising the AGM.
Just a small correction, it took them 3 years to get EC.

(Dhiraj Dave) #92

Thanks for brininging out error. updated the note with correct information.:slightly_smiling_face:

(bkasal) #94

Dhiraj bhai,

Do you aware of any materialist changes recently (1-2 months)?


(Dhiraj Dave) #95

Not to my knowledge. I believe the market sentiment is affecting company as well as loss in latest quarter. While market was prepared with expansion related cost and lower margin, did not expect loss reporting in June quarter. The break even and higher capacity utilisation of Dahej plant would be key monitorable variables for the company in my view.

Discl: I hold share and my view may be biased.


However, in order to get these supply order, it need to become cost competitive which is again major challenge due to higher input cost in India for some of the chemical. For instance, Ethylene, RM for EO, is cost around $ 1.2/kg in India as against $ 0.7/kg in US

Building upon your AGM notes. Ethylene costs are bound to come down. Feedstock cost, economics of sales and current demand/supply mismatch contribute to current cost structure. Reliance has recently commissioned a new cracker and that has doubled ethylene production. The fact that ethane will now be be used as feedstock and not naptha/lng gas will drive prices down.

There’s a very interesting report from McKinsey that talks more about etyhlene.

“Second, India’s overall production infrastructure for petrochemicals remains at a relatively early stage of development. The industry is mainly growing up based around a limited number of oil refineries that have added an ethylene cracker, or stand-alone ethylene crackers. This setup is far from the kind of cluster structure, with multiple crackers, that exists on the US Gulf Coast, in Singapore, and in Rotterdam and Antwerp. At the same time, the pipeline infrastructure is minimal, so intermediates plants depend entirely on the host cracker to provide feedstocks. That creates problems and constraints for the intermediates producer if the cracker runs into operating difficulties, and also makes it hard to settle contractual agreements on issues such as exit clauses.”

There’s also a ONGC petro additions plant which is 4kms from Daichi’s plant. Its also in an expansion mode for ethylene production. Its difficult to transport ethylne over long distances.
Being closer to feedstock let’s you keep optimal level of inventory. Dahej is also a port so exporting products and importing any intermediaries is cheaper.
Hopefully Dahej will emerge as such a cluster.

I view Dai-ichi as a startup chemical company and it will definitely have teething troubles.
It has a strategic plan to move higher on the product value chain and tackle more complex product processes. There are very few companies who can relocate their plant and decide from scratch what they want to produce, what production process do they want to use and where do they want to produce for maximum transport economies.

Daichi has a joint venture with Nalco champion. Nalco is a subsidary of Ecolab which is a $45 billion market cap company. Ecolab has 6 factories in China and if tariffs continue for extended period then it could look at diversifying its production. Daichi could be an unintended beneficiary of that provided Nalco has been a happy partner.

Revenue as a variable will be proof for mastery of production process. Its too early to look at profit for at initial stage.
It remains to be seen whether Daichi has the expertise to tackle hard products which come with high profit margins.

Disc: Invested

(bkasal) #97

Thanks Guys for inputs/views.

(Dhiraj Dave) #98

Since Ethylene and other pertro bulk-product are global commodities and dervied from natural inputs (Gas/Crude), I feel cost differential would continue to remain across region. The Gas cracking in US or with Crude cost of Middle east, it would not be possible for Indian companies which depend on imported crude/gas to match the same prices as input cost are materially different. Players like Reliance industries have marginsal advantage of captive Gas on limited extent, but for other Refiners/Petrochemical players like GAIL, Haldlia, IOC; the cost of production would continue to remain higher, in my opinion, since they depend on imported crude/gas for ethylene crackers.

Second point, global price decline on excess supply may be another point altogether which is difficult to predict. Further, the important point from Dai Ichi perspective would its ability to produce require attribute/quality end-products at lowest cost. Chemical skills and quality of products would play more imporant role for success of speciality chemical player vis a vis only lowest cost which is the case for global commodities like Ethyelene and other petro bulk chemicals. Most of the time, pricing is tolling margin, which is ethylene price+ tolling maring in $ terms. The context of ethylene cost comparison in AGM was to reply to query about supplying to Champion group global operations. The management said that they have first right subject to cost for all outsourced product of Champion group. However, it would be difficult to achieve same for Dai Ichi acorss all product given the higher input cost in India vis US/Middle east.

(hazariwalapu) #99

Why JV turnover reduced drastically in Fy2018? do anyone has idea about it?


(Dhiraj Dave) #100

In my limited understanding,they lost supply contract to Cairn Oilfiled exploration business in FY18 which affected there sales during FY18. During FY15-FY17, the company benefited majorly from increased supply of contract from Cairn. However, with chnage in management of Cairn, Dai-Ichi is facing some issue in getting order from Cairn. Dai Ichi in past had issue was ONGC as well where arbitation proceddings were underway. This is my understading and it may be completely different from reality. Investor shall do his/her own due diligence before making any investment decision.

Discl: I hold share of Dai Ichi since last 4 years and my view may be biased.

(khs) #101

FY19 Q2 Results: