Dai-Ichi Karkaria Limited

Poor results. While loss can be explained by higher fixed cost of Depreciation and interest on Dahej plant, fail to understand decline in Sales. Probably, shifting of plant from Pune to Dahej may have adversely affected the sales but no communication from management on result/press release with consistent deterioation in performace is concern for shareholder.

Discl: I continue to own my partial holding as of now. (afterly liquiditng nearly 70% of my holding couple of years back). My view may be biased due to my investment.

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Yup you are correct shifting of plant have adversly affected the sales …i feel 5-6 months more to go before we can see things moving back on track

Bad newsflow does not appear to end for Dai Ichi. After poor results, Now Crisil has classified them as Non-cooperative borrower due to not providing information. While my impression about management being good and trustworthy, such incidence raise major concern about conduct of business. Even if they intend to move out and get rating from other agency, the exit shall be respectful in my opinion.

https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Dai_Ichi_Karkaria_Limited_November_14_2018_RR.html

Discl: I still hold my position and critically evaluating situation. Investor shall do their own due diligence before making any investment.

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Lower crude should be good for dai-ichi or is there more to it?

In my limited understanding, Lower crude price are not overall good. On positive side, raw material cost of the company would be lower as it serve input to some products. However, bigger negative side is nearly 40-50% of the company sales is dependent on Oil and crude exploration business which has generally negative sentiment when crude price decline. In addition to standalone, nearly 100% of Nalco JV is has Oil exploration business in India whose profitability is directly linked to crude price. While not having any linearity and objective ways to prove my hypothisis, it is more based on my subjective evaluation.

Discl: I continue to hold Dai Ichi shares and my view may be biased. Investor shall take decision after doing its own due diligence.

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Rating for Dai Ichi downgraded to BB+ from Crisil. Fund based limit uitisation over last 12 months is positive in my opinion.
https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Dai_Ichi_Karkaria_Limited_January_03_2019_RR.html

Discl: I continue to hold Dai Ichi share and my view may be biased. Investor shall do his her own due diligence before making any investment decision.

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above statement makes a perfect observation of the business going forward.

As they claim they got best technology, will they get any kind of pricing power for their chemicals? and how sticky is their business ?

Who are competitors of this company?
Thanks for updating Dhiraj

Prashant

Yet another Q with -ve OPM

What is the exact problem they are facing? Dahej should already have been operational since long back, during AGM period they were running final trials! Even if Kasarwadi plant don’t contribute, shouldn’t dahej plant bring at least topline growth? Even Gross margins have been falling.

Sales have been steadily on the decline.
Surely a matter of serious concern.
The management should put in efforts to explain the cause of reduction in top-line & also the future prospects in the coming quarters.
I think we should meet / write to the management regarding it.

I got annual report of Dai-Ichi Karkaria yesterday. The report is mixed bag with some positive points, but many negative issues. Find enlcosed my notes from annual report:

Positive:
Benefit of new swiss technology:
The gas dispersion in a liquid, without any moving parts inside the reactor along with pressure tight set-up, makes this the safest technology for an ethoxylation process. The Buss reactor with its double loop has allowed the company to expand its capacity two-fold and manufacture specialty ethoxylates of superior quality and with utmost safety and efficiency. The cutting-edge technology used and innovative products that can be produced will allow, the company to enter not only the personal-care space, but also move forward with higher
molecular weight products that are used in the pharmaceutical industry. This will allow us to move into niche markets where our presence so far, has remained limited.

Labour lost case in Mumbai High Court
HKS had filed a Writ Petition in the Mumbai High Court for representing the workers for negotiating Charter of Demands with the Company. However, the Mumbai High Court has dismissed the Writ Petition. As advised by the High Court and in order to settle all the legal matters, the Company had made an offer to pay the differential wages to all the workers who had not accepted the earlier Individual Settlements. However, the workers have refused to accept the offer.

Negative issues:
Longer period to stabilise of production at Dahej
This transformation required several systems & processes being put in place (some of them adopted from our Pune site), a recruitment drive to attract local talent, transition of manpower from Pune to Dahej, outsourcing of service functions like boiler, utility, ETP and ousekeeping, set-up of local supply chain, start-up of RM/FG stores (material movement), canteen, along with a full-fledged Quality Control and R&D Centre.

The new Plant at Dahej is based on new Buss Technology which required the setting up of each of the Company’s products on a much larger reactor and into a fully automated DCS system. The SOP of each of the 100 products the Company manufactures had to be reviewed and reset on the new conditions in the Plant. This process itself took over 6 months.

Besides issues with labour and our inability to move several key reactors from Kasarwadi to Dahej, we had issues with our key manpower from Pune adjusting to the facilities at Dahej. Due to shortage of reactors we were only able to achieve partially our overall capacities. In fact with the delays we faced in production we could not even despatch substantial of the orders received.

Meanwhile because of Labour issues in Pune (created by the ex-workers of the Company together with an unrecognised union) resulted in non – removal of several balancing reactors from Kasarwadi to Dahej. The result has been that we have had to carry out production on a partially completed Plant with atleast 30% of the equipment still lying in Pune. This has been seriously challenging for the Company.

Issue in shifting machines from Pune to Dahej
Some ex - workers have entered into an illegal agitation at the factory gate of the Kasarwadi Plant and have restrained the Company from moving its machinery and equipment to the Dahej Plant.We have not been able to fully commission the Dahej facility resulting in serious disturbances to our Sales plans & despatches.

Stressed cashflows:
CSR Amount not spent

Delay in deposit of undisputed statutory due (amout is < 1 Lakh hence not material, but does indicate issue on cashflow position of the company)

The company need to pay term loan of Rs 16 Cr. While it has some liquid investment which can be sold and also surplus land assets at Pune (once Karaswadi labour issue is resolved), there could be temperory cashflow mismatch in case company is not able to scale up at Dahej plant signficantly during the first half. While currently, it does not have solvency risk, in case financial continue remain as they have been since last 6 months, the company may face issue of liquidity in near term in my opinion.

Deteriorating operations:
Despite decline in sales, Lower production (based annual report mentioned plant opeating at 30% at Dahej), we see major jump in Power cost and also unit consumed. May be due to stabilsing face, but the efficiency appears to deterorated during the year with almost 25% increase in power consumed. Per Kg production, power consumption increased from 213 kwh in FY18 to 249 kwh in FY19.

Change in Depreciation policy:
While not affecting cashflow and cash profit, still the company changed depreciation policy which lower depreciation charge during FY19 by Rs 7 Cr. Same was also disclosed in interim results so not new in my opinion.

Lackluster performance of Nalco Champion

Given the loss making operation (even after lower rate of Depreciation during FY19), deteriorated performance of Nalco Champion JV, unability to stabilise operation at Dahej and closure of Kasarwadi unit, sign of strained cashflow (indicated by not spending CSR and delay in depositing undisputed income tax), I have moved Dai Ichi position from Core holding to trakcing portoflio. There is high porability that managment would try to address issue ot Dahej unit stabilisation and business may show good prospect during the time to come. However, at this stage, in my limited understanding, business has many moving parts which increases risk given my risk profile.

Disclosure: While being initiator of thread, I continue to respect management of the company for transperency, I consider it to my duty to intimate investment decision to the fellow investors. After reading annual report, I find it difficult for me to hold company in my core portfolio. Hence, I have liquidated substantial (more than 99% of my current holding) holding of mine in the company . My view may be biased due to minor holding and/or recent sell of material quantity. I am not SEBI registred advisor. Hence, investor shall consult his/her own due diligence/consult investment advisor before making any investment decision.

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Has anybody attended AGM?
Pls share key takeaways. Thank you

Find enclosed my notes from Dai Ichi AGM held on August 13 2019.

Status of new plant: Dahej plant is expected to start in three phases. The first phase was Oil chemicals which has commenced production from March 2018. The second phase was Ethoxylation which commenced from October 2018, The last third phase would be completed once reactor from Karaswadi units are relocated to Dahej.

Factors affecting Dahej plant production

  • The company has now capability to manufacture 200 product s. Each product has separate SOP/ logic which needs to put in place before production can began. This affected production volume
  • The company planned to shift 27 reactors (mainly Balancing equipment) from Pune to Dahej on closure of plant. While the cost in book is around Rs 4-5 crore, new equipment replacement cost for same would be around Rs 45 Cr. The labour objection to shifting of reactor and limited support from Local administration delayed this shifting which also affected production adversely.
  • Pune workers who were shifted to Dahej, had experience to operate manual plant. When new automated plant started, it took some time for the experience team also to cope up with new production system. Things are now broadly sorted out with necessary training being provided to experience team. Further, now company intends to recruit fresh talent for additional requirement then just to relocate Pune team.
  • Currently Dahej has Ethoxylation capacity of around 430 tonnes per month. However, since the balancing equipment is not in place, the company used main reactor for value addition which affect production volume and current capacity is only around 350 tonnes per month. The company attempted to utilize PPD reactor which have busy season in year-end during the lean period to improve production volume for manufacture construction chemicals. After shifting all balancing equipment from Karaswadi, the company would achieve total capacity of around 30,000 tonnes per annum. At present, the company is able to achieve production of around 14-15,000 tonnes per annum.

Sales : While the company has orders in hand as on previous year AGM date, due to issues in production stabiliisation, there was limited supply which affected revenue during FY19. There was increased volume requirement for Agricultural product from the south based Agro company but supply constrained curtailed sales of Agro product as well during FY19. One of unit supplied by GMM Pfaudler was not working as per affected production. Despite issue with equipment, the management said that GMM is best equipment supplier.

Nalco JV : Due to very aggressive bidding, the JV did not win tender to supply to major customer. The customer is not satisfied with product supplied by the competitor and hence management is confident to get back business whenever next tender are announced. Prices quoted by a local competitor were significantly lower (~25% of JV quote not sure for this number) and difficult to even break even in the management opinion. The customer put the penalty in case performance does not meet the standard. So the customer is protected too an extent. In Indonesia, Clariant quoted very aggressively and emerge as winner.

The company research division has developed couple of products with consultation of Nalco and is in process to manufacture to supply to Nalco in Middle East region. These products are mainly used in Oil field area and the company has already installed reactor to manufacture same. It expects production to begin from November 2019. (First product capacity 100 tonne per month and second product would have capacity of 60 tonne per month, expects gross margin around 30%.) the management intend to have reasonable margin in order to get maximum share from Nalco sourcing.

Future plan: At full capacity expected to achieve by 2023, the company would estimate sales to reach ~ 300 Crore. The company is looking at all free assets and monitise same to reduce the debt on balance sheet. In July 2019, the company achieved Cash break-even of operation. The company aims to achieve sales of around Rs 145-150 Cr during FY20. This is with assumption that Pune equipment is shifted within couple of months to Dahej. It would take around 3 months for installation of equipment and commencement of production from relocated reactors (So effectively no benefit of Pune equipment during FY20). The company is intending to file Writ in Mumbai High Court seeking assistance from local administration and police to move equipment from Pune to Dahej. The management does not see any issue as they have already paid compensation to labour as stipulated in Industry court order.

Benefit of Buss Technology: Speed of reaction is very quick. Precision of product is very good. It is only Indian company to have successfully implemented Buss (Swiss ) Double Loop technology.

Disclosure: I hold token position in the company and view may be biased. Investor shall do his/her own due diligence before making any investment. I am not recommending investment in the company.

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I feel this stock is undervalued
but market does not seem to think so

3 years back JV dividend payout to DIK was 7 crores

in your assessment what is holding back similar performance ? Ecolab is a big player

Appreciate these are your notes of AGM. But does the company release transcript ?

Already mentioned in transcript about Nalco relationship. No more information to me beyond that

There was a trading halt on 25 Sept 2019. Any ideas on why? Was there any announcement?

The company intend to sell Karaswadi Land (Old plant from which machinery transferred to Dahej). Find enlcosed extract of email seeking shareholder approval for transfer:
NOTICE is hereby given to the members of Dai-ichi Karkaria Limited (the “Company”) pursuant to Section 110 and other applicable provisions, if any, of the Companies Act, 2013, (the “Act”) read with the Rule 20 and 22 of the Companies (Management and Administration) Rules 2014 (‘Rules’) and in accordance with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (including any statutory modifications, amendments or re-enactments thereof for the time being in force), the Company is seeking consent of its Members for the following proposed Special Resolution by the way of Postal Ballot;

  1. Authorization to the Board of Directors of the Company to sell/ transfer or otherwise dispose of Kasarwadi Land Parcel

Notice of the Postal Ballot along with Explanatory Statement and Postal Ballot Form can be viewed/ downloaded from the below link:

i. Postal Ballot Notice

ii. Postal Ballot Form & Instructions

Does it mean the labour union issues are resolved at kasarwadi plant?

While no information available, considering the conservative of managment and share price movement, I would believe that labour issue is resolved. I do not have any actual update to substantiate my belief.

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I live very near to Dai-Ichi Kasarwadi plant.
While passing through that area, i could still see a couple of workers sitting in a tent near the gate.
Although the number of workers on strike seemed less, but they are still there.
Also, from what I can observe, the manufacturing activity at this plant has stopped completely.
The land is of high value looking at the prime location.
I hope this value unlocking proves to be a good benefit for the shareholders.

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