Dharamsi Morarji Chemicals is an old Indian company. It was formed in 1919. It was India’s first sulphuric acid manufacturer. It later diversified into fertilizers and for a large part of its existence it used to manufacture fertilizer. However, given the unattractive nature of the business and government intervention, the company kept on losing money in this business. It exited the fertilizer business few years back and since then has been focusing on the speciality chemicals space. If we look at the numbers from the speciality chemicals it has grown at a good clip (last year realizations were down, but volumes were up)
I have been tracking this co for more than a year. I don’t understand the products it makes as I don’t have the background and there is very limited info available. But I have attended the last 2 AGM’s and these notes are from there. My thesis at the time of investment was
The company has seen a revival through exports and its focus on speciality chemicals. Numbers in terms of margins & working capital are improving. Company’s balance sheet has improved significantly with debt/equity below 1. Speciality chemicals is a sticky sort of business, so they should be able to grow with existing clients. The company is available at TTM P/E of 7
About the Business
The company focuses on 2 lines of chemistry -sulphur based and ethanol based. In its 2015 AGM the co mentioned that it is in global top 3 of all the spec chemical products it manufacturers. The interesting part is that these products are not high volume products but are niche products and are high on margins but could be low on volumes.
For ex - Benzene Sulphonyl Chloride - which is its leading product, it is the largest manufacturer in the world controlling ~ 50% market share. In FY15 it did ~ 35 Crores of sales from this product. Thus globally it is just a 70 Crores market.
It has 35 such products and has recently entered sulphones which as per management is a big market.
The company has the following criteria for choosing a new product
Should have some edge either in terms of cost – backward integration or in terms of better process
In terms of quantitative benchmarks the product should deliver 30% minimum profit margins.
(These margins are at a PAT level as per mgt, even if they are at EBITDA level it will be great )
In terms of expansion the company has recently got approval for its new multi-functional plant - this has the potential to do ~ 20 Crores of revenue and 6 Crores of EBIT. Capex was around 5-6 Crores.
Nature of contracts with customers and suppliers
Long term contracts of more than 1 year - 70% of the contracts are for more than 1 year, company is trying to move away from spot contracts to 100% >1yr contracts
With customers – quarterly adjustments with regard to change in raw material prices, maintains fixed EBITDA per ton. Also doesn’t take forex fluctuation risk with key customers. That is also baked in to the quarterly pricing revision
Major RMs are Ethanol, Benzene, Sulphur. Suppliers are Indian Oil etc and thus no bargaining power and there are monthly pricing adjustments
Other Interesting points
Co has been hiring strongly in its engineering and R&D team. The CEO mentioned that the headcount addition has been of the highest in the last many years for the company.
Q1 was strong with 25% EBITDA margins. If this is sustainable it will lead to strong bottom line growth
A 30 Crore top-line can be considered as a good quarter for the company. As per the numbers disclosed during the AGM the company seems to be on a run rate of ~ 40 Crore run-rate in top line in Q2. This is significantly better than many of its previous quarters.
DTA- Company is carrying 26 Crores of Def tax assets in its P&L which it has to w/o. This has begun already and will be passed through P&L over the next few years. this will have a limiting impact on profit and profit growth
Given it only looks for niche chemicals - scalability is an unknown here. Company has to introduce a lot products to become big.
Disc: Forms ~15% of my PF. Bought in the range of 45-55.