# Dharamsi Morarji Chemicals (DMCC)

(Rohit Balakrishnan) #41

Can you elaborate on your calculation of 62 Crores?

(Multiplier777) #42

Valuation of BM by DMCC

Let us look at the liabilities in BM:

1. Total debt of Rs 24 cr

2. Payables are going up despite stagnant sales:

a. Rs 12 cr in FY14, Rs 21 cr in FY15, Rs 21 cr in FY16 and Rs 26 cr as on Sept 2016.
b. Which basically means you are not paying your r/m suppliers on time and any new buyer will have to clean up payables to a reasonable level to do business. I feel there is excess outstanding payments to suppliers of about Rs 15 cr which will need to paid immediately by a new buyer.
c. Just to give you a perspective, Indo Borax with sales of Rs 73 cr has payables of Rs 4 cr (compared to Rs 26 cr of payables for BM on sales of Rs 41 cr).

So total liabilities are around Rs 39 cr.

Based on 1:2 merger ratio, 22.59 lakh new share of DMCC will be issued to shareholder of BM (DM price assumed at Rs 100/share so Rs 22.6 cr worth of new shares issued)

Thus, DMCC has valued BM at a total of Rs 62 cr (equity of DMCC shares worth Rs 22.6 cr and taking on liabilities of Rs 39 cr).

(Rajeev Jawahar) #43

Assuming that the only worth while asset that DMCC is acquiring from Borax Morarji is the Dahej plant, what would be the approximate current market value of the plant, together with the already developed infrastructure?

(Rohit Balakrishnan) #44

As per my Back of the envelope calcualions - it is around 20 Crores

(Rohit Balakrishnan) #45

How? I am unable to get the 39 Crores figure.

As per the balance sheet -

1. Debt (ST + LT) = 21.5 Crores

2. The net working capital is around (2.75) Crores (CA - CL) If we are taking the payables then we should also look at the current assets that come along viz inventories, receivables etc.

3. Equity value is ~ 22 Crores

So adding 1, 2, 3 it comes to around 46.25 Crores.

Against this they get a land of INR 20 Crores and some P&M. I think it’s not a high valuation, but can they have gotten a sweeter deal? Perhaps yes.

Now this deal would be worthless, if the business @ Borax Morarji is not worth owning at all. The past numbers seem to show that, however, can this change in the future? If yes, I think its a good deal, if not, then it will dilute DMCC’s business and will short-change the shareholders of DMCC.

(mythace) #46

Hi Rohit,

DMCC is not the only manufacturer of Diethyl Sulphate in India. Either the document is dated, or not well researched.

(Rohit Balakrishnan) #47

I think its a dated document. Industrial Solvents is the other manufacturer. Are there others as well?

(Dhwanil Desai) #48

I am looking at slightly different perspective at the whole situation. Just sharing the same for whatever it is worth. As an investor, I would like to see, under different scenario, how the situation may play out and what kind of risk/reward is present.

The underlying assumption is that the DMCC base business trajectory remains as it is and it continue on its path to move up the value chain and grows that business at calibrated pace.

• What I can make out based on numbers of both the companies- that one is getting a combined business at enterprise value of 230-240 odd crores ( 200 Crore of market cap + net debt of 30 odd crores of both the entities put together).
• Borax Morarji- indeed had slipped in performance in last 3 years- however prior to that, it used to command 11-12% margin on topline of 60-80 Crore (as @Prdnt_investor mentioned) . Moreover, in most of the years during that period, it generated decent cash flow from operations (based on screener data)

Hence possible scenarios two years down the line

Scenario 1- Base case:
DMCC :business continues to grow at 15% CAGR and is able to maintain current EBIDTA margin profile.

Probability: 70% - as the company is indeed focusing on its specialty chemical business and has executed brilliantly in past couple of years.

EBIDTA: It will grow to 40 Crores at end of FY 19 (based on FY 17 expected EBIDTA of 30 odd crores)

**Indo Borax:**Business is able to get back to its run rate of 60-70 Crore top line - due to bottoming out of boron downcycle; better capacity utilization at Dahej plant and hence higher production (company faced issues in utilizing capacity in FY15/FY 16 due to shifting of the plant); Introduction of some specialty products due to management’s focus on the same

Probability: 60-70%- ON TTM basis, company has as such achieved top line of 52 Crore and company has already talked about plans to introduce new products (boric acid) to improve capacity utilization

EBIDTA: With increase in capacity utilization and one off cost of moving plant going off, EBIDTA can improve to 10-11% in couple of years. Thus EBIDTA contribution of 6-7 Crores is likely.

Thus, for the consolidated entity- EBIDTA of 46-48 Crores feasible. Moreover, if DMCC continues to generate strong cash flows as it has in the past, it is possible to pay off at least half the debt (as company will have to spend less on expansion due to availability of brownfield site at Dahej) over next 2 years.

Thus, if we assign EV/EBIDTA multiple of 7-8 for this business (considering a mix of commodity like Borax business and specialty focused DMCC business which can command much higher multiples)- EV can be in the range of 322-384 Crore. Reducing the debt component of 15 Crore- Equity value can be 310-370 Crore.

Scenario 2: Worst case scenario-

Improvement in Borax business is minimal and EBIDTA contribution is zero (almost same as current); Thus EBIDTA of the combined entity will be 40 odd crores. The EV Range based on the calculation similar to above can be 265-305 Crore

Considering that Borax business has bear the burnt of severe fall in boron chemical prices, lower capacity utilization and higher cost due to plant transfer issues in that business, management’s intent to improve the business economics, and the new management’s ability of making substantial improvement in DMCC business in last couple of years, calls for assigning lower probability of worst case scenario.

More importantly, even under worst case scenario, the downside is limited while if the management is able to pull through as planned, there is decent return possible.

Disclosure: It is not a recommendation to buy/sell. I am not a registered investment adviser. Please due your own due diligence or consult an investment adviser before making an investment decision.

No holdings however, closely tracking and doing further due diligence.

(Multiplier777) #49

Rohit,

Before I begin replying to your comments, I want to make it clear that I have been tracking DMCC for a long time, liked the story and even hold the stock. Full credit to the promoter for the story that has gradually unfolded till now in DMCC. Unfortunately, as I looked deeper into BM and its proposed merger with DMCC, I find that the story of DMCC will get derailed. So rather than just have faith in the promoter, I feel it is important to play the devil’s advocate and through back and forth in discussions, we are able to get crystal clear clarity on what is being attempted and what lies ahead. And then make our own decisions on the way forward. These are my assumptions and personal views so everyone should make their own informed judgement and calculations before buying or selling DMCC/BM.

Coming to valuation of BM

1. One can value a business either on the basis of asset value or on the basis of a going concern.

a) Asset value: I take your figures of Rs 20 cr for the land and p&m, negative wk of Rs 2.75 cr and debt of about Rs 22.5 cr (slightly higher than your number which I shall explain). So if someone were to buy the company and then sell the land and retire the liabilities, the seller would have GIVE Rs 5 cr to the buyer. Negative value.

b) Going concern basis: Typically you would value the business on an ebitda multiple. This would give you the enterprise value. This will include a normal wk (inventory, receivables & payables) and you will not pay separately for the wk capital as it is going concern. Only if there abnormal values in the wk (very high inventory/receivables or payables) will you make adjustments. In the case of BM, payables are at Rs 26 cr as on Sept 2016. In the 1st six months of FY2017, BM has used around Rs 24.5 cr of r/m, thus extrapolating, they will use around Rs 49 cr during the full year. Payables of Rs 26 cr means payables of around 193 days. This is abnormal and not sustainable. The r/s suppliers would soon stop supplying material to you. A normal would be 60 days payables meaning payables of around Rs 8 cr. Thus the figure of around Rs 15 -18 cr as excess payables which any new buyer would have to additionally bring into the company to get payables to normal levels. Just checked that the payables for Indo Borax in the last few years have hovered around Rs 3 or 4 cr only on a much higher turnover (they were only 41 days in FY2016).

Thus,

debt of around Rs 22.5 cr
(there is around Rs 0.7 cr of current portion of long term liabilities. They are part of debt but are shown as other current liabilities in the balance sheet as they are falling due in the coming year – see page 46 of Borax 2016 balance sheet under ‘other current liabilities; FY2016 figure was Rs 1.28 cr)

Additional funds required to bring payables to normal level : around Rs 15 cr -18 cr.

New equity issued of DMCC Rs 22.6 cr.

Thus DMCC has valued BM at around Rs 62 cr (where I differ from your figure of Rs 46 cr is mainly the additional funds of Rs 15 cr which a new buyer will have to bring to get payables down to a reasonable level).

I am happy to be corrected on my above assumptions. The proposed merger has clearly brought a lot of haziness into the long term growth plans of DMCC. It was moving perfectly fine until this decision.

Disclosure: The above is not a recommendation to buy/sell. I am not a registered investment adviser. Please do your own due diligence or consult an investment adviser before making an investment decision.

(Rudra Chowdhury) #50

This product is being manufactured in India by Aarti Industries (Link) and being supplied to major clients Link. Not sure what the management meant by saying no one is doing it in India.

Aarti is one of the largest manufacturers of various polymer intermediates (4,4- dichloro diphynyl sulphone (DCDPS). 4,4- dihydroxy diphenyl sulphone (DHDPS); 4,4- diamino diphenyl sulphone (DHDPS) in India, supplying to global majors including BASF, Toray and Cheveron Phillips. It intends to expand its capacities of high performance engineering chemicals sensing sturdy demand from emerging industries - electronics; mobile communications.

The export from Aarti is being validated by Zauba data, exports to US (Cheveron Phillips), Japan(Toray) and Spain(BASF). Link

(Rudra Chowdhury) #51

Hello Rohit,

Kindly share your rationale for arriving at this. As per this document on environment clearance for Borax M at Dahej, the total cost was 70 Cr and total land parcel is 100,000 sq mt. The industrial land itself at current prices costs close to 30 Cr.

Also going by the list of products and capacities it seems the plant is more suited to DMCC over BM.

(Rohit Balakrishnan) #52

Hey @Multiplier777 I totally appreciate your work and counter points helps us to do more work on the company and get the assumptions ratified.

@Prdnt_investor You are bang on - even I found this on Aarti’s website. Its a question for the management. What I did find out when I dug more was this product was getting manufactured by a company called Ganesh Polychem. Ganesh Polychem is a 50:50 JV between Aarti Industries and Banchem Group.

As per the environmental clearance report attached Environmental Clearance report of Ganesh Polychem -Aarti Industries.pdf (2.8 MB)
it has a capacity 90 MT/month for DHDPS and it is expanding it to 100 MT/month

Found a slightly dated ICRA report on Ganesh Polychem - attached Ganesh Polychem ICRA Report.pdf (148.6 KB the metrics seem strong.

While we do need to understand is there anyone else apart from DMCC & Ganesh Polychem… (I couldn’t find anyone except Solway doing it for their captive purposes - don’t know if they are still producing it) the fact that even Ganesh is expanding capacity points out that there maybe a good demand for the products.

This was based on reading googling out the rates at Dahej. IBorax Morarji Land Value_GIDC 2017.pdf (2.1 MB) as per this the rate would be ~ 14.4 Crores.

(mythace) #53

Yes. Aarti Inds also manufactures DES.

(Multiplier777) #54

Regarding the proposed merger, a better option would be for the promoters not to waive the Rs 6.6 crore of outstanding dividend on their preference shares in DMCC. They should use this money and add some of their own and inject into BM to revive it. If they are able to revive it and bring in their proposed boron based specialist products over the next 2-3 years, DMCC will then happily look at a merger at may be even better terms than now.

However, for now, DMCC should be left alone to progress on its growth trajectory. DMCC will not have a problem and it has the financial wherewithal to pay Rs 6.6 crore of the outstanding dividend due to the promoters. It must be remembered that promoters own 50% of DMCC. The other 50% is owned by others. Let the story of DMCC not be destroyed by merging a struggling company (both business wise and financially) into it. Business wise, as it an ebitda loss making company and financially, as it has huge debt and very high pending supplier payments.

([email protected]) #55

The Result for March quarter looks good? Any views

(Rudra Chowdhury) #56

Borax Morarji continue to post losses for the quarter and whole year. It would be a drag on DMCC consolidated numbers for a while.

(Rohit Balakrishnan) #57

Strong numbers by DMCC this quarter. FY17 has been a strong year for the company

• For FY17 revenues were up 32% , EBITDA and PAT was up 91% and 44% respectively.

• In Q4FY17, the gross margins were at 53% one of the highest for the company.

• In FY17, company made an ROE of 29% and ROCE of ~42%

Few questions for the management post the results:

1. In this quarter there has been a sharp rise in the other expenses. Need to understand what is this pertaining to?

2. Split between Speciality chemicals and commodity chemicals for the year and the quarter

3. Traction in sulphones , if any?

4. Reduction in share capital - what does this pertain to?

5. Understanding Borax’s numbers.

As @Prdnt_investor mentions Borax’s number were not great. It is important to understand what is happening on that side. If the management can turn the ship in Borax in the coming year, it can be a very interesting FY18 for DMCC.

(Rohit Balakrishnan) #58

Financial Updates for FY17 - Dharamsi’s filing on exchange