Himadri Specialty Chemicals


(Abhishek Basumallick) #1

Himadri is a Kolkata based company mainly focusing on coal tar pitch and carbon black.

Product chain

Main Products
Coal tar pitch:
- used in the manufacture of aluminum, which is used in automobiles, airplanes, televisions, radio components, rockets, beverage cans, wires, cables, smartphones, furniture, foil wraps.
- finds downstream use in the manufacture of graphite electrodes in electric arc furnaces.
- specialized coal tar pitch, which is used in long war head missiles.
- manufactures coal tar-based thermoplastic polymeric coating, which is used as an anti-corrosive material in underground and offshore pipelines.
- Coal tar distillation capacity is 4 lakh MTPA.
- 70% market share
- Debottlenecking of capacity at 20cr planned to increase capacity

Carbon black:
- used for reinforcement of elastomeric materials. Carbon black is a critical raw material in tyre and other rubber industries, inks, plastics and paints.
- manufactures a range of specialty carbon black with specific applications in plastics, fibre, inks and food grade materials.
- Carbon black capacity - 1.2 lakh MTPA
- 17% market share

SNF:
- manufactures SNF (Sulphonated Naphthalene Formaldehyde), which enhances the performance of concrete for commercial and core infrastructure constructions.
- manufactures PCE (poly carboxylate ether) which is a performance chemical used in next-generation super-plasticisers to manufacture high-strength, high performance concrete.
- Dumping from China poses a threat
- SNF capacity - 68,000 MTPA - Largest capacity in India

Advanced Carbon (Anode for Li-Ion batteries):
- manufactures advanced carbon used in the manufacture of lithium-ion batteries that power smartphones, electric vehicles and digital cameras as well as airplane brakes that make flying safer.
- The consumption pattern of anode materials are slowly shifting from natural to synthetic graphite. Himadri offers anode materials in both synthetic and natural varieties.
- Co is the only company in the world to have in-house access to raw material making its products superior in quality.
- Moved from batch processing to continuous processing.
- Current capacity is 5 MT/month. New capacity of 50 MT/month coming onstream from 15 Sep 2017.
- Expected CAGR of 40%; no need to have firm contracts as demand is huge
- Realizations are 6 lakhs - 7 lakhs / MT for the finished product.

Plants:
Himadri has seven manufacturing units across India – four in West Bengal and one each in Andhra Pradesh, Gujarat, Chhattisgarh – and is now setting up its eighth unit in Odisha. The Company exports products to more than 10 countries.

The Company had been incurring losses during the last three years, even though at the operational level, they reported profitability. Primarily, the losses that the Company incurred were due to a depreciation of the INR and inventory losses on account of fall in the price of crude oil. The inventory pileup continued during the first two quarters of 2016.

The co took measures to reinforce operational efficiencies; appointed a consultant with global expertise to help us incorporate best-in-class practices.

The business model is unique and fully integrated to manufacture speciality chemicals. Use coal tar as the raw material and distill it to produce naphthalene, oils of various grades and coal tar pitch. The naphthalene produced is used in-house to manufacture SNF and refined naphthalene of the highest purity. Heavy creosote oil is sold to customers for specialised applications while other oils are used for making carbon black. We also produce
clean and green power. The power generated is used to power the entire complex while the balance is sold to the State Grid.

Inelastic Demand:
Aluminum smelters cannot moderate consumption during a downturn without having to shut down one (or some) of their manufacturing units. The cost of shutting down and starting afresh is too high. This means that coal tar pitch manufacturers are assured of regular offtake in even the most challenging
of markets. The strong offtake across the last two years, when aluminum and graphite industries were going through their worst phase, stands testimony.

Reason for decline in the Company’s earnings in the last 3 years:

  • INR depreciation
  • inventory losses due to fall in crude

What has changed:

  • reduced its exposure to foreign currency loans
  • debt reduction
    • net debt of the company reduced by 225 Crores during 2015- 16, including the repayment of long-term debt of 122 Crores, even as the financials appeared stressed.
    • LT debt reduced from 414 cr in 31-Mar-17 to 310 cr on 30-Jun-17, reduction of 104 cr.

Non-promoter holding:

  • Bain Capital
  • Vallabh Bhansali

RISKS
- The profitability of the company is susceptible to volatility in raw-material prices (forming 85% of total cost of sales) as the prices of raw-material are volatile in nature due to linkage with crude oil prices and global demand and supply.
- The company is also exposed to foreign exchange fluctuation risks due to high dependency on imported raw-material, foreign currency term loan and no fixed hedging policy.
- HSCL’s operations are working capital intensive due to requirement of high level of inventory on the back of lead time involved in import of few raw-materials (imported pitch and carbon black feedstock) and high credit period offered to its customers.

Financial Ratios from Screener

Disclosure: Not currently invested.


(v31) #2

An old video. https://www.youtube.com/watch?v=14aBrBx2hoc

Most of the info is covered by @basumallick. (great work btw) However, this video gives us some idea about the Promoter and his thought process. Though a 15 minute video is no way to judge or understand a person but it does gives us an idea.

Disc- tracking and looking to invest


(paresh.sarjani1) #3

@basumallick

Hi Abhishek

Any idea about below subsidiaries of this. These have been taken from its website

Looks like they are operating in HK…China too… Is it?


(Abhishek Basumallick) #4

These seem to be subsidiaries created for import or export of raw materials in the past. The difference of standalone and consolidated numbers are very small so I have not delved much deeper into them.


(paresh.sarjani1) #5

Adding clientle and important points from recent investor presentation

Reason of high finance cost in the past… continuos rupee depreciation


#6

Great write-up @basumallick. You have covered pretty much everything. I was quite surprised HSCL did not have a dedicated thread here although there was one which seemed to have been closed long back.

I have been buying and adding HSCL from Rs.13 levels when Vallabh Bhansali entered HSCL (Then HCIL) and the company had just renamed itself from Himadri Chemicals & Industries Ltd. to Himadri Specialty Chemicals Ltd. It looked like having “Specialty Chemicals” in the name was pre-requisite for re-rating.

The earnings post that point have been excellent and the main reasons are crude prices being favourable and the demand being good for coal tar pitch from Nalco, Hindalco which are HSCL’s customers.

Carbon black demand as well has been excellent during the last 4-6 quarters due to good demand from tyre industries. Graphite as well as done well if you see how Graphite India has performed in the period. Other notable clients is Vedanta which as well has been having a dream run in the same period. So there is a lot of tailwinds at play here and HSCL is a good proxy play for demand in aluminium, tyres, batteries.

The biggest risks are crude prices, rupee weakening (raw-materials are imported) and demand slump. This way HSCL is very, very similar to Bhansali Engineering Polymers Ltd. where again the story is driven by crude price slump and simultaneous rise is demand. Again BEPL’s raw materials are 80-85% of total cost just like HSCL. So HSCL can be played in a similar fashion as BEPL as the investment thesis is sort of similar in both with both players vying to be the top players in the country for ABS and Coal-tar/carbon black respectively.

Disclosure: Invested in HSCL at multiple levels from Rs.13 to Rs.86. and BEPL as well.


(ashit) #7

Thanks Abhishek Basumallick for excellent insight on Himadri chemicals

Globally two big peer group companies are RUTGERS and KOPPERS
RUTGERS is subsidiary of Rain Industry
as per Himadri web site they are having two specialized product but Rutgers have 22 product and it holds 15 patents and 24 trademarks to add on that it has distribution channel specializes in transporting coal tar and CTP, which require specialized vessels heated to 220°C in order to prevent the materials from solidifying and they have transportation fleet includes one deep sea icebreaker, two barges, and approximately 350 rail cars with RÜTGERS’ own terminals and connection of European sites with regional sourcing pools.
this is just peer group company information
thanks
ashit

disclosure: invested in rain industries

source : http://www.raincarbon.com/products-and-services/carbon-products#parentHorizontalTab2


(nil_71) #8

Key concern is with so many good products with eye catching market share, why making losses for 3 years while peers like PCB or Graphite India making profits ?


(nil_71) #9

Another Red Flag , even if Cos is making losses , in 2014-15 , MD was getting 42 L and despite all the losses, there has been 42% rise in salary in 2015-16 to 60.5 L. Taken from AR

Management mentioned this happened because of reduction of losses !!!

All good management will avoid taking hike in tough times


(Raj A A) #10

HSCL Con-Call Transcripts

http://www.bseindia.com/xml-data/corpfiling/AttachLive/fd961d82-8b3a-4bbd-b19f-dd482bff24b1.pdf


(nil_71) #11

Also we need to compare with Rain Industries. How it was making profit with similar products ? Net Profit.


(Billu) #12

These days, I’m least bothered with high salaries. As I see it, the biggest risk in Indian Public Companies are promoters stealing from the company. That increases risks beyond what we can calculate. High salaries are visible, that means we know what they’re taking.


#13

Few things I noticed from the concall

  1. Margins are going to be sustainable going forward. OPM for Q1 FY18 on screener shows up as 22% and this is the highest margins the company has ever put up and they claim this is sustainable and not one-off.

  2. FY18 Sales could be around 2000 Crores. So it looks like the 450 Crores sales for Q1 is not a blip and will be sustained as well and in fact improved.

  3. From #1 and #2, it looks like FY18E EPS could be around Rs.5 and on that basis (FY18E), P/E is at around 16.

  4. Going forward, the coal tar pitch capacity is going to increase from 4 lakh to 5lakh (25%) metric tonnes. This is going to be operational from Q3 FY18, i.e next quarter itself.

  5. Next biggest growth driver is going to be the anode material for Li-ion batteries. He slipped in a number like 20,000 metric tonnes. This could add to the topline by about 1200 Crores if this capacity is achievable and could completely change the product mix where Anode material makes up about 25% of the revenue mix. This will be a proxy play on electric vehicles made in India and also for Li-ion batteries manufactured here and abroad. It looks like demand is pretty healthy for this product.

I like the fact that they haven’t diluted equity much and hopefully they will continue on the same vein and capex for the anode production would come from internal accruals. Overall this looks like a good bet for the next few years.


(Mute Spectator.) #14

Its trading 40 times earnings , Which looks a bit on the higher side to me.


#15

I did not mean P/E based on TTM earnings if you notice but on FY18E. It looks more or less certain that HSCL will do a PAT of 200 Crores for FY18 going by their guidance.

Also, current P/E is 28 and not 40 so not sure where you got the 40 number from.


(Mute Spectator.) #16

I just looked at the latest financials from BSE … As per BSE mCap is around 3.4K Cr and They made profits of 81 Cr in Fy17.

Comes out around 40 times earning.

Also , in their PDF submitted to BSE FY17 EPS is 1.94 --> Current share price 81 / 1.94 = 41.

If you have very good reasons to believe profits will become 200 Cr then still its trading around 17 times earnings which is usually where chemical companies trades on an average.

I mean you can still make money If PE expansion continues as growth is already priced into the stock so, its less attractive now compared to year ago.

PS: Ahha you looked at 137.84 Cr as FY17 profits thats why you are getting 24 times earning … which i believe is wrong. even company EPS has not taken that into consideration. it clearly says " Items that will not reclassified subsequently "
Considering that is being too optimistic i guress :stuck_out_tongue:


#17

Not sure why you would use FY17 earnings when Q1 FY18 is out and current P/E is usually on TTM basis and TTM earnings is at Rs.119.58 Crores which makes the P/E 28. As for what’s a good P/E for HSCL, let’s see what the market thinks. Specialty Chemicals are all trading above 25-30 P/E range in the last 6-8 quarters if you haven’t noticed.


(Mute Spectator.) #18

Ohh i didn’t know FY18 Q1 is already out … but even if they make 200 Cr by Fy18 its trading at decent valuations.
Its not cheap, If you are growth investor then we have completely different way to looking into things -
As a value investor i don’t think its a very good risk adjusted high reward story.

Like below is the playing ground i feel greedy about -

So its just we have different tastes… we may not agree to each other ever.

PS: sorry for the typo’s, tried doing all that in phone …


#19

Not sure what your point is. That second chart in your post is not even HSCL’s.


(sivaprakasamp) #20

I think Rain Industries is a better pick in this space both on valuation front and operation wise.

On a consolidated basis, Rain is available at 10x trailing PE. And based on latest concall, the company expects 2H to be better since 1H was disrupted by planned maintenance. Outlook for Aluminium and hence the raw materials is positive given low inventory levels. Further a few Al smelters on N America and Europe are expected to be released started. Further due to China emission norms supply side of raw materials is tight. Based on latest con call the company plans to reduce debt to 3x EBITDA in the near term. And they are planning to add new capacity in AP. And recent measures taken by them to reduce cost (Co generation etc) will start paying off. Further the company has interests in cement (Priya cement) though share is meagre. And their specialty chemicals is doing good good too.

Based on the above I prefer to stay with Rain.

Risks: We need to watch out for debt since this is a highly leveraged company as of now. Commodity slowdown is a big risk.

Discl: Invested at lower levels.