Kesar Petroproducts


(Vishal Bhalla) #1

The one mid-cap stock that appears simply waiting to graduate to the next league is Kesar Petroproducts. The pigments company comes from a background I can only describe as “romantic”.

Loss-making and a BIFR case and acquired by a new management. Bankers place restrictions on BIFR companies; you cannot borrow afresh; you can only grow through accruals. In Kesar’s case, the result was that the problem of a loss-making environment was replaced by the challenge of low capacity utilisation (usually accompanied by losses, as companies find it difficult to cover fixed costs).

This is where the Kesar Petro story becomes compelling. The company, restricted by inadequate throughput, selected to strengthen its once-foundering business through alternative routes: A wider portfolio of value-added downstream products and disciplined accruals’ deployment into capacity expansion.

Normally, this restriction would have been limiting but Kesar Petro transformed this into a competitive advantage: Over the five quarters ended June 2017, revenue increased Rs 1.5 crore, while pre-tax profit increased a little more than Rs 3 crore; Ebitda (earnings before interest, tax, depreciation and amortisation) margin strengthened from 18 per cent to 24 per cent.

This is where the story gets interesting. Not being able to borrow afresh means the company has no debt; it reported more than Rs 10 crore in cash profit in the first quarter and after paying moderate tax (20 per cent rate), finished with a post-tax profit of Rs 8.03 crore (on only Rs 42 crore revenue, never forget).

This excitement generated from quarterly results is only a trailer of what could be coming. At Kesar Petroproducts, we believe the foundation of all enduring sustainability is essentially derived from the ability to commission additional capacity at a cost considerably lower than the prevailing capital cost per tonne. In January, Kesar commissioned a 300-tpm (tonnes per month) beta facility (engaged in value addition) in eight months, against a benchmark of 18 months.

During the current year, the company debottlenecked its alpha blue capacity, from 80 tpm to 125 tpm, again through accruals. These initiatives indicate the proportion of revenue being derived from CPC (of which the company accounts for eight per cent global capacity) could decline, strengthening its margins.

As more cash is generated, the next round of deployment could be where the company needs it most, working capital. What it has achieved in terms of manufacturing throughput until now has been on the basis of less than 40 per cent capacity utilization.

A company generating quarterly revenue of Rs 42 crore possesses the potential of rising to more than Rs 150 crore in quarterly revenues. Which means what it is doing for a full year today is what it should be doing in a single quarter in about three years (my estimate).

Kesar petrproducts is Future Ready

  1. Economies of Scale:
    Geared to improve utilization levels resulting in better operating leverage

  2. High Margin Products:
    Focus on increasing the mix of high value products like Alpha Blue & Beta Blue Pigments

  3. Product Innovation:
    Continuous Product Innovation through use of Technology and by way of Backward / Forward Integration

  4. High Entry Barrier Business:
    Intensive Environmental Regulations, High Water Requirements, difficulty in Obtaining New Licenses and Client Stickiness

  5. Growing Export Opportunities:
    Growth in the Pigment Industry and the continued dominance of Indian Players in Pigments such as Blue and Green

That is why I would buy into this pigment company and whistle through my morning jog from now on.

Originally authored by Mudar Patherya.

Any thoughts / feedback / suggestions ?

Disclosure: Invested recently!!


(Bheeshma Sanghani, PhD) #2

Kindly also highlight the risks in the business for a balanced discussion. Also disclosures are missing. Kindly add those as well.


(Rohinipathi) #3

This is a Mudar Patherya’s article in BS. Kindly give the credit while publishing.


(Prasad India) #4

FY15 & FY16 CFO are negative. I am not a finance expert. if someone can see this and explain, it will be of value to this thread.
Rest appears to be (?) OK.
Prasad.


(Gaurav Agarwal) #5
  1. What are the products of the company? Are these two only products of the company. You mentioned CPC also somewhere.

  2. What is the installed capacity? What is the capacity utilization?

  3. What is the raw material?

  4. Who are the competitors?


(Ashusharma) #6

Some of general risks will be

  1. Commodity chemical company at 25 PE
  2. If oil prices move up, margins can get affected
  3. Need to check their loans and advances, giving around 10-15% of annual sales.

Thank you

Discl: Not invested


(Bheeshma Sanghani, PhD) #7

Hi @EROHIT316

If you find anything that is plagiarized, request you to flag it to the moderators.

Best
Bheeshma


(Yogesh Sane) #8

Since the original poster did not post risk factors, I am posting risk factors from my notes on the company.

Company History.

History of the company as per the reply given by the company to SEBI. Sebi orders are available here and here. Following points reproduced here from SBI order.

  • “The company was incorporated in the year 1990 and was a manufacturer of specialty chemical. Due to various reasons, the company’s net worth turned negative and as a result, it was referred to the Board of Industrial and Financial Reconstruction (“BIFR”). The BIFR declared the company as sick in September 2005 and ordered it’s winding up in April 2006.
  • Shreyas Intermediates Limited (“SIL”) and Mr. Dinesh Sharma took over the company as per the scheme for rehabilitation approved by BIFR in August 2007. Accordingly, SIL acquired 35 Lakh shares (51.72%) and its promoter Dinesh Sharma HUF acquired 30 Lakh shares (44.33%) i.e. a total of 96.05% in April 2008.
  • The shares of the company were suspended from trading on BSE from September 2007 owing to defaults on the part of the erstwhile management of the company. Furthermore, although the rehabilitation scheme was approved by the BIFR, the erstwhile promoters of the company not only did not cooperate for a smooth transition of the management but also created hurdles including non-payment of Income Tax dues (Leading to penalties), …….to sabotage the scheme of Rehabilitations. It was only with the assistance of Police Authorities that the incoming promotes could take possession of the assets of the company. The matter related to ECBs was finally settled in the review petition in the court only in 2013.
  • With the efforts of the new promoters, the company became profitable in 2013 and has remained so thereafter.
  • The SCRR was amended in 2010 and mandated the manner in which public shareholding was to be brought up to 25% within 3 years and marinated at that level. Since the new promoters could not have raised fresh capital and since the shares could not be sold on stock exchange because of suspension (which the BSE was not willing to lift because of failure to meet MPS requirements), the promoters were not able to sell their shares on BSE and thus reduce their shareholding.
  • Therefore, in and around November 09, 2012, SIL transferred a total of 48.16 % (24.08% shares each) to Mr. Shreyas Sharma and Ms. Shruti Sharma who were coparceners of Dinesh Sharma HUF. On April 2013, Mr. Shreyas Sharma and Ms. Shruti Sharma retired as coparceners of Dinesh Sharma HUF and thus, ceased to be part of the promoter group from that date. In the manner, the company has complied with the MPS requirements well before due date of June 03, 2013.
  • However, the Interim order erroneously held that the company is not in compliance with MPS norms. The order erroneously assumed that Mr. Shreyas Sharma and Ms. Shruti Sharma were Mr. Dinesh Sharma’s children, they would be part of the HUF and therefore, considered their shareholding as promoter’s shareholding and not public shareholding; however, in fact Mr. Shreyas Sharma and Ms. Shruti Sharma had resigned as coparceners from the HUF on April 15, 2013.
  • In February 2015, after having settled all matters related to the BIFR etc.; and in order to raise the capital, the company issued 24 Lakh convertible share warrants at a premium of around Rs. 49/- after obtained necessary prior approvals from BSE on February 2, 2015. These warrants were issued to non-promoters.
  • The company attended the hearing before WTM on July 2, 2015 and thereafter, it filed its written submissions on August 6, 2015. In the personal hearing and in the written submissions, the company reiterated that Mr. Shreyas Sharma and Ms. Shruti Sharma were not part of promoter group and therefore, the company had met the MPS norms. However, the submissions of the company were not accepted by SEBI and interim order were confirmed by Order dated January 11, 2016.
  • Aggrieved by the confirmatory order, the company filed an appeal before SAT. The shares warrants were converted into equity shares in April 2016 and thus, the total authorized and paid up capital of the company increased to Rs.9,66,73,170; consequently, the shareholding of the promoters reduced to 36.20% resulting into increase of public shareholding to 63.80%. In this regard, BSE on May 26 and 30, 2016 issued notices permitting listing of the shares so allotted.
  • The aforesaid public shareholding of 63.80% included the shareholding of Mr. Shreyas Sharma and Ms. Shruti Sharma; even if the same is excluded (assuming but not admitting that they are not public shareholders), the public shareholding of the company was 30.98% as on April 07, 2016. Thus, the company complied with MPS norms as on that date. As of June 30, 2017, the shareholding of public in the company is 68.97%; (32.82% of the shareholding of Mr. Shreyas Sharma and Ms. Shruti Sharma is included in promoter shareholding).
  • The facts relating to the issue of Convertible Share Warrants, their conversion and the sale of shares by Mr. Shreyas Sharma were brought to the notice of SAT and it was submitted before the SAT that the company had achieved and maintained MPS requirements. By its order dated June 14, 2017, SAT remanded the matter back to SEBI with a direction to the company to provide in detail, the mode and manner in which the MPS requirement had been achieved. This was done by the company vide their letters dated June 20 & 22, 2017.
  • The sale of shares by Mr. Shreyas Sharma during period April 2015 to January 2016 on the BSE indicates that the BSE approved and permitted the same and therefore, the said sale was in substantial compliance with the requirements of the clause (c) of the amended Clause 40A of Listing Agreement; if at all, the company may have omitted to take prior approval of stock exchange.

    SEBI Orders
    SEBI Order Min Public Shareholding.pdf (172.4 KB)

    SEBI vide the interim order dated June 4,2013 (confirmed in Jan 2016), SEBI had prohibited promoters/ promoter group form buying, selling or otherwise dealing in securities of their respective companies, directly or indirectly, in any manner whatsoever, except for the purpose of complying with MPS norms.
    SEBI Order Min Public Shareholding Sept 2017.pdf (531.3 KB)

    In Sept 2017, SEBI passed another order vacating earlier order since company has issued shares to non-promoters and as per SEBI, public shareholding is now 30%. However, SEBI found several violations by the company and has ordered adjudication proceedings against Kesar Petro Products Ltd, its directors and promoters/promoter group…

    Risk Factors

  • Company is part of Sharma group which also run Shreyas Intermediates Ltd (SIL). This company (SIL) has been making losses for several years. Kesar, took over CPC blue assets from Shreyas Intermediates in 2015 for 37 Cr.
  • Shreyas Intermediates has accumulated losses of 90 cr and debt of 90 crores. The company has defaulted on its debt. It will mostly be wound up while Kesar has bought working assets from the company. Creditors of Shreyas Intermediates will be at a loss here. something similar can potentially happen to Kesar shareholders as well.
  • Shreyas Sharma sold shares on BSE in violation of SEBI order and without following proper process. SEBI concluded that Kesar Petro conveniently ignored the procedure to be followed by the promoters while selling shares in the secondary market for compliance of MPS requirement.
  • Kesar reclassified promoters as public shareholders to meet MPS requirements.
  • Kesar has reclassified Raj Kumar as public shareholder without following proper process of reclassification.
  • Kesar has used a non-prescribed method to meet MPS norms i.e. Issuance of warrants convertible into equity shares to non-promotes on preferential basis.
  • BSE vide email dated February 27, 2017 to SEBI has stated that it had provided its in-principle approval to the issue of the warrants based on the declaration made by Kesar Petro that they had complied with the MPS norms. SEBI noted that since the interim order of SEBI was in force at the point of time, Kesar Petro obtained the aforesaid approval for issuance of warrants from BSE by misleading BSE.
  • CEO of the company is a 27 year old Mohit Kaushik who is paid only rs 3 lakhs per year. As per company's IR presentation, his name does not appear under either management team or leadership team. Similarly CFO is Manali More who is paid only rs 6 pakhs and her name also does not appear under management team or leadership team.
  • Other directors do not receive any compensation or sitting fees.
  • there has been several changes to key management personnel in the company.
  • I found a few copy and paste text in company annual reports which are repeated from earlier reports and same text appear in annual report of SIL as well.
  • Aartur Mehta (son of Harshad Mehta) own 40 lakhs share of the company. He was one the shareholders who were issued warrants in feb 2015 and converted to equity shares in mar-april 2016. Most of the public shareholders are long term shareholders so public float is very small (about 6% of total shares or 60 lakh shares) making these shares very volatile.

    Disc: Tracking position only.


(Nityanand) #9

Nicely articulated @Yogesh_s I am also researching on this from last few months. But was not able to join the dots on BIFR.

In 2014 below line was posted on its website
"Kesar Petroproducts Ltd was acquired under the change of management scheme formulated by the BIFR. Sharma Group having F industrial units at Lote Parshuram took over the management of the Company they have infused new capital in the Company and have started the manufacturing of various chemicals Cuprous Chloride, phthalimide and sulphates being the major products.
"
There was no mention of CPC Crude so was wondering when they started production of CPC Crude, Betablue.

Other Competitor in this segment is Asahi Songwon which manufactures CPC Blue Crude, Beta Blue and Alpha Blue.

Disc: Tracking Kesar Petroproducts and Asahi Songwon


(Yogesh Sane) #10

Some quick facts about the company from IR presentation and annual reports.

Products

Customers

Utilization (MT)

Volumes and Margins

End Users
Ink (65%) and paints (25%) accounts for majority of company’s end users.

Competitors
Poddar Pigments Ltd.
AksharChem (I) Ltd
Bhageria Industries Ltd
Bodal Chemicals Ltd.
Dynemic Products Ltd.
Kiri Industries Ltd
Plastiblends India Ltd.
Ultramarine & Pigments Ltd.
Vidhi Dyestuffs Ltd
Asahi Songwon Colors Ltd

Key Developments in FY2016-17

  1. Commissioned a 300 TPM beta facility in January 2017. plant was commissioned in eight months as against a prevailing benchmark of 18 months.
  2. Debottlenecked existing alpha blue capacity – from 80 TPM to 125 TPM
  3. Company de-bottlenecked its alpha blue capacity resulting in a production increase by more than 50% during the first quarter of FY18. Alpha blue capacity has a revenue potential of 100 cr.
  4. Cooling period between the time the Company exited BIFR and the time when it can mobilise bank funds has come to an end; the Company is at the point when it can prospect for working capital financing from banks.

Outlook
for FY 18 company is expecting 45% utilization (up from 39% in FY 17) and high margin non-cpc products to contribute 60% of revenue up from 40% in FY 17.
Medium term, by 2019-20, company expects fully-utilised capacities should be in a position to generate peak revenues of nearly rs 700 crore (compared to Rs 166 cr for FY 2017) at margins higher than the prevailing levels. (Source AR FY2017).


(grohal) #12

Though company does feel like a great turnaround story from the numbers. But its important to note that real turnaround happened post 2014, just the time when whole chemical industry went on a cycle of super normal profits. Typical numbers for companies since 2014 have been characterized by super normal profits but stagnant sales. I see similar numbers for this stocks.
So, I will advise investors to look at it as only a chemical stock on up cycle and not as a great turnaround story.


(Mukesh Amar) #13

I recently read somewhere “you can borrow someone’s idea but not his conviction” this fits very well here. Not to clutter more into a non issue I guess we get (new) ideas from these sources only, there is no harm in representing them to start a topic but one should put some of his/her efforts and present them in a original way instead of putting all the same words (I mean it’s like ccp only).


(Vishal Bhalla) #15

Source: Firstcall Research

Kesar Petroproducts Ltd. began its journey in 2010 and slowly incorporated the business of Shreyas Intermediates Ltd. into its fold. Today, the company is the leading manufacturers of Phthalocyanine Blue Crude and its downstream products in India and contributes upto 15% of the entire Copper Phthalocyanine market of India. The company has a global presence in 15 countries.

INDUSTRY STRUCTURE AND DEVELOPMENTS
Chemicals are an integral part of our modern day life. There is hardly any industry where chemical substances are not used. Pigments are an integral ingredient of the chemical industry. Pigments are colouring agents that can be classified into phthalo and azzo pigments. Phthalocyanine pigments are one of the largest categories of pigments manufactured in India. Kesar Petroproducts Ltd. is engaged in the manufacture of Phthalocyanine Blue
Crude and its downstream products in India.

OPPORTUNITIES, THREATS, RISK & CONCERNS
The global pigments industry produces hundreds of colourants for a wide spectrum of industries and consumers. The major markets are prinking inks, paints and coatings, plastics, paper, ceramics, textiles, glass, food and cosmetics. With more and more people are moving to urban areas there has been a hefty growth in the paints and coating industry. The Asia Pacific region is expected to grow as demand and production of pigment are
shifting from the US, Europe and Japan to the emerging markets of Asia, especially China and India.

A steady increase in the large pigments markets such as paint and coating will catalyse volumes. With the printing ink industry also performing well, it will open up newer opportunities for the Company.

Raw material availability and their costs are always a concern. The key raw materials used in the manufacture of the pigments are derivatives of crude oil. Hence, prices of raw material vary with fluctuation in the international crude oil prices. The Company has an in built system of monitoring the inventory and logistics. Further production process of the Company is vertically integrated, where CPC Blue Crude is the primary raw material for the production of Pigment Blue.

This helps Kesar Petroproducts Ltd. to manage the raw material cost. The future of pigment production is completely dependent on the ability to treat the waste water. The Company has been investing continuously in meeting its obligations towards protecting the environment. Towards this step, the company aims at providing a seamless integration of quality and schedule by ensuring timely deliveries, state-of-the-art manufacturing products, new age technology, constant innovation and economic viability. The Audit Committee monitors the implementation of the risk mitigation plans


(nitin_g) #16

Disc :- Not invested .
P/B is too high and promoter holding is too less


(Vivek Mashrani, CFA) #17

Important SEBI order on Kesar…some things to ponder before taking position. There is some follow-up investigation going on with SEBI which could be black swan event in future.

http://www.sebi.gov.in/enforcement/orders/sep-2017/order-in-the-matter-of-kesar-petro-products-limited_35844.html


(Yogesh Sane) #18

Noticed another risk factor with the company.

Here is a shareholding distribution as of March 2017 of the company.

Small investors holding less than 10,000 shares make up only 1.5% of the total shares of the company. Company has not provided distribution of shareholding for shareholders holding more than 10,000 shares. That information is available in previous annual report.

Here is a distribution of shareholding as of March 2016.

Shareholders holding more than 10,000 shares but less than 100,000 shares are only 37 in number and together they own less than 1.5% shares.

Assuming that shareholding pattern has not substantially changed for these large shareholders, we can assume that shareholders owning less than 100,000 shares make up only 3% of shares or together they own less than 3,000,000 shares. Large shareholders own rest of the 97% shares.

I have been observing the trading pattern over last several days and have seen bids in excess of 1,500,000 shares when shares were locked up in upper circuit. surprisingly when shares were locked up in lower circuit, volume was thin. such activity combined with extremely low shareholding by small and medium shareholders can cause extreme volatility in share price.

As per the recent SEBI order, public shareholding is about 30% or approximately 3,000,000 shares. Out of these 2,400,000 shares were issued to 10 warrant holders. There is no report by these shareholders about selling their shares. that means only about 6% of shares are publicly traded. This also confirms that float is extremely small and can lead to large volatility.


(Vishal Bhalla) #19

RESEARCH REPORT by JOINDRE CAPITAL SERVICES LTD.


(ishikaghose) #20

Thank you for doing the research for the rest of us and truly helping us to separate the wheat from the chaff


(Prasad India) #21

Thanks Yogesh.
CFO, Working capital, cash in bank and Book value were something different from other good company patterns.
Somehow they didn’t look quite okay.
On the face of it looked seemingly convincing.
But I didn’t like the above mentioned parameters.
A finance guy can explain better.
Any how thanks for pointing out.


(rockstarinvestor) #22

Somehow I feel the price is deliberately kept low for further accumulation by interested parties… The Volumes speak volumes…