The chemical dye & pigment industry has seen a major boost due to shutdown of a global competitor in China due to environmental concerns. I'm analyzing the situation using Kiri Industries, a leading manufacturer in India.
CMP - 169
Market Cap - 448 cr
Starting off with the news: http://www.dsij.in/article-details/articleid/13903/kiri-industries-surges-on-debt-reduction-plan.aspx
The company’s total debt has been reduced from Rs 853.13 crore to Rs 410.62 crore. Its debt decreased by almost 51.87 per cent as compared to previous fiscal year. Kiri Industries’ repayment of the debt was done in initial installments. According to the company’s management, it will repay majority of the balance debt during FY17 in installments.
Competitor plant closure in China
A company called Hubei Chuyuan, which is the largest dye intermediate manufacture in the world makes 2,000 tonne, which is 30 percent of the global consumption shut down the plant. The Chinese government has asked most of these polluting plants to move from the east side to the west side.
India is the second-largest manufacturer of H-Acid, globally after China. H-acid is the chief dye intermediate used in manufacture of black dyes. However, H-acid is the most polluting industrial effluent that generates 50 kg of waste for every one kg of usable material. It is toxic and non-biodegradable.
The Company has two major division of products-dyes: intermediates and chemicals. The intermediates which are used for producing dyes and these intermediates were priced in the range of ₹300 to ₹350 per kg and it has significantly increased during the last one month due to the closedown of a major plant in China, which was the world’s leading
supplier. There were other plants in China which also closed down.
The average price of H. Acid during the previous financial year which has been ranging from Rs. 300 to Rs. 360 per Kg, has now shot up to about Rs. 900 to Rs. 1000 per Kg and average price of Vinyl Sulphone during the previous financial year which stood at Rs. 160 to Rs. 180 per Kg, has now shot up to about Rs. 240 to Rs. 275 per Kg globally.
March 2015 financial position
The company had a net loss of 33 crore on 783cr turnover. Out of which interest payment was 84 cr on a total long term debt of 736 cr. EPS = (17) based on 2 crore issued shares.
The debt has been halved will be repaid over FY17 in installments. Besides, turnover due to China shutdown is expected at 1000 cr for FY 16 and 1200-1300 cr for FY17 if China situation continues for another 6 months.
However, this revenue growth will purely be on the back of price increases and not volume growth. Volume growth is difficult due to environmental issues.
Margin improvement will be in the range of 30-40% (current OPM for Kiri is ~11%).
March 2016 assessment
December ended Consol PAT as per screener is 14.6cr on a topline of 770 cr. This is after interest payment of 60cr.
With March qtr expected to be better and management guidance of 1000 cr for FY16, PAT can ~20cr (being optimistic here). EPS = 10 (-17 for FY15) could be quite a turnaround.
For FY17, repayment of loan will add another 30cr to the profits and with management guidance of 1200 cr. topline, things look good for Kiri and for the industry in general.
Recovery in China remains the biggest risk. Although it will not be easy, Chinese competition can return within a few months. As of now there is no update on the shutdown but the Chuyuan could either make changes to their pollution control or shift their setup. News reports claim either of them could take atleast 6 months. Kiri will have a chance at grabbing some of the market share until then. Its more about when than if.
Another risk is that the stock has already run up almost 100% in the last 1 month on the back of the above news and is trading at its 52 week high of 170.
Disclosure: not invested yet.
PS: My first topic here, please feel free to point out if there's any mistake in the workings/ analysis.