Thirumalai Chemicals - A chemical Company


(DAGARWAL) #1

Thirumalai Chemicals

CMP – 368.9 Market
Cap -377.71 crores

It is an India based company which is engaged in manufacturing of Phthalic Anhydride (PA) and other Industrial chemicals .It business segments include Chemicals and power generation.

It offers its products to various industries such as paper , powder , coating , Agrochemicals ,plasticizers , unsaturated polyster resins ,esters , bakery goods , confectionaries ,feed , food , construction materials
, metal cleaning , electroplating ,water treatment , intermediaries , textile , leather , Flavours and fragrances etc

There has been a decrease in sales in this year due to increased dumping of PA into India at lower prices as there has been a economic recession in rest of the world , especially for CIS countries.

But company has been able to improve its margins through improvement in internal efficiencies, including in Marketing and Working Capital management. Their supply chain improvements also helped addressing the volatility in prices, which in earlier years, have caused huge losses during times of falling prices. Without these improvements, the sharp drop in prices which had an adverse impact on the Industry, would have severely affected them.

Anti-dumping duty.Though there is an existing Anti-dumping Duty against some countries and selected Companies, Producers and Traders in certain countries like Korea, have found loopholes to circumvent it. This continues to be a major reason for the low margin for business. Company is working with govt. to fix these loopholes.

Financials

Equity is 1.024 crores
shares of Rs 10 each means 10.24 crores of capital

Promoter holding 41.71%

Long term debt of .28 crore and short term debt is 22.7 crore as of 30th March
2016. Company has Cash and bank balance of 11.3 crore and short term loans and
advances of 4.12 crore.

Year 12 13 14 15 16 Q1(17)

Sales ( in crores) 911.31 1155.91 1050.65 941.69 792.11 219.14
Np (in crores) 4.79 27.75 3.57 14.21 42.73 20.24
EPS (in per share) 4.67 27.1 3.48 13.87 41.73 19.77
Dividend (per share) 0 5 2.5 0 8 6

Investment Thesis

It is a small Cap company with its business in chemicals which takes its raw materials as crude . As there has been a sharp decline in last year in crude prices , company has able to keep himself stand in the competition and improve margins . They have able to grow through internal accruals .And good times seems ahead of them .

Their fine Chemicals Divisions have performed very well. Their contributions have increased significantly. All these Plants are working at full capacity and substantial expansions through debottlenecking are underway. These will help them increase their earnings and grow up the value chain .These will help them serve customers better and increase market share.

Contribution to the Exchequer is about 15.31% of your Company’s Sales (which is excise + customs) which shows they have paying taxes fully.

Average increase in remuneration is 23% for Employees other than Managerial Personnel & (8.3%) for Managerial Personnel (KMP and Senior Management) which gives some signs of management integrity . Also by reading annual report , I found that management is candid in sharing their bad times which is a positive sign.
It is a available at a reasonable valuation of around 8 PE.Quarter 1 results showing that company has able to bring efficiency which help them to increase earnings with same revenue.

Risk
Volatility in crude prices (Raw materials)
Foreign exchange movements as there is lot of import and export involved.
Promoter holding is not high.

Disclosure – Not invested . As i am a novice investor and recently started writing on forum , other senior vp members please let me any other useful insights or feedback on any mistakes .


(ravijain88) #2

I was about to start thread for Thirumalai chemical.

The company’s business shall be divided into standalone and Malaysian subsidiary business.

Historical Performance: Over the past few years earnings has been volatile due to RM Fluctuation and loss from the malaysian subsidiary led by operation inefficiencies.

Future Outlook on standalone business: Currently, company derives 75% of its business from commodity and balance from fine chemicals. Management expect volumes to grow by 30%+ over the next two years and targeting business mix of 60% from commodity and 40% from fine chemicals. Revenue number might looks lower due to decline in the prices.

Margin should expand due to better operational efficiency and higher contribution from fine chemical business.

Malaysian Subsidiary posted losses in last couple of years, but most of the losses were non-cash in nature: The slump in the world market affected subsidiary significantly, where gross margins dropped by over 40%. This was aggravated by the sharp drop in the Malaysian Ringgit vs other currencies. These gave rise to losses. A major portion of the losses are non-operational and unrealized, and are due to the Forex changes relating to residual Term debts due to our company.

**But now has turned positive and expected to contribute significantly to the consolidated profit and cash:**Company’s Subsidiary M/s. Optimistic Organic Sdn. Bhd., completed its expansion project which will add about 40% capacity. During the Q4 FY16, the expansion and refurbishment of the older plants have been completed and production has started to ramp up during the month of February’16. We are already seeing results of this project in terms of production and lower operating costs (Q4FY16 and 1QFY17). By Q3 FY17 it is expected that the Subsidiary will reach its full designed performance in terms of production, sales and cost reduction. A major part of the Capex costs for expansion was paid from their internal cash flows and accruals of FY13 and FY15.Company is confident that the Subsidiary will again after a break of two years, start making significant contributions to the consolidated Profits, cash flows and to revenue

Financial Estimates Standalone business should generate 55-70 cr profit in FY17 led by volume growth, operational efficiencies, higher contribution from fine chemcials and lower interest expenses. Subsidiaries should easily contribute 25-40 cr profit in FY17 led by capacity expansion and cost efficiency. Consolidated profit can be 80-100 cr.

Key Positives:

  • Free Cash Flow Generator: Company generated Free Cash Flow of ~90 cr and 130 cr in FY15 & FY16 respectively, which enabled it to reduce it debt to a comfortable level of 0.3x by the end of FY16. Debt to equity is expected to reduce further by FY17.

  • Attractive Valuation: Current Market cap of the company is ~360 cr and is expected to generate net profit of 80cr+ and Free Cash Flow of 100cr+ in FY17. So stock is available at less than 4.5x PE and 3.6x Price to cash respectively, and is from a sector which is in limelight for quite some time.

Disclosure: Invested 10% of the portfolio.


(DAGARWAL) #3

Thanks @ravijain88 for giving more insights … It will help getting more conviction . I have majorly focused at standalone level … Do you see promoter shareholding low ??


(atishay1) #4

Its pure play on commodity chemicals,how can we really predict in the long term the sales price and margins but yes only looking at current year financials, it is cheap.

Commodity plays are always double edged sword, it can go up and down so fast and its extremely difficult to time that. Even if margins decrease by 5%, it can start showing up losses but good the management has been able to reduce debt in last 2 years.

Discl: Not invested


(Pranav) #5

Thirumalai Chem is up 20% today.
Any news?

Disc: Invested


(DAGARWAL) #6

Q2 FY17 results
At standalone level ,Revenue has grown from 166 crores to 213 crores registering a growth of 22 % QoQ and also Other operating income has more than doubled.
Consolidated -
Also at consolidated level revenue increased from 218 crores to 251 crores
PBIT has decreased from 34 crores to 28 crores but increased from loss in same quarter in previous year of 6 crores .

Finance cost has reduced by around 50% .

PAT also in same line with PBIT has decreased QoQ from 20 crores to 16.39 crores but increased from same quarter in previous year i.e loss of 15 crores .
PAT has increased at standalone level but not a consol level which means the subsidiary would take more time to be profitable as expected .

EPS has been at 35.77 for H1 17 against 4 in H1 16 i.e around 4 times increase which if annualised is still at PE of around 10 .

Also there may be increase in margins through change in product mix and improving operational efficiency as guided by management in annual report .

There has been around 30% of increase in cost of materials at standalone level which needs to be seen.

Inventory build up is seen in this quarter .
Total Borrowings has reduced at consolidated level which has been in line with expectations .

More insights from other Vp members is appreciated


(DAGARWAL) #7

Q3 results

Standalone performance - Revenue has grown by 30% yoy. It has been flat on qoq basis partly because of demonetisation and also seasonally it has less sales as of September if that taken as trend.
Margins had been in that range only or slightly upwards due to gradual increase of fine chemicals contribution and operating efficiency in build up of inventory and other expenses.

Finance cost has increased this quarter due to reasons not known .If anybody does have any insights it would be helpful.

Consol Performance - Malaysian subsidiary has changed its reporting currency from Malaysian Ringgit to Dollar as most of its operations are from US and it contributes 10-15% to total revenues.
Nothing has been good for subsidiary in this quarter ,revenue decreased ,finance cost increased and loss increased as a result .
Company is making efforts to breakeven the company but this quarter it also has been operationally at loss unlike previous quarter.
As major operations are from US ,may be it got affected due to Trump elections which mostly cannot be accepted with full certainity without evidence.

9 months EPS (consol level) - Rs 51
Thus on TTM basis, it is still at 12 PE taking conservative side.

Disclosure - Have some shares but no transaction in last 30 days.


(phreak) #8

Something doesn’t seem right here. It was on a nice uptrend, always respecting the trendline but last few weeks has been sideways under the trendline and RSI trendline also has been broken. Volumes have dried up but am afraid there are several twitchy fingers waiting to book profit. Fundamentally, the sales haven’t improved much here and the company has been solely surviving on better margins. If the margin cannot be bettered, this might be the top perhaps. Q4 could be make or break for this stock.


(DAGARWAL) #9

Q4 & FY17 results

Standalone performance
Revenue has grown by 30%+ yoy for quarter ended March17 and 10% for year ended March 17.
PAT margin had been in 7-8%.
But its around 6.5% at consol level due to drag down by subsidiary losses.

Its subsidiary is showing some revenue growth but still had some losses which dragged overall profits .
More insights in it will be available in AR and in AGM . So looking forward to it .

There are no borrowings at standalone level . Finance cost has increased this quarter due to reasons not known but it is down y-o-y.

FY17 EPS (consol level) - Rs 69 .
Thus it is still at 14 PE taking conservative side.

Disclosure - Have some shares but no transaction in last 30 days


(ravijain88) #10

Excerpts from 2017 annual report and my view

Standalone Business:

  • Had manufacturing capacity constraints in certain products along with issues arising from older technology and plants in our commodity business. These are now being addressed. Older equipment & systems are being replaced with newer ones with better technology which will help us work towards improved efficiency, quality and volumes.

  • Significantly improved Business efficiencies and Margins, Costs, Working Capital management, which improved profitability and Cash flows.

  • We have become a zero debt Company and the entire capital expenditure for improvements and replacement of technology & equipment are being met from internal accruals.

  • Our commodity ( Phthalic Anhydride ) business is often affected by market volatility and by the swings in costs & prices and of raw materials & products, and customer’s business cycles. However, operational changes effected in the last few years have made us more resilient to withstand these surprises and lessened their impact on our volumes and margins.

Commentary on Subsidiary, which is key for future performance:

  • Subsidiary M/s Optimistic Organic Sdn, Bhd., (OOSB) has completed its Maleic Anhydride expansion. As this was built within a functioning petrochemical plant, the plant went through a number of shutdowns which caused production and sales losses during the expansion works and start-up. The ramp up to full capacity has also been slow, affecting their performance during the year. In spite of loss of volumes their cash flows during the past years were decent and largely funded the expansion and refurbishment programme.

  • Future Guidance on Subsidiary: We now expect better performance from them during FY-18. The subsidiary is diversifying into downstream derivatives and value added products, which will make it stronger. The location of OOSB provides strong advantages in raw materials, utilities and logistics. These plans are designed to dovetail with our growth strategies

Expansion in Specialty Chemical Business:

  • Food Ingredients and Fine Chemicals businesses did well and first Phase expansion of these units was completed recently, and has reached full capacity. Further increases are under execution this year.

My View:

  • Thirumalai Chemicals has successfully turnaround its business over the last 2-3 years led by operational efficiencies and favorable commodity prices. As a result of this company has become debt free and financial performance has been stellar at the standalone level.

  • Subsidiary was expected to turn green in FY17, however stabilization of operations has taken much longer than expected. The operations are now moving towards normalcy. The Subsidiary is now expanding into downstream higher value derivatives. Perfromance of subsidiary holds key in the future performance, which should be good from FY18 onwards, in my view.

  • Further, company is shifting its mix towards speciality chemicals, which should be positive in long term.

Disclosure: I was holding the stock since lower levels and exited in Jan 2017 and hold no position currently.


(Rajeev Jawahar) #11

The Thirumalai chemicals stock seemed to be on a tare this last week or so. The market seems to be waking up the the potential of this stock. According to the AR, the past year 2016-17 was a challenging one for the Co. with Chine & the EU slowing down, predatory dumping by overseas manufactures & capacity constraints. The Malaysian subsidiary too was in the red with repeated shut downs due to the ongoing expansion & operations taking longer than expected to stabilize.

The Co.'s performance in 16-17 must be viewed in this background. It did Sales of 1032 crs. & a PAT of 70.54 crs with an EPS of Rs. 69. The Co. has been aggressively reducing debt these last few years & is today almost debt free. The return ratios even at the end of a challenging year are more than acceptable, In fact, the RoCE for average capital employed during the year is in excess of 40%!

Along with debt reduction, the Co. has been aggressively building capacities & plans to continue to do so over the next few years. This, it plans to do from internal accruals without raising debt. It has also started the process of continuously upgrading technology. It also expects the Malaysian subsidiary to turn around this year & start contributing to the bottom line.

The effects of the last expansion completed in 16-17 will get fully reflected in the current year. Further, the co. is already in the process of further expansion, which as mentioned earlier, will be a continuous process It could do an EPS of any where between 85 to 100 Rs. for the current year, thus making the current market cap of about 1050 crs rather attractive.

Attaching the latest AR for better understanding of fellow valuepickrs.
http://www.thirumalaichemicals.com/pdf/TCL%20-%20FTP%20-%202017.pdf

Also attaching a link to the Co.'s announcement regarding expansion on the BSE.
http://www.bseindia.com/xml-data/corpfiling/AttachHis/463A0E78_FB9E_4298_8879_68AAAEBAE394_174102.pdf

Disclosure: Invested & adding on every rise.


(DAGARWAL) #12

Sir just one question on valuation parameters .As it is expeced tp do EPS of 85-100 in FY18 which seems pretty acheivable .
but then considering it as a commodity chemical company should it be given range of multiple at max to 15.
or considering its margin ratios ,debt position ,and fine chmeicals expansion ,you are valuing it on some other or higher parameters or multiples ??
Sir may be this question be naive to you but will help me too get conviciiton to add on rise.
Thanks

Disc - Invested from lower levels but getting difficulty to add on rise as at initital investing it was available at dirt cheap valuation.


(Rajeev Jawahar) #13

@DEEPAK_AGARWAL, according to me PE ratio is just one tool to measure valuation, though I prefer EV/Ebitda. I also feel that the word “Commodity” is used a bit loosely in investing parlance. I mean, there are “commodity” companies with operating margins ranging between 3-4% to 13-15% & it it is perhaps not right to club them together. Most so called commodity companies try to go up the value chain by getting into some kind of forward integration.

Your question on valuation is not naive, but somewhat profound if you ask me & I am not sure if I am qualified to answer it! A part of the answer perhaps can be found in your question itself when you mention margins, ratios, debt etc, but there are no easy answers. Investing, after all is as much an art as is a science!


(Rajeev Jawahar) #14

There have been some discussion on how Thirumalai compares with the industry leader IG Petrochemicals. I found very little to choose between the two with almost identical top line, operating margins & even Price/Book! IG is more expensive in terms of EV/ebit, but marginally cheaper in terms of PE. Perhaps Thirumalai is more investor friendly in terms of a much higher dividend payout ratio. Promoter holding though is much higher in IG. I guess it’s neck to neck, but I prefer Thirumalai!


(atishay1) #15

Apologies if I may seem rude however posts seem quite biased. Can we also highlight the key risks on why the stock deserves current valuation / more or lesser. I believe there needs to be second order thinking on the longevity and sustainability of EBITDA+earnings. Looks an interesting learning story for me in my small pf.

Discl. Invested


(DAGARWAL) #16

Thanks for great insights .
Rightly said as there can be no one answer or easy answers to the valuation criteria considering risk reward in mind .
But as u took an industry leader and identical company which seems to be comparable in mostly every terms with little bias towards Thirumalai .

So can u say that both these companies are near to fair value range ,
Or as u mentioned adding on rise , till which valuation range (whichever tool you use) , you believe that it can be bought or added ?

Means the overall broad range through which it can be taken as not an overvalued stock , ( if possible , it would be great if you can share some quantitative parameter that u look to consider its value and then add even after steep rise ).

In other words , do u believe investment return is possible in this stock due to re rating or only earning growth will bring in equivalent price growth bringing it back to current multiples .


(Rajeev Jawahar) #17

@DEEPAK_AGARWAL
A stock is bought more often taking into account the Co.'s potential to grow going forward. Thirumalai will make a good investment at current prices only if it can scale up with improving margins due to newer technology & more value added products in its product mix. That is a call each individual investor needs to take.

Another important factor to keep in mind while valuing a Co. is how efficiently it uses its resources. That is where Thirumalai scores well. Its board of directors also exude confidence, but as I mentioned earlier, the share price more often than not is a reflection of the Co.'s ability to grow its Sales with a disproportionate growth in profits!


(DAGARWAL) #18

Thanks sir for your great insights .
Got my answer collaborating all your replies regarding whats your thesis and expectation from investing in Thirumalai Chemicals .


(DAGARWAL) #19

Splendid Q1 results again by Thirumalai .

http://www.bseindia.com/xml-data/corpfiling/AttachLive/8908b607-367d-4e4b-9e43-c931fc588422.pdf

Revenue have grown by more than 50% .
EBITDA margin at 18.9% vs 17.1% yoy.
Earnings have been 29.8 crs vs 16.1 cr ,up 85.1% y-o-y , translating to a PE of 12 on TTM basis .

Disc - Invested


(Pranav) #20

Did anyone attended AGM? Key takeaways from AGM will be helpful to understand their future strategy.