Thirumalai Chemicals - A chemical Company

Stock Opportunities Untested - but worth a good look
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Well without going into any direct question related to any buy/sell questions at any specific price point and for any specific time horizon, here is a a bit of homework that I did recently. Hope you find some pointers -direct or subtle - worth evaluating. So, here you go…

Quite curious case where ROE has increased at an envious cliff - straight from 9% to 29% in under 3 years. Any one will go head over heels just by these numbers.

However, what really is at stark difference is the top line growth. Struggling for past 4 years.

Contradictory…very very contradictory and unusual. How can it be that a company with shrinking sales yet improving ROE. Whats better than a DuPont analysis to see what is driving the ROE:

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What is evident here is that Net Margin is reason behind improved ROE. Now, next drill down, what is improving the Net Margin? Here is a common size break down of cost (i.e. all heads presented in % value).

As evident, raw material is coming down for the same time frame. Non of the other header so significant to drive cost down and improve the profitability.

Have spent some time and will do so further in coming days, however, for now, I really dont have any firm explanation as to what is it that is leading to this reduction in raw material cost. Have gone through couple of previous ARs and sell side reports however, have not come across to find if they have got any backward integration or strategic partnership etc.

At the cost of sounding generic theory and little presumptive, is this has to do with the crude price fall? I am not very certain at this juncture but can be a possibility.

In conclusion, ROE is good and (comparatively speaking) stock is available at a reasonable P/E, However, so far I have not been able to notice any moat/edge or even a significant differential factor. Even not a short of any niche in its operating areas.

Regards,
Tarun

Disc: Not invested

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Good points! Though, just one thing which comes to my mind. Sales are falling and the reason behind that could be falling RM prices, which they are passing over to the clients.

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In that case., the net margins would have remained same.

There is a better possibility that : the company is passing only partial cost benefits (resulting from drop in raw material prices) to the customers & retaining some portion of it.

But, in either case., the company has some clear friction in increasing the annual sales.

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There used to be inverted duty structure due to which the raw materials for PAN ended up being available at a higher cost. I believe some part of that has been fixed due to measures taken by Govt. Probably that’s one of the reasons raw material costs are falling.

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Hi, I am a newbie to stocks and to this forum. I had a query about Thirumalai chemicals’ numbers. Their balance sheet tells me that their debt status is zero as per March 2017. However, their net payables position is 228 crores which is a steep rise from 60 odd crore levels of the last 2 years, and receivables are 112 crores. This difference amounts to 116 crores which is greater than their cash from operations. Does this mean it is a red flag pointing towards a deteriorating quality of earnings?

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Even though at the face of it, it might seem that increasing trade payables means that the company is able to extract better credit period from its suppliers and thereby fund its working capital at the cost of its suppliers/vendors. This, in turn, leads to lower financing costs to the company. However, it is common finding that vendors/suppliers are the first counterparties to whom payments are delayed in times of liquidity stress. …Agree that many times, increasing payable days is the first indication of developing stress in any company.

for Mar-17, the cash from operating activity (CFO) is 117 cr

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Thank you very much for clearing that up. Also, I stand correct on their cash from operations positions!! :slight_smile:

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Can anyone throw some light on q2 results… Revenue stagnant …yet earnings have shot up… Due to change in guidelines of accounting system??.. Also q1 revenue had to include excise duty of 25 crores… But because new IND AS is not including excise duty after gst introduction q2 sales is not recording the excise duty…hence q2 sales look better than q1 sales… Earnings optically look too good to believe… 56/share… Previous quarter was 29rs / share…but if we add an excise duty of 25 crores ( approx which was paid in the last quarter) then net profit will come down to 16 crores…which is less than the profit of 17 crores for the same period in 2016… Correct me if i am wrong…
Disclosure:had invested in thirumalai at around 990 levels… Trimmed down significant portion of my holding aftr todays result

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The September quarter results are nothing short of spectacular. Not sure if these margins are sustainable as the growth in operating margins is huge. The Co. could end up with cash profits of about 180 Crs for the year. No wonder the Co. is aggressively looking to expand. The stock may have more than doubled in the last 4 months or so, but looks good to see higher levels in the coming days. At the AGM, the mgt. had mentioned that they would consider a stock split. Perhaps it’s time!

Attaching the Sept Qtr. results:

http://www.bseindia.com/xml-data/corpfiling/AttachLive/bd517504-bab7-4aef-8eed-2cfae70ab62d.pdf

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The Sales figure in Q2 of Rs. 259.64 is almost similar to that of Q1 (284.49 less 25.60 excise) of Rs. 258.89. It would be incorrect to reduce excise from the Q2 profits as the Sales figure itself is net of excise.

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I agree with Rajeev… Refer following explanation for better understanding to compare results before and after GST.

“Earlier, companies were reporting revenue after deducting value- added tax levied by the states but before deducting excise. Now, sales will be reported after deducting GST (which has subsumed both state and central taxes), which means only the net amount will be disclosed”

Source :http://www.livemint.com/Money/q48ZwJXMlhBJDAiyida83I/Sales-accounted-under-GST-could-distort-September-quarter-pi.html

If we go with above understanding Q2-17 results 259.46 cr vs Q2-16 262.44 cr ( 239.80+22.64 , Excise duty added to sales). We did not see revenue growth, but we see substantial improvement in margins. This is really a good news.
Question is, can Thirumalai sustain these margins? answer may be yes for at least for couple of years. Considering China and other macro factors.

Correct me if i am wrong. As per my understanding company suppose to give good numbers from Q3.

Disc: Invested 5% of portfolio,

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Hi Rajeev… can you help me with these questions…How this compares with IG Petrochemicals in terms of product profile and valuation?? Any negative for stock to decline post results??

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Ig petro is same as Thirumalai , they bought belong to a duopoly industry and their products are fully same, its like HPCL, BPCL of refining you can compare numbers of both the companies.
Both the companies manufacture PAN and maleic acid which has incremental demand. There are lots of moats in their product:

  1. There are a lot of entry barriers to manufacture this product so u will not find a lot of new players in this. Also this product is very toxic and u need a lot of experience to manufacture it and to turn in profitable.
  2. There is no substitute/replacement for PAN
  3. New end applications for the product are coming which will increase the demand.
  4. Its a proxy play to the indian growth story where the demand for PVC pipes,wires, cables,etc in housing/infrasture will increase along with the increase in the per capita consumption of plastic which is less compared to developed nations.

The only problem with IGPL is that the managment is not as good as that of thirumalai/ultramarine group, but considering the promoter of IGPL having 75% holding and the very bright prospects ahead they should not goof up

disc: invested in both companies

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@T11 Wonderful analysis.

Continuing where you left. Major raw material for Phathlic Anhydride is Ortho-Xylene. The synthesis process is detailed at this wikepedia link → Phthalic anhydride - Wikipedia

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2015-16 annual report of IG Petrochemical confirms topline shrinkage and bottomline expansion due to increasing crude oil prices.

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But I could not understand how management is saying - rising crude price led to proportionately higher increase in the price of Phathalic Anhydride…

We know that crude price were not rising in 2015-16 infact they were falling during the period.

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What’s in IG Petrochemical’s AR is indeed strange because

  1. As you pointed, crude price was falling and not rising.

  2. Even if you humour the management a bit and say PAN prices were higher due to rising crude, why is their topline shrinking when it should be increasing?

What is contributing here is reduction in o-xylene prices which seems to have been around $1500/tonne when crude prices were higher (say 2012) and has dropped to $700-800/tonne in 2016. This correlates with reducing raw material prices, some reduction in topline (RM drop benefit passed on to customer), margin expansion and better RoE.

So why has o-xylene price dropped along with crude? Because o-xylene is commercially manufactured by the methylation of toulene and benzene and benzene occurs naturally in crude oil and is the main source.

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@phreakv6 @T11

I think we can deduce that due the reduction in price of o-xylene the companies had to reduce the prices of Phthalic Anhydride which resulted in shrinkage of topline but at the same time they could increase their margins by not passing on all the windfall due to reduction in price of o-xylene.

Can we conclude that overtime their customer will know about windfall margins they are making and will start pressing them for more price reduction? On top of that they have Korean dumping problem.

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Good observation Gaurav

Both these companies definitely have an advantage to pass on crude increase if crude rise is marginal, like it happened in crude recently from 50 to 60. Similarly if crude reduces it has to be passed on but profitability is not impacted.
Also when crude falls people hold back their purchases anticipating further fall in crude and PAN prices, so this may be the reason for reduction in top line. But if crude rises the customers should increase their inventories, let’s see what will happen now and what will be this marginal impact of crude rise.

It like steel industry pricing is based on the ore prices primarily, any any fluctuations in ore prices gets easily passed on to the consumer.

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now that the brent crude hit almost 70$ what will be the impact of earnings? is it still good to hold onto chemical companies when there is a rise in crude?

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Good results from Thirumalai…Qtr EPS 50… 9M EPS 128 http://www.bseindia.com/xml-data/corpfiling/AttachLive/c9a3d33a-7ed0-4c6d-8cee-93ee79d4cd14.pdf

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Outlook encouraging…http://www.moneycontrol.com/news/business/moneycontrol-research/thirumalai-chemicals-q3-review-earnings-outlook-valuations-attractive-2486759.html

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