Valiant Organics - High ROCE, debt free


(Akshay Jain) #1

Valiant organics is a specialty chemicals player. It manufactures and markets ‘Chlorophenols’. -Chlorophenols are divided into 2 categories; Mono-chlorophenols (Ortho-chlorophenol and para-chlorophenol) and Di-chlorophenols (2,4 & 2,6). Domestic sales are 56% while exports are at 44%. The promoter is Mr. Hemchand Gala. Some of the directors are closely associated with Aarti Industries.

Positives

  1. The demand for this product far exceeds supply. Which is why the company is expanding capacity from 4800mt to 21600mt in a phased manner over a 3 year period. Current capacity utilisation is close to 100%.
  2. Valiant would become the market leader in India with the enhanced capacity.
  3. The financials appear to be very decent. 5 year PAT CAGR is about 27%, average 5 year ROCE is about 32%, and the ROCE last year is about 50%. The company is debt free, and the payout in 2016 (as per screener.in) is about 70%
  4. The manufacturing facility is fully integrated with almost no dependance on outside factors. The raw materials Chorine gas and phenol are readily available. The location is about 180Km from Mumbai’s Nhava Sheva port
  5. The product has uses in multiple industries - Agrochemicals, pharmaceuticals, dyes, cosmetic and veterinary drugs
  6. The company has the ability to customise its offerings and it even charges a premium for this.
  7. Expansion strategy is to set up a sales and marketing team and to enter new geographies with their existing portfolio. Apparently there a very few players worldwide too

Negatives

  1. Competition is primarily only from Chinese players. More information is needed to understand the threats posed and whether Valiant’s customization, locational advantage, long term relationships etc translates into repeated business and/or some pricing power. As of now the high ROCE provides some solace
  2. High customer concentration risk - 75% business from top 10 customers and high supplier concentration risk - 78% business from top 10 suppliers. However this trend seems to be improving every year
  3. No idea about product substitutes, longevity etc
  4. Very low volumes, restriction on purchase quantity

Since it is a newly listed company and very tiny company, we don’t have much information. It will be great if we can collaborate and do some more digging
Disclosure: Tracking position


Aarti Inds - Techno Funda Pick
(Nityanand) #2

@akja as per my knowledge the company is listed on bse sme exchange and its IPO happened in Oct 2016.
Got to know from news that reliance mf has bought some shares at tiimeof IPO.

Disc: tried to invest but could not do as it was listed on sme exchange. Tracking closely


(Parag) #3

I am not sure to what extent earlier year number can be trusted. It became the public company in Sept 2016, so there is not much public information about the enterprise. Looks like it has a given high return after IPO.

I think Red Hearing prospectus provide more information about it than the company website. The investor section of the website is very primitive, and most of the links in the investor section have no information associated with it.

http://www.bseindia.com/downloads/ipo/201672818241Valiant%20Organics%20Ltd_DP.pdf

In related party transaction section- it lists Aarati Drugs/Aarati Industries. They seem to well known listed player.

Valuation- ON PAT Of 10 cr (approx.) the market cap of the company is150 cr (approx.). So they have a PE of around 15. I think a lot has been factored into the price and PE of 15 is not a cheap in my view.

But overall based on the limited information, it looks promising and worth keeping an eye on.


(Akshay Jain) #4

Thanks for the reply

Nityanandparab - It is possible to buy shares of the company, from experience :slight_smile: I gave an order to my broker and it was executed. But you can only buy small lots at a time
Paragbharambhe - Yes, all my numbers and information is from the IPO prospectus. Why do you say it cant be trusted?? it does provide financial statements for the last 5 years and I assumed the numbers are audited. In terms of valuations, while I don’t claim it is very cheap but we have to factor in for the very high ROCE, debt free status, possible market leadership and the fact that capacity is to expand about 4-5 times in 3 years itself.

I think limited information and lack of clarity can be both a positive and negative. Since all investors are on the same page and there is no informational advantage as such.


(Nityanand) #5

@akja the company is going to expand to 21600mt but from where you got the info that it will become market leader after that. Can you please publish the source


(Akshay Jain) #6

Our Strategies
Increase production capabilities
In focus areas, we have constantly enhanced our production capabilities. We plan to increase our installed capacity from existing 4800 MTPA to 21600MTPA over the period of the next three years. We currently operate at almost full utilizations of our installed capacities. The enhanced capacity will aid our Company in establishing market leadership and increase more customers.

This is from the IPO prospectus. Link has been provided by Parag Bharambe in his post


(Parag) #7

@akja- I do not intend to say there is a fraud. Most of the big companies- listed or private, accounts are audited. For public companies, the accounting rigour is more stringent as many people view the accounts. The same rigour is not essential for the private companies, so it is easier to manipulate the account by being private. Again, I am not saying something is wrong here, I am being cautious and I could be wrong.


(Nirav8) #8

Hi Akshay,
Thanks for posting on Valiant Organics. It certainly looks interesting company. Would be nice if can understand following points…

  1. Why would company raise Rs 21 cr (its offer for sale) at valuation of 7.7x. Interestingly, capex could very well be funded internally once EC is received.

  2. Rationale for proposed merger with Abhilasha tex chem, which will result in close to 60% equity issuance of Valiant Organics. Would be interesting to dig into more about Abhilasha.

  3. Status on Environmental Clearance (EC) for the project. Since its brownfield, construction phase could be much faster.


(Akshay Jain) #9

Hey Nirav

  1. As far as I can understand, capex will be funded internally only. The proceeds will go to the promoters and not to Valiant. Reading between the lines, the company seems to be increasingly focusing on the exports market. At least that’s where the traction seems to be. There is an increase from 30% to 44% in the last one year. They have stated that listing would help create some brand equity, and may help further increase their acceptance and reach etc.

  2. Yes would love to know more about Abhilasha texchem. Could not find much information on it. It will lead to about a 5% promoter dilution (52% to about 47%), at the end of the merger.

  3. Wish i would know more. Have read the IPO prospectus, a couple of articles online and all their official notices to the BSE. Could not find an answer to this and quite a few other questions I have at this stage :slight_smile:


(Vivek Gautam) #10

Valiant Organics seems a decent bet as it was the first SME IPO where a reputed MF like Reliiance MF invested & they are still invested in it.

“We always look for investment in quality companies and Valiant Organics is one of them. We have applied for shares worth Rs 8 crore in Valiant Organics’ IPO,” Sunil Singhania, CIO for equity investment at Reliance Mutual Fund said.
Valiant Organics is a chemical company with focus on manufacturing and marketing of different types of chlorophenol which has several applications in agro-chemical, pharmaceutical, dyes industries as well as manufacturing of cosmetics and veterinary drugs.

  • Valiant Organics is quite old and is the India’s biggest manufacturer of Chlorophenols whose usage & opp size is constantly increasing .The other maker Gitanjali Ind is a comparatively smaller player.The plant runs at 99% capacity and is now being expanded 4 times but PCB permission is still awaited

  • Company has recently merged Abhilasha Tex chem with it which has broadened its product range .margings seem to be in the same range & promoter stake has come down to 47% from 52 % post merger

  • Co seems to belong to Aarti group but dont know the exact relationship. These all cos were founded by technocrat & competent chemical engineers from UDCT & Bombay University who all belonged to close knit Kutchi community.they seem to have equity stake in each other cos.

  • Mkt cap vs opp size seems attractive. Risk remains threat from China but exports has been increasing constantly inspite of China & now constitute 40% .

  • Dividend seemed good at div yield but not sure if its sustainable as it was increased sharply before IPO which again was priced v cheap at 7 PE & 220 rs in Oct 16.

  • Risk remains single location plant dependency on cholorophenols threat from China & delay in PCB permission

_ Real returns could come once it migrates to main SE in 2 years time

Discl- Invested since IPO & also bought on listing with atleast 2 year POV.


(Parag) #11

The narratives are going great for all Chemical companies listed in India including Valiant Organics. I have heard that India’s Chemical companies have great market ahead of them as Chinese companies are reducing/controlling their output.

Is there any industry analysis done by research houses, which provide more detail on future /opportunities/threats of India’s Chemical Industry?


(Nityanand) #12

@akja missed that point of Market Leadership.

One observation from my side. If valiant can become the market leader in its product segment i.e. Mono-Chlorophenols just by upgrading the plant capacity to 4x then it comes as restriction in terms of his scalability. Views invited.

We need to dig the opportunity size here to get the feel of scalability.

@akja which broker you are using to invest in SME companies. I use ICICI Direct and it is not allowing me to buy shares of SME companies.


(Vivek) #13


(Mute Spectator.) #14

China is not a problem bcoz of two reasons -

  1. Climate change is really a big problem there and Government has started looking it seriously.
    companies has to comply more of regulations and specially in chemical sector many companies have closed there operations.
  2. Labor cost arbitrage is not there at all , Chinese workers are not cheap anymore we have now significant advantage over china in terms of labor cost.

If you look at the financial and very nice Capex plan i don’t see if there is any better chemical play there, Also there is a Auditor report in the company website related to merger , which has very detailed information realated to Debt and Assets on balance sheet.
http://www.valiantorganics.com/amalgamation.php

Best part is the merger happen at very fair valuation and diversification into the pigment chemical will mitigate the risks of client concentration.

Plus the raw material procurement is from Arti and Arti has substantial stake in the company.
Arti promoters have proven track record in terms of integrity and ability. No wonder why Reliance MF (sunil singhania) bought the 2% in the company.


(Vivek Gautam) #15

Many thanks for the informative post. In small co 90% bet is on promoter & technocrat Kutchi promoters of Valiant knows the business like the back of their hand it seems.Remaining bet is on sector & tailwinds is there for the Sector. Valiant profitability also seems to be very high.

Any update on PCB permission which could be a big trigger?

Valiant has been supplying chlorophenod to my friend company for last 10 years. Feedback on product quality id good.


#17

Disagree here! I think anti-globalisation trend will impact large scale shifting of jobs. Niche small scale chemicals will always remain unaffected from protection. If you look at Specialty chem sector, Germany is the largest exporter of Chemicals in the world not because cost base is low. They have expertise attained over a period of time and also ability to manage huge SKUs. Overall, IP based industries either in services or Manufacturing will largely remain unaffected.


(Mute Spectator.) #18

All that is true but if develop countries start shutting down their market for outsiders i am not sure how IP based export industries will not get affected.


(Mute Spectator.) #19

If this theme will play out then its good for valiant too …


(Mute Spectator.) #20

With reference to the earlier announcement having reference number VOL/B-1/2016/12 dated 27th April, 2017, the Board Meeting of the Company which was scheduled to be held on 6th May, 2017, due to unavoidable circumstances stands postponed and is rescheduled on 10th May, 2017.
http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/14bbcb12-b9e2-4eee-9b6e-af1fc2a9300f.pdf


(Mute Spectator.) #21

Nothing special in result have to wait for balance sheet for Capex related information , great news is
Appointed Shri Chandrakant Vallabhaji Gogri as an additional Director in the category of Non – Executive Director.
and
resignation of Shri Vicky Hemchand Gala, Non – Executive Director shows good corporate governance practice. This is rare to my experience specially in small/ mid cap space where despite family members not attending any board meetings remain the member of board and draw money as a salary yoy.

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/5c521d14-df9b-4cb2-b3fc-671f01bbc2d0.pdf

So, far i have been very impressed with the corporate governance and transpiration shown by the company and more than numbers QoQ or YoY i prefer these things as these company really generate great value for the shareholders in long term.

and not disappointed with the dividend either.

The company was planning to increase installed capacity from existing 4800 MTPA to 21,600 MTPA over the period of the next three years. Currently the company operates with full capacity (99+%). The enhanced capacity will aid company in establishing market leadership and increase more customers, It will be interesting to see in annual report how of that Capex has gone through.
Considering high ROCE the company has maintained over the years i believe we will start seeing fruits of Capex done last year in coming years .

Lets see … its been great journey so far.