Vidhi’s claim of being “the 3rd largest facility of synthetic food grade dyes globally” makes for a tempting investment thesis. Company has shown consistent sales growth, profit growth, improving margins, capacity additions and rising market share. All the “numbers” look good.
I had a tracking position for some time in this and also attended the AGM.
My impression is that this is a typical small cap company that is all but a proprietary business. Closer scrutiny of the Annual Reports threw out quite a few “irritants”. For example,
- Two directors Vijay Atre & Praful Shah are 93 & 84 years old respectively.
- There is a back to back transaction of taking a loan from Baja Allianz Insurance Company and buying 10 insurance policies from the same company.
- Some debtors are more than 365 days past due but still provision is made only for 10% of the amount.
- A Related Party (Trident Colours and Chemicals) is in similar line of business.
- There are 3 adverse remarks in secretarial audit - delay in uploading Form IEPF, delay in filing Form CHG-4 and renewal of FSSAI license.
These may not be serious individually, but all of them put together leave a bad taste in mouth .
Last year, promoter remuneration increased by a whopping 40%. They have now passed a resolution to allow remuneration in excess of 5% of the Net Profits of the company.
AGM:
At the AGM, one of the shareholders raised an objection to Promoter Remuneration, but the management did not even bother to reply or justify the hike. In his speech, this shareholder also said that he had visited the registered office of the company and wanted to see the register for Related Party Transactions. But it was not shown to him and he was ill-treated (Under Companies Act, the Related Party Transaction register should be open for inspection by any shareholder).
On the positive side,company said 20% margin is sustainable in the long run. Sales in U.S. are growing and margins there are better.
On capacity expansion , capacity will be increased by 4,200 MTPA in two phases of 50-50 each. Arjun Foods which was acquired has 4.5 acres land which will be used for expansion. Capex for this will be Rs.65 crore which will be funded mostly through internal accruals. The new capex will give an Asset Turnover of 1:6. The project can go on stream in 12 months after getting environmental clearance. Demand is not a problem.
At the time of AGM, company was waiting for environmental clearance from Maharashtra Government. I am not sure if it has come through by now, but the management told me they will intimate the stock exchanges when the clearance comes through.
Conclusion:
Despite all this, my impression is that the promoters lack the professionalism and vision to make it big. Besides, the size of the opportunity is too small for institutional investors to show any interest in the stock in its present form. In fact, small market size is the reason why Vidhi is no.3 in the world - no Chinese or other large players are interested in the business. There is no indication that Sensient is interested in buying the company, and just hoping for it cannot form an investment thesis.
On plans to enter natural colours, Mr. Mihir Manek said there are no such plans on the cards. I asked him why, and he said this (synthetic colours) itself is a large market waiting to be tapped.
I think stocks like these will move in line with the increase in their capacity and earnings, and the general market mood towards small caps. But I don’t see a future Vinati Organics here. More importantly, I do not get the comfort to take a large position due to promoter quality. And keeping a small position doesn’t make sense as the portfolio becomes needlessly bloated.
Company passed my quantitative filters but failed at qualitative ones. I have exited completely and no longer track it, but I thought I will write this since some of you have shown interest. I may be wrong, so please do your own due diligence.
