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VIVID GLOBAL IND Ltd - a small cap stock with consistently high RoE

A Small Cap that is performing consistantly

As per investment mantras of accomplished investment gurus like Basanth Maheshwari (The Thoughtful Investor), investors should focus on small capitalized companies that are leaders in their sectors and growing their revenues at fast clip, preferably with growing dividend yield.
One small cap company I noticed fulfilling this criteria is Vivid Global Ind Ltd.
It is in a sector where most of the companies are making new 52 week highs i.e Specialty Chemicals
In case of a small cap stock, the first thing we want to be assured is the quality of Management.
For ensuring this we generally do not have much information except the historical figures
of its earnings and return ratios.
As per the experts (The Thoughtful Investor), a company that has grown revenues at a steady rate for a long periods of time without taking too much debt while generating a high degree of ROE and by keeping a reasonable payment rate will essentially have a honest and effective Management.
The return ratios of the company during the last 10 years are

Compounded Sales Growth
10 Years: 21.84%
5 Years: 15.5%
3 Years: 20.11%
TTM:12.35%

Compounded Profit Growth
5 Years:16.84%
3 Years:40.94%
TTM:78.79%

Return on Equity
10 Years:22.37%
5 Years:23.18%
3 Years:29.1%
TTM:26.49%
A business that generates high ROE consistently for long periods is most likely a good business.

Few more thing that gives confidence about the Management are
Negligible equity dilution over a period of ten years.
Consistent increase in promoters stake over the years

Coming to the specifics, 2012-13 was the turn around year for the company. The company has concentrated on few products and almost 90% of the India’s export of Phenyl J.Acid is being done by the Company.
The Company has established facilities for various grades of Tobias Acids and commenced production of Tobias Acid and Sulpho Tobias Acid at its Boisar Plant. The company claims that it is 1st plant of Tobias acid in India.

The return on assets of the company has increased consistently from (-) 2.5% in 2012 to 9.93% in 2016. Concentration on few customer specific products may be the reason behind such a performance.

The company recently announced establishment of facilities for commercial production of additional capacity of Tobias Acid 98% from March 2017.
Exports constitutes about 43 % of Sales
With capacity expansion, the margins are likely to be expanded as the company is the only manufacturer in India and benefits of volume expansion kicks in. Again as per experts (The Thoughtful Investor), once a company experiences margin expansion with above average revenue growth, the price earning ratio expands resulting in a disproportionately high gain for initial investors.
The negative side of the company that I noticed are as follows

  1. Low liquidity and entry and exit at fair prices may be difficult.
  2. Buying a stock at a time when the company in cyclical industry is doing well may be a risk as the end of cycle may be near.
  3. Volatility in currency and Crude prices may be another risk
    4 Paying high PE for a small cap may be a risk.
    But trying to find the best business at the lowest valuation is an exercise that remains unfulfilled almost all the time (The Thoughtful Investor)

The figures are taken from company website, annual reports and Screener.in

It is not a recommendation to invest. Further inputs and analysis by the experts on the board will give a 360 degree view of the company, the industry and will greatly help in understanding the investment worthiness or otherwise of the company.
The Company is listed only in BSE, the price on 01.02.2017 is Rs.43.30 and the market cap is Rs.39.53 crore.
In the budget corporate tax was reduced to 25% for the companies with less than Rs. 50 crore turnover. Since the turnover of the company is less than Rs. 50 crore it will benefit the company, I guess.

Things to watch out for: Company to declare the quarterly results on 03.02.2017.

Disclosure: Invested and my views may be biased. The stock forms 5% of the portfolio.

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Its raw material J Acid is in severe short supply. This may impact production and/or margin. Please check.

The company performed well over longer periods. The RM prices and shortages are temporary abbarations. I am looking at the company from a longer term perspective. However, the quarterly results to be announced tomorrow may give a clue about the road ahead.

Company has recently did expansion and their gross block is increased by just Rs.2 crs. so I would like to know what kind of expansion they have done with such a small amount and what are the reasons for their competitors are not getting into this business when it is generating such a fabulous RoE and need small amount of fixed assets?

Thanks

Prashant

Not invested. on Radar

I guess the products are specialty products and customer stickiness may be the reason for having good ROE and not having competition. This is fair to assume this way as there is nothing to doubt the reported figures. The company is paying dividends and taxes.
Results update:
http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/1EB449CE_3F0A_44AC_8B91_CEC08DF70724_174802.pdf
Company has announced very good results today 03.02.2017.
The sales for nine months FY17 was Rs.25.90 cr against Rs.19.96 in FY16 and PAT was Rs.1.25 cr against Rs.0.71 cr
The EPS for nine months was Rs.1.37 against Rs.0.80
I recon it is very good showing.

As a carollery to the severe shortage of J acid, the output i.e .the final product should also be in short supply negating the adverse effect. The company posted decent set of numbers, it seems that the company has handled the perceived shortage well.
The concern I have about the company is the size of addressable market. It appears that the company has many products contributing in small quantities. It can be its strength as competition from other organised players would be limited as well as a weakness as it will not have scope to expand to a reasonable scale. If somebody can through some light on this it will be helpful. Thank you.

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promoters have bought 2.58 lakh shares of the company from open market since March 16 taking their holidng above 50 percent.
also in AR 16 they talk about preferential allotment of 22 lakh shares for expansion,as the company is plannong to expand its operations, business and activities. this allotment did not take place
I am planning to talk to the company or send a mail to have some of my questions answered by the company.

  1. What is the global and Indian demand for the products of the company, capacties of the company and hence how much market share they have captured?
  2. Major competitors of the company , especially understand the Chinese competition , and how does the company plan to differentiate itself.
  3. RM sources of the company.
  4. Rough projection for the next 3 years or a rough idea of the vision of the company moving forward.
  5. Entry barrier into the business , how difficult is to develop the process for making dye intermediates?

if there are any more questions which need to be answered let me know.

Disc - Not invested

You have chalked out very pertinent questions. I would like to supplement one more question relating to the Group Companies,
In companies website they have mentioned that “60% of N.Methyl J.Acid exports is also done by our Group”.
What is this group company, why they are operating separate companies, what is the interest of promoters in the group company, is it not conflicting the interests of share holders in listed company, is there any possibility of consolidating the group companies in future.
Thank you

had a great chat with the director Mr. Mody. Highlights of the discussuion

  1. have got government permission of manufacturing 240 tonnes /month of Tobias Acid and S tobias Acid in the Tarapur Plant. They have developed a Tobias Acid of purity 98% compared to the traditional 97 percent. Most of the demand for this new product will be outside India.There is no fear of Chinese Competetion in this new product. they are planning to reach that target of 240 tonnes per month in phases. first 120 tonnes per month the capex incurred will be not much - hardly 3 -4 cr.
    for the next phase of 120 ton /month it will be a state of art plant. capex will be 10-12 cr as they will be constructing a building , and then putting in machinery. there can be a case of fresh equity being raised for this project. The company has decided to not do any preferential allotment in the future.
    The demand for Tobias Acid - 450 ton /month in India and Sulfo tobias is 700 ton /month .
    the users of tobias acid have to import 17 tons at a time from China if they want to make the purchase cheaper than the company. This is far above the average requirements of the clients of 2- 5 tons at a time.

Average realisation of this product is Rs. 250/kg , which is on the increase nowadays as the Chinese have started increasing their prices.
Tobias
Now Tobias Acid is a backward integrated product. It is used to make their RM( J acid) for the other products at the Vapi Plant . The Vapi Plant is a zero liquid discharge plant. The capacity for this plant are 480- 500 tonnes per annum .
Products at the Vapi Plant are as follows -
Di J acid - 4- 5 tonnes per month are produced
Only producer in the world for this product. wont see any growth in this product. Realizations for this product are more than Rs.1200 / kg.

PH Jacid- 10-11 tons/month . can increase its capacity to 20 - 25 tons /month.

NM J acid- 10 - 11 tons / month. This can be an area of future growth .
Realization in this product are roughly around Rs.1000 /kg.

Mr. Moody feels that there is not much Chinese competetion in the products made in the Vapi Plant as these products are speciality chemicals.There are no expansion plans of the plant as such .
Based on the figure of 500 ton/annum given i think that the Vapi plant is underutilised.

As per the doubt regarding the group company is concerned he said that they will merge that company into vivid global in the coming future. But he did not give any details on how much the company will be valued or how much the promoters stake will increase after the merger.

The company is in the process of backward integrating right now. This will also solve the problem of their RM J acid being in short supply as highlighted in the comments above.

As far as the entry barrier is concerned the government not giving consent for a new plant is the highest in this business. It takes normally 1-2 years to get a government consent and then again 1 year to set up a plant. The market for the product can change a lot after 2 -3 years , it is difficult to predict. So there is definitely a first mover advantage for the company.

So lets have some rough calculations

for FY 18.

tobias acid plus s tobia acid will be 120 tons/month = Rs. 3 cr /month = Rs .36 cr/ annum
Revenue from the Vapi Plant = Rs. 40 cr /annum

So without any equity dilutions are additional loan requirements i see that turnover of the company doubling in FY 18. At an OPM of 10 percent , EBITDA of 7.5 cr is achievable.
PBT = 6.5 cr.( 60 lakh dep + 40 lakh inter) , PAT = 4.5 cr.

Looks like 3 times from TTM.

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also if any one is from Mumbai or surrounding regions we can see the Vapi or Tarapur Plant , the management will look forward to our visit.

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Good effort,
Thank you

Yes Shikar, your assumption on 3x improvement is correct. for further info…

This is recommended by smallcapvaluefind when trading @8rs vs current 53rs…

http://smallcapvaluefind.blogspot.in/2016/04/vivid-global-industries-limited-new.html

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Any idea why sales growth was babrely kept up in FY 15 and FY 16, its 27.5 and 26.9 cr, YOY basis 0.1% and -2.3%,

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Any one visited the plant or management ? Also do we know if the company started the production of Tobias Acid 98% and increase of capacity of Tobias acid /Sufo Tobias Acid in March as mentioned in Dec results ?

Disclosure: Invested close to 9% of PF ~40.00

Hi Shikar and All,
Any update on tarapur plan operation? stock has came down from 55 to 42 any special reason? what will be impact of merger on share price?

Disc: Not invested but thinking to enter.

Regards,
Jagdish

There seems to be good YoY and QoQ results.

hi @nagesh_reddy it would be interesting to hear your views on the results.

Results - Very Good

http://www.bseindia.com/xml-data/corpfiling/AttachLive/818220d6-1700-408e-bd6a-38c90c7e4e03.pdf

Y on Y comparison

Sales - 9.98 Crores vs 6.18 crores
Expenses - 9.09 Crores vs 5.76 Crores
Profit before tax - 0.75 Crore vs 0.35 crore
Tax 19.57 L vs 11.56 L
Net Profit 55.70 L vs 23.41 L
EPS 0.61 vs 0.26

Disc: ~1.5 % of PF @ average cost of 37.5

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Results seems to be outstanding, but its not reflecting in the share price. Is there something wrong with company, which I am not able to visualize.

The reserve on screener shown in negative, what does this mean ? Does some one owe money to the company

Reserve is generally the total of all the profits earned & retained by the company over its lifetime. As you can see its negative but seems to be reducing.

1 Like