20 Microns - potential multibagger

Stock Opportunities Untested - but worth a good look
1

Hi,
I would like initiate a discussion on 20 Microns Ltd, a specialty inorganic chemical company. It’s a 160 crores Mcap company with annual revenue of 410 crores and has EBITDA margin in the range of 13%-14%. It has seven manufacturing facilities and sizable part of revenue is derived from domestic market. For more detail about the business one can visit the website - http://www.20microns.com/ 17

Historical sales and profit
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End Markets:
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In paints and coatings they have come up with a prodcut named Lithoma which is somewhat substitute for TiO2. TiO2 is a key raw material for paint companies, but the prices are very volatilie and supply of TiO2 is unpredictable.

Asset Base
9 captive mines that has mineral reserves for 25 years
- Annual sales is 4 lakh tonnes while mineral reserve is 100 lakhs tonnes

Geographical diversity; Export market -14%, domestic: 86%

Key customers: ITC, Pidilite, Asian Paints, Berger, Akzo Nobel, nerolac,

Competitive Advantage - Niche specialty chemical player with no major competition, good entry barrier given long term mining leases. consistent growth in revenue and profit in recent historical years.

Valuation:
(all figures in crores)
EBITDA of about 55, Mcap -160 + debt of 130 resulting in EV/EBITDA of around 5.3x, manageable. This is comparison of specialty chemicals EV/EBITDA of 10x-12x

Growth Opportunity and Key triggers:

  1. Consumption play like paints and coatings, food ingredients (though I dont have exact break up)
  2. Reduced Debt to 130 from 155 in last two years
  3. Started generating free cash flows

Negatives

  1. Promoters holding at around 43%, of which 55% are pledged
  2. Debt seems to be slightly on the higher side = Debt to EBITDA = roughhly 2.5x
  3. No major investors as of now

Conclusions
Seems to be undiscovered story with reasonable degree of moat around the business, no direct competition, multiple use of the products and hence no concentration risk in terms of products or customers.

Would be great to get the views/opinions of the member in the forum, given their expertise and profound knowledge of the subject, thanks!

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3

Hii

We r working in a same sector it has a good reputation in mining industry and they r known for their innovations .
I request forum members to have look at numbers and pls share ur views .
I know the senior management and promotors of the company since long time.

Disclosure: Not invested tracking position

4 Likes
4

Thanks for the update…
Are you working in 20 microns or any of the company to which it supplies the products.

Furthermore, if you could clarify, what do you exactly infer to in greater detail about their reputation.

Also, your detail view on the promoter and senior management will be greatly appreciated as you have the right source of info (being closer to that industry), thanks!

5

As starting point … I can find below points from Screener
Cons:

  • Though the company is reporting repeated profits, it is not paying out dividend

  • Company has low interest coverage ratio.

  • Promoter’s stake has decreased

  • The company has delivered a poor growth of 6.42% over past five years.

  • Company has a low return on equity of 7.42% for last 3 years.

  • Promoters have pledged 55.56% of their holding

7

The company seems to be generating decent Cash Flows, but I’m not sure why they’re not making an active effort to repay Debt (Paying off 5%-10% of Debt is nothing, when the D/E is 1.50).

We can clearly see that Interest Expense is almost 50% of Operating Profit. So Debt seems to be a very big red flag here. This is especially alarming in the light that the company has a ‘D’ rating for both its Long Term and Short Term loans from ICRA. A ‘D’ Rating indicates an almost-insolvent level of operations: https://www.icra.in/Rating/CreditRatingScale

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8

On D rating - I think that was in 2014, when their Debt to EBITDA or interest coverage was quite sub-standard. The company seems to have moved beyond that point. The EBITDA has doubled to closer to 60 crores from 2014 level of about 30 crores. The Debt has remained at same level.
Though there is scope to reduce debt levels, it does not seems to be an alarming factor with Debt to EBITDA of about 2.4x. I personaly believe Debt to EBITDA is a much better measure than D/E.

As I mentioned earlier they have been investing in the business and hence we saw modest debt reduction in last two years.

1 Like
10

Results are out today…a satisfactory one…substantial increase in profits YoY and modest increase QoQ.
FY 2018 financials/valuations (in crores)
Revenue: 434
EBITDA: 62 (margin 14.3%)
Net Income: 19
EV/EBITDA: 4.7x
PE: 9x

  1. Debt has come down to 119 cr…EBITDA margin has been continuously on the uptrend in last few years (_please note that lower crude oil prices has no contribution in improvement in EBITDA margin, as this is inorganic chemical)…
    Company has announced dividend, i guess for the first time
  2. Will analyse the cash flow statement post filing of annual report.

Will really appreciate the views of the fellow members.

1 Like
11

The promoter holding has reduced but in a television interview, management claimed that they are restructuring the promoter holding and will soon will see an increase.
On high debts, they are re-negotiating with the banks and credit rating agencies to reduce the Interest costs which is at 12% right now.

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12

Could you please let us know the source of this info, thanks.

14

Seems the company is very good in containing the expenses. The growth is a bit slow, but stable. Generally follows the trend, and it looks to be a good long term bet.

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Disc: Tracking, might initiate a position soon

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15

Indeed very good company and Q1 results also good…
Company generates decent cash flows but something is still missing, the way stock price behaves makes u less confident to go and buy the stock.
May be long term debt or tax figures !!

16

Note: Below observation is purely from the historical figures.

The debt to equity ratio is slowly reducing over the last decade. Current ratio has improved a bit.

I don’t see a significant reduction in debt going forward given that their ROA has been hovering around 4% max. On the other hand, the debt would likely increase to acquire new assets as this is a capital intensive business.

What really matters in this company is their consistent earning growths, a very stable margin and pricing power.

Sources for historical ratios:

http://www.ratestar.in/company/20microns/533022/20-Microns-Ltd-207635

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17


EARNINGS CALL TRANSCRIPT


INVESTOR PRESENTATION AND QUARTER RESULTS

18

As i said earlier we are in same business of processing industrial minerals and i know the management i could be wrong but my initial assumption about the company is:-

In last 30 years of their existence they have created a unique products portfolio consists of:-
1)Industrial Minerals
Calcium Carbonate
Dolomite
Muscovite Mica
Silica/ Quartz
Natural Baryte
Talc
Hydrous Kaolin
Calcined Kaolin
Feldspar/ Nepheline
Syenite
Natural Red Oxide

2)and Specialty Chemicals & Functional Additives

first one contributes 90% and second less than 10% to their revenue.

Another thing is Diversification and client concentration.
Calcium Carbonate,Dolomite,Silica/ Quartz and Kaoline generates 80% of their revenue and this are not the rare minerals at all.
According to me its a Grinding company they simply grind the minerals according to clients sizing requirements in some cases they do calcination or pass the material thru rotary kiln.

Asian paints ,Nerolac ,Pidilite and ITC contributes 60% and Berger,Finolex ,Kajaria and some cable companies contributes another 30% of their revenues.

So whatever words(Like speciality and inorganic chemicals) they use but they are industrial minerals processor.
So market will gives valuations accordingly so dont expect it to be >15pe stock.

Disc.:- Not Invested

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19

I attended the AGM of 20 microns dated 25th September, 2020 and want to share the notes/ takeaway’s after attending the AGM, this article is mainly to highlight management quality which I think needs to examined & studied more.

(I had taken only 20 micron’s AGM part from my blog article
https://stockactivist.blogspot.com/2020/09/AGMupdates.html)

The meeting started at 3:00 p.m. and all formalities such as reading out resolutions, reading comments from independent auditors report, confirming quorum and then chairman speech was done.

Now came speakers turn to ask questions only 3 speakers were there.

First 2 speaker asked following questions

What is impact of covid on business?
Why operating margins were down?
Why press release was not being published on exchanges along with results?
What is the market share of 20 microns in the industry and what is revenue share?
What is finance cost?
What are the plans for IPO of 20 microns Nano?

Answer:

Covid has impacted business and our revenues have definitely been affected from this

Operating margins were down due to transferring high margin business in 20 microns Nano to streamline the process.

Due to covid this year we are not attaching press release, next financial year onwards we shall restart the practice of publishing press releases as well.

20 microns is the leader in the market of micronized minerals
(Also revenue breakup from each segment was given)

The finance cost currently stand at 12%, we are in talks with lenders to bring it below 10%.

We have no plans of IPO for 20 microns Nano due to bad market conditions, we may consider it next year.

Now afterwards I asked my questions
(Which were already emailed to them as per their request.)

  1. What is the finance cost? They already had answered that as 12%

  2. What is this note number 40.2(b) (page no.98) what is this 1 crore lenders are asking in exchange of permission to pay dividends?

Answer) this is the Adhoc recompensation amount we had to pay as 1 crore to prove to SBI (lender) that we have the intention to pay back 8 crores of amount.

(I did not understood it the first time and even after clarification why you would pay 1 crore rupees to pay 2 crores as dividend, why not clear 8 crores of loan in the first place? Also as a layman I would wonder what does ‘adhoc recompensation amount’ means… Thankfully we can google it…but it’s a red flag for me.)

  1. 20 microns has launched very innovative and disruptive products such as micronsil 30c, I had seen it on YouTube, and so have you patented your product?

Answer) we have not patented that product, also due to IP rules in India it was not appealing for us to do so, but now the rules are better. also in future we have some innovative products which could be patented.

(They made high claims in their YouTube video about the ability of product but no patent? (Red flag) so anyone else can also manufacture and produce this product going forward.)

  1. 38% of revenue come from only 2 clients/customers how do you plan to diversify your customer base?

(No answer was given)

  1. Cash flow and valuation:
    We have 38 crores of operating profit, but if we deduct 13 crores of investing cash flow, and 20 crores of finance expense only 5 crores of free cash flow remains.

This is a big concern as finance cost is very huge (it makes 20% of current market cap)
How do we plan to improve these figures?

(No answer was given)

  1. What is the business like in herbal division as i see a lot of potential in it (I asked a general view on it?)

Answer) we have been launching products it may take some time to pick up as currently we are only doing online sales as online is the future.

  1. I had written in email about suggestion on improving the website further.

Answer) we had developed website in-house using 2 to 3 people, but now we are hiring professionals to do this job and in coming time you will see the improved version of website.

I was waiting for answer on cash flows, but then I was muted and company secretary of 20 microns Anuja muley started the formalites to end the AGM.

My views: important question on cash flow was ignored and not answered, this is how management ignores tough question,

I felt bad on not getting answer even when they had my email before hand to answer me appropriately, then what was the use of sending email? Huh?

I was not impressed by the management at the AGM, hence my views could be biased against the company and I wish there would be better communication so I could get clarification and answers to my question.

Conclusion:

The company has great products with great potential, but due to my experience in the AGM, I am not so positive about the company, let the things improve:

In terms of reduction of debt, more free cash flows, more patents being filled and more sales in herbal division

My views on the:
Company: neutral
Management: neutral

Meeting ended around 3:40 p.m.

note:

  1. i am invested in the stock (for study and tracking)
  2. my post was to highlight the quality of management, i am not satisfied with them currently would need further investigation.
  3. may seem a value pick but if we look at cash flow statements they dont look great at all (financials also needs to be investigated further)
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20

Any new update on the company ?

Anyone has met the management ?

21

Dec 2020 Qtr interest component increased substantially (5Cr to 11Cr), any specific reason?

22

Market seemed to have punished this stock a bit harshly after the earnings fell by 40%. The mgmt attributed this to “slowdown in the consumer activity led by macro-economic and weather-related
challenges resulting in lower offtake for our products in various industries”.

Need to watch how the earnings pick up in next quarter as mgmt is positive for upcoming quarter.

Disc: Invested. Accumulated a bit more after the fall.

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23

Reasonable results posted by the company.

https://www.bseindia.com/xml-data/corpfiling/AttachLive/202e2fff-8cfe-4241-87ad-a515cafb54a2.pdf

Earning update presentation is also ok

the stock is cheap and with paint industry expected to do reasonable going forward. This stock can be worth a watch.

Moreover when we met the management during the last AGM we had requested them to give dividend and after 3 yrs they have declared 0.75 per share which is a good sign IMHO.

3 Likes
24

I support all the research and hard work you guys have done in order to filter down the stocks, but what happens in the long run is, most of these companies with even a good track record dusts off due to n number of problems, it’s too hard to guess to be honest in this sector. Have you guys faced something similar?