Hi,
APL seemed like a good company (few pointers on what I like about it at the end) to begin with however a further look into historical numbers and annual reports raises some questions on sustainable quality of the business. Laying out my questions/comments here -
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Cash flow generation has been poor over last decade (cumulative CFO/PAT is 0.4x)
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Looks like high dependence on oil & gas sector (I could be wrong here since management does not provide industry wise sales mix but reading through last 10 annual reports that is the impression i got) which is very cyclical in nature. So we should be well aware that it is more of a cyclical story than secular growth story. And future outlook of oil & gas industry is very difficult to predict. This cyclical aspect is also visible through return on capital/net worth profile of business over last decade.
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Last ten years history of gross margins (21% - 37%) indicates that there is less pricing power. Clients are able to get better pricing terms either because of consolidation at their end (less number of total buyers in industry) or may be there is high competition. Companies such as Dharamsi Morarji, Alkyl Amines and NGL give more comfort on this parameter.
Things which are interesting about APL -
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Management’s focus on new chemicals to enhance their market opportunity is very commendable. Almost every year they come up with some thing new that too across industries.
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Historically company had heavy debt but the same has changed since FY17. Debt ratios improved meaningfully only over last 2.5 years; an unlevered balance sheet provides more headroom to grow in case opportunities arise
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market leadership and long term relationship with key clients
Would love to have counter views on the points above.
Best
Rajat