Asahi Songwon - Steady Performer

Stock Opportunities Untested - but worth a good look
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Introduction:

  • Asahi Songwon Limited is a Gujarat based company and is involved in manufacturing of pigments (Green-7 / CPC Beta Blue and Blue Crude). These products are used in various industries viz. ink, paper, paints, food, fabrics, etc.
  • Company’s clientele comprises global giants like DIC (Japan), Sun Chemicals (USA), Clariant Chemical India Ltd. and BASF (Korea).
  • Although one shouldn’t rely on this, but, one notable observation is that (source FY13-14 AR) : 76% of the Company’s revenues were derived from customers who have been working with the company for more than five years.
    Company website

Financial Summary:
Current Market Cap: Rs. 177.5 crore
CMP: Rs. 140
Book Value Per Share: Rs. 120
FY 14-15 Sales Turnover: Rs. 258 crore
FY 14-15 EBITDA: Rs. 38 crore
FY 14-15 Net Profit: Rs. 17.72 crore
Debt Equity Ratio: 0.5
P/E: Around 10x
Other financials can be found here

Sales CAGR 10 Yrs: 24.62%
Profit CAGR 10 Yrs: 34.00%

Financial figures for FY 12-13 is dismal, as the company went into upgradation of its plant. Below is the answer for the same given by the management in its AR.
“Over the 12 months leading towards the close of 2012-13, the Company invested Rs. 29.70 crore in capital expenditure, of which a sizeable Rs. 13.93 crore was deployed in environment treatment assets and infrastructure. The usual capex in capacity over the years had been productive, enabling the Company to generate an increase in throughput that translated into enhanced revenues and profits. However, the sizeable investment in environment protecting assets did not generate any increase in revenues (though this is expected to generate repeat and growing business over the foreseeable future), which reduced the Company’s cushion against probable cost increases or price declines.”

During the above mentioned period, there were instances where other companies into similar industry were forced to shut down their plants as they weren’t emission compliant as per GPCB (Gujarat Pollution Control Board).

In the following year, which is FY 13-14, the company bounced back with clocking turnover of Rs. 302 crore and NP of Rs. 14.59 crore. However, the EBITDA margin stood at 12.81%, which is lower than their past EBITDA margins (of 15-19%). I could not find the reason for the same. Company raised debt in the same year to install/upgrade water treatment plant.

Also, in FY 14-15, their sales have decreased from Rs. 302 cr in previous year to Rs. 258 cr. Eagerly awaiting latest AR to ascertain the reason for the same.

Management Quality:
No red flags observed as of now. Need to dig further.

Key Observations:

  1. Company enjoys good EBITDA margins despite being in a commodity type business. This may be due to less competition in similar grade (quality) of pigments they manufacture.
  2. Have consistently increased sales and profit margins. (except as discussed above)
  3. Decent return ratios
  4. Available at decent valuations when compared to past growth. (Only if growth is observed in long term) :wink:

Key Points To Be Worked Upon:

  1. Need to ascertain what impact can raw materials have on its products. Crude Oil or its derivatives are their prime raw material.
  2. Company’s bargaining power - buyer and supplier.
  3. To analyse operational performance of the company - Asset Turnover, Inventory Turnover, etc.
  4. Cash flow analysis - Net Profit to Free Cash Flow, etc.
  5. Capacity utilization / Capacity upgradation / Capex plans.

I understand that my analysis is at a nascent stage and I need to dig deeper. I request all forum members to join me to work together on this. Also, feel free to let me know if I have made a mistake or incorrectly observed anything. Thanks in advance! :smile:

Apologies for a long post.

Disclosure:
I have borrowed this idea from Dr. Vijay Malik’s blog.
I currently have no position in this company. However, I may take a small/large position. This is not a recommendation to buy/sell. Kindly do your own research or take wise consultation before buying/selling.

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Other notable points observed in one of their AR are as follows: (Text in italic format is highlighted to understand the company’s strengths/weaknesses)

Risks & its Mitigation:

Industry Risk: The business may cease to be attractive
• Global volume demand for pigments is expected to keep growing 4% annually by 2018.
• The global market for pigments is expected to grow to $11.7 billion by 2018. The global pigments market is projected to grow at a CAGR of 4.5% from 2013 to 2018.
• The role of organized players such as Asahi Songwon is growing as rigorous quality, performance and environmental standards are being enforced.
• Phthalocyanine pigments account for 60 per cent of the world’s organic pigment market.
• The demand for phthalocyanine pigments is catalysed by a range of sectors like printing, paints, plastics, automobile coatings and textiles. - Proves that the company’s products do not rely on demand from just one industry or product.

Strategy Risk - Intense competition and strategic errors could result in a loss in market share
• Asahi Songwon maintained excellent relationships with its clients.
• Clariant and DIC made strategic equity investments in Asahi Songwon.
• 76% of the Company’s 2013-14 revenues were derived from sales to international giants.
• The Company’s order book was secured through long-term contracts with large global players across various countries.

Environmental Risk - Increase in stringency of environmental norms might result in the Company being on the back-foot.
• The Company complied with all relevant statutory and environmental requirements. Safety and environmental standards were periodically reviewed and upgraded.
• The consumer preference for ecofriendly products is growing. The Company installed a state-of-the-art emissions and effluent management system.

Technology Risk - Technology might become redundant
• The Company constantly upgraded its manufacturing technology in line with international standards.
• The Company drew on technical support from industry leaders like DIC Japan and Clariant Pigments (Korea) Ltd. to manufacture quality products.
• The Company made investments in ERP for enhanced organizational synergy.

Quality - Consistency Risks - Quality of key products may deteriorate
• The Company prioritized product quality. An inflexible Quality Management System helped to improve quality, reliability and customer-service.
• Stringent quality checks helped moderate production rejection to nil.
• Records of testing of raw material to finished goods were maintained.
• Raw material was mainly imported from stable international vendors.
• Visits were made to suppliers to ensure raw material quality.
• The Company is ISO 9001:2008 certified.
• The R&D department helped enhance efficiency and quality.

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the company demerged the green pigment business into akshar chem and alloted proportionate shares in the latter in the last FY. that is why topline is lower.

according to experts, the chinese authorities are cracking down on polluting industries thus affecting Asahi Songwon’s global competitors. There will thus be a short-term benefit because of this. However in the long term even India will have to tighten norms on polluting businesses like this.

disclosure: holding small quantity

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The company seems to need continuous increase in capital expenditure to the tune of Rs 10-15 crore every other year for increase in revenue and in my opinion also lacks pricing power. The growth rate is 4-5% for the entire pigment industry and so doubt the opportunity size for Asahi unless it develops new products/pigments.

Asahi Songwon derives major revenue from single product CPC Blue which I consider a major risk (though company looking for product diversification). Not to mention there is no significant in-house technology edge for Asahi and the company is constantly looking out to DIC, Clariant for technology support.

Investments from DIC, Clariant cannot be much significant because DIC also has invested in Sudarshan Chemicals which also deals in Dyes & Pigments. Sudarshan Chemicals has also just come out of approx Rs 250 crore capex which might stand in good stead when the economy rebounds.

Disc: Not invested. Analyzing between Sudarshan Chemicals & Asahi Songwon for opportunistic portfolio.

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The company has successfully transformed itself from a commodity chemicals to semi-specialty and specialty products. Its product mix has successfully progressed by value addition, niche explorations and higher realizations. This year the company, launched its first two products after a gap of seven years, the impact of which will be reflected in FY17. The products were cleared by seven of the most demanding global customers; this clearance was validated by attractive commercial orders that have the potential to be the game changer for the company. The demand for its products is buoyant in international markets as many developed countries have banned the production of these hazardous chemicals.

Promoters hold close to 66% of the shares in the company. Clariant Chemical holds close to 3% of the equity and DIC Corporation of Japan hold 7% equity in the company. Recently, the promoters bought close to 3% equity through market purchases and have announced their intention to raise it to 75% in coming years. In the past two years, its margin has risen from 14% to 17% and is likely to reach 19% going forward. The top-line is expected to grow at 15-20% whereas the bottom-line is expected to grow at 25-30%.

Disclosure - Have invested 0.25% of my portfolio in it as a tracking position. Might look to increase position at 200 level. Since it a small company, I do not plan to allot more than 1% of my portfolio in it.

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Googled and found this article on web. http://www.moneylife.in/article/asahi-songwon-vibrant-colours/49855.html
However, it is paid article. Anyone has access to the same?? If yes can they share the details.
Thanks

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Thanks for the update!

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@mg108 since it is a paid online article, it would be a violation to paste it on this forum. @admins pls note.

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i am sorry i was not aware of this. Wouldn’t have asked it in the first place

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@admins Firstly my apologies, if there has been an infringement. Please delete my post. I was simply trying to help with no mala fide intention.

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Promoters seem to be creeping up their holding. Any clues as to what’s triggering this aggregation?

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http://www.moneycontrol.com/news/business/stocks-business/here-are-7-things-you-should-know-about-asahi-songwon-2408359.html

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2016-17 Annual report mentions that they plan to start commercial production in Azo pigements (Orange 64 and yellow 12) in current fiscal. Does anybody know when is it supposed to start and what is the capacity of the same?

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promoter holding has increased by over 4 % in the last few years.
the company seems to be going into more value added products, the co is continuously launching new products.
the company has undrtaken a capex of 50 cr , out of which 35 cr has gone for acquiring a land parcel for setting up specialty pigment plant.
the current margins of the company are on the lower side in the past few years , they are under pressure due to rising crude and rising Pthalic anhydride prices over the the years.
These margins can be expected to bounce back in the future when RM prices stabilize
Disc- Not invested

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Asahi Songwon Colour Ltd 2018 AGM-28/09/19 by Aashav Patel

Products

  • Conventionally, CPC crude is core product, now focusing on Alpha Blue & Beta Blue. Alpha blue was going through ramp up and from this fiscal, would show up in numbers

  • Current utilisations 100% in CPC crude blue(capacity- 10200 tonnes), 70% in Beta blue(capacity-2600 tonnes), 60% in alpha blue by next year(capacity 700 tonnes)

  • Plans to enter into other pigments as well. Maybe yellow, red etc

R&D

  • Historically accepting R&D to be weaker so now focusing on it. Exploring Newer pigments and newer segments for application of the pigments.

  • Purchased 3 R&D Equipments worth 1.25cr recently which only sudarshan chemical has in India

  • Trying to do be better at plastic segment as Ink segment is very strong already for us.

  • Govt accredited R&D lab from this year. So now, will get tax benefits on it

Operational

  • Tightening operational expenses to maintain/slightly raise margin despite rising RM scenario

  • Will be getting little aggressive because earlier were too conservative and that leads to lower growth

  • Able to pass on most of the price rise and currency volatility. Books order on Quarterly basis and hedge that much amount.

  • Crude going up hampers margins. Have been able to pass some of it, can’t pass on completely so need to focus on utilisations/volumes.

Financials

  • This Half would be better than previous Half in terms of profits. Expect double digit growth in top-line.

  • Strategic move to operate on lower margin range because want to increase profits in absolute terms by increasing volumes/utilisations.

  • Expect long term margin to be around 14-15%. Margins not going upward of 17% anytime soon.

  • No plans to raise money in excess of 60cr currently. Special Resolution passed just for optionality

Capex

  • Filed 2 EIA because didn’t have EC for anything they wanted to make

  • Filed EC for anything and everything they could make. So, no chance of suddenly huge one time capex

  • Purchased 2 land as strategic move, now no more investment in land for next 5-10yrs

  • Will not exceed 40cr capex/year. Planning 120 cr capex over 3 years. Would start slowly at dahej plant first. Saykha land would be completely optional.

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This is excellent summary. Any idea on how Asahi in particular and pigment industry in general doing right now ?

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