Chembond Chemicals- A Perfect Misvalued Bet

[Anant]

Chembond’s annual report is out and can be accessed from:

Chembond%20Chemicals%20Limited%20-%20Annual%20Report%202018.pdf

What is interesting in this year’s annual report is a lot of R&D/Incubation projects are closer to fructification. The company has not provided a segment wise sales numbers which it does in the presentation but some interesting excerpts/inferences are:

Water

Water business is bread and butter of the company and it looks like it will continue to chug along nicely.

Construction

This should do well due to the ongoing infra push but is a relatively smaller part of the business.

Biotech

The animal nutrition business had a strong second half (also evident from Q3 presentation). The key developments here are:

• Creating an India wide sales force
• Launch of newer products and addition of newer accounts (probably institutional customers).
• The most interesting commentary here is the following:

The development activities in the areas of enzymes and probiotics for varied applications, in addition to animal health continues. In this context, six different microbial strains for nitrogen and sulphur metabolism have been delivered

The above is like pushing the envelope further in enzymes and moving into more areas (industrial/human?).

Industrial Technologies

This segment has shown fantastic growth both organic and inorganic (Pheroze Sethna acquisition). The adhesives business has doubled and Industrial coating grown by 60%. This segment could also grow significantly due to the toll manufacturing agreement coming to an end. The toll mfg business was a zero margin business and any freed up capacity could help would allow manufacturing realignment of
the products we make and to allow debottlenecking operations in some businesses.

Chembond Calvatis

The JV seems to have started delivering results this year. From the AR:

On the back of the approval from a major brewing company, the Company started business in the segment
by supplying bottle cleaning products to several of their plants. The Company also developed, and successfully supplies products to the food processing and dairy segments. Team expansion to serve the customers and new application trials are underway to build on sales growth opportunities for the next year. Lubricant and cold disinfectant applications are being explored by the Company

Polymers

This looks to be the most exciting area that the company is in. From the AR:

CPML has fi rmed up plans to scale-up its biobased polyamide production. Polyamides, also known as
Nylons, are a family of thermoplastic polymers that can be melt processed into fi laments, fi lms or shapes for application in various industrial and non-industrial uses. Development work on polyamide 610 and other specialty polyamides, most of which are based on bio-renewable raw materials, was started around 4 years ago.

In the current year this production will be scaled up several notches and we plan to simultaneously commence work on building a plant to global scales. One of your Company’s patented product, developed over three years ago, has been accepted by customers and is being used by them with promised results.

Future Outlook
The scale-up of polymer manufacturing would be a milestone event and has the potential to change the revenue mix of the Company

FInal comments: Over the last many years Chembond has consistently innovated and has created a stream of differentiated and specialized products. This looks like is the year when a lot of hardwork done earlier is starting to pay-off. The Water chemical business and the cash will provide the earnings cushion while rest of the projects stabilize and grow. The animal nutrition business should start becoming sizable and continue with the momentum gained in last two quarters. The Industrial segment should grow fast becuase of Henkel toll moving out and along with Pheroze Sethna clients there could be considerable cross selling and rationalization opportunities. Finally any success in the Polyamide business could create a different company altogether. Interesting times ahead, keeping fingers crossed.

Disc: Chembond forms a significant part of portfolio and the views expressed are biased.

[arsh13]

Any idea why the statutory auditor has resigned after just one year that too after being appointed just last year for 5 years?

[Anant]

No I dont, may be we can drop an email to the CS.

[arsh13]

And while I don’t want to unnecessarily be alarmist, it is pertinent to observe that the Company Secretary / Compliance Officer also quit a few months back - havent been able to track (through LinkedIn) where he has moved on to. Just that with so many other black sheep around, change of both CS/Compliance Officer and Stat Auditor back to back makes one a bit jittery

Disclosure: Evaluating; no holding now or in the past

[Anant]

As expected very good growth in Animal nutrition segment:

this is from this year’s presentation at

https://www.slideshare.net/ChembondChemicals/chembond-chemicals-limited-corporate-presentation-201819

compared to last year where animal nutrition was just 6%. Trading and toll which dont contribute much margin-wise are also down.

https://www.slideshare.net/ChembondChemicals/chembond-chemicals-limited-corporate-presentation-2017

[ashwinidamani]

Isn’t Pidilite very dominant in the water treatment space

[Anant]

Yes Pidilite is and there are more brands like Sica, BASF, FOSROC etc. Chembond is coming up with a lot of newer products but in I do not expect construction segment to be an area where they would focus much. Good part is that they have received a lot of approvals from different agencies and as mentioned in AR they have been very conservative in their client selection and credit terms. Not sure what their long term strategy is but clearly the competition is way ahead.

From their AR

[basumallick]

@Anant

1. Is there any details on the specific chemicals other than the P610? I could not find any specific names for any water chemicals or other products that they produce.

2. Any idea why the company seems to be investing in stocks? They seem to have a holding in some good stocks (Someone in the company is a good investor probably)

[Anant]

The list of products they deal in huge:

Water treatment

Water Treatment Chemicals

Water Treatment Equipments

Bioremediation

Industrial Segment
http://www.chembondcoatings.com/products/structural-coating.asp
http://www.chembondcoatings.com/products/industrial-floor-coating.asp

Animal nutrition:
http://www.chembondanimalhealth.com/poultry-2/
http://www.chembondanimalhealth.com/dairy-2/

Phiroz sethna

Adhesives, Sealants, Coatings for Automotives - Phiroze Sethna Pvt Ltd

http://www.gramosindia.com/en/

Dont have exact reaon as to why there are into direct equity but exposure to direct equity is contained. Most investments are in gilts/MF

[basumallick]

@Anant Thanks for the quick reply. I have looked at these links. Not sure if I missed anything. These sites do not have any specific names.

What I am trying to undertsand is what chemicals are they actually making, as a step towards understanding what is their capability to handle complexity of chemical process. In industrial water treatment, chemicals are mainly few dosing chemicals like lime. Polyelectrolyte, sodium bi-sulphite, sodium-bi- carbonate, Sodium-hypocloride, antiscalant and few types of resins. Not getting such info from their published info.

[Anant]

I haven’t looked deep into products for their Water/Industrial/Coatings related products.

In case of water it is less about the chemicals and more about the solution for the vendor, for example you manage cooling towers or other water treatment facilities of a company by having a company personnel at client site taking care of remediation. This along with some setup costs at the beginning creates entry barriers for newer player. My guess is most chemicals here are commodity. I have heard that besides govt bodies where it is tender based the clients in this business are extremely sticky.

I have not looked deeper into the Industrial or coatings side but my guess is that it would require more knowledge of material science and less of chemistry. Basically how interaction of various materials can produce desired physical properties.

Incase of Animal nutrition they have been able to develop various enzymes like Cellulase, Xylanase, Arabinase, Amylase etc in house, these enzymes are used for breaking up for fibrous intake. What is also very interesting is their development of saccharomyces cerevisiae an enzyme used to maintain rumen ph. Most other animal products are minerals admixtures to complete the product profile.
http://www.chembondanimalhealth.com/products/?SingleProduct=6

[salonihemnani011]

Chembond Chemicals AGM Notes
We are more towards service-oriented specialty chemical companies which has lot of competition from within and outside India. So, whatever threat from China is presumed for this company, is not applicable.

No capacity is required as such. Most of our plants run at a single shift anyways so if required, it can be increased to run at a double shift as well.

Manufacturing Assets are all owned by the parent company. The sales is done via JVs and subsidiaries.

Major RM

• Crude based derivatives
• Castor based derivatives
• Zinc
• Phosphoric acids
• Solvents

30-40% of the water segment is done to public sector where the company cant pass on the increased RM costs and thus cant negotiate on the prices.

Q. Plans to enter into Residential segment in construction chemicals?
A. The company focuses more on infra, highways in construction chemicals. It does not plan to enter residential space as it is crowded by – Dr. Fixit, Asian Paints, etc.

Water Segment
Water Business Segment is the core segment now. It is growing at a good pace but cannot be expected to grow at 30-40%.
R.O. Chemicals – leader in India.
Competitors: Ecolab (Nalco), Ion Exchange, Vasu Chemicals, Thermax etc.

Animal Nutrition Segment
Thoughtful diversification which came around 7-8 years ago when developing Biotech Enzyme. After Workhardt went through a bad phase, the company was left with the product and technology but no one to sell it to. So, it planned to successfully launch on its own. Not much capex is required and the production can be done in existing facilities.

The growth rate is hard to estimate as it is a very cyclical business which is prone to disease spread as well. Generally, the first two quarters will have lower sales as compared to the last two quarter; similar to what was observed in FY 18. As of now, a lot of competition present in this segment from pharma companies.

Polyamide Segment
There are a lot of grades of nylon-based products in this segment. We are in the biobased nylon (specialty polymer). RM of this product is castor-based derivatives. India is one of the major producers of this. One of the major producing states of castor is Gujarat due to which procurement becomes easy for the company.

Each and every product doesn’t require equal amount of work. Once a technology is developed, the company can produce several products with the same modifications.

Uses: Toothpaste – Brisol and Orange Cable sheathing

Approvals required for Polyamide chemicals for the customers to use it. The polyamide business expansion will require clearance but not EC as it will be provided by state-based corporation. It took 3 years to for the development and pilot stage of the plant. Now, the company is ready for the intermediate stage.

Construction Chemicals
The focus is on the bottom line and credit worthiness of the customer. But, it is a very unorganised sector regarding customers. No expansion being made in this segment.

Coatings
Not a very great margin and very competitive field.

Toll Business
The margins for this business are anyways very low in the range of 3%.
Tarapur plant fully available after toll business. All plants are fungible so some products have already been shifted to Tarapur.

Industrial Coatings
Same end customers for sealants, wipes and adhesives.
Calvatis – Hygiene Chemicals for F&B industry. 250 crores market. No exports. A fast-growing industry in India, however small in size.

Insurance of the plants
Plants completely equipped with fire hydrants. Tarapur plant regarded as the best plant in its area.

This is all I could take down…other contributors who attended the AGM… please add on more pointers that you all could note.

Thanks

[rohitbalakrish_]

• Found the company to be interesting overall. The focus of the company seems to be in niche areas which are low on competition and high on profitability. Two focus areas of the company are clean chemistry and bonding materials.
• The company sold their stake to Henkel few years back and has been allocating the capital in a very prudent and thoughtful manner. Small, niche acquisitions, R&D into poly-amides.
• Management believes that the company is in the growing phase and wants to re-deploy the profits into the business.
• Some segments are mature, while others are growing - such as Polyamides and animal nutrition and Pheroze Sethna
• Company doesn’t face any competition from the chinese manfuacturers as they are mainly into niche products. So don’t benefit from the upheaval from the Chinese chemical co’s shut down. Neither will face too much competition
• Main Business units of the company are
o Construction Chemicals
o Water Chemicals
o Animal Nutrition
o Polyamides
o Tolling business - which has ended in Q1 19
• Construction Chemicals
o Company caters to the infrastructure segment and is B2B focused and not B2C like Pidilite. B2C segment is very competitive and very tough to breach
o It has multiple products which cater to multiple industries within construction segment
o Lot of cross-pollination. For eg lot of products developed for water business are now used in construction chemicals, with some tweaks. Vice-versa has also happened.
o Very easy to grow this business, but the company wants to only grow in a profitable manner by working with credit worthy customers.
o Construction chemicals business is very unorganized ; if they grow very fast, they will have to take a lot of write offs, dont want that
• Water Chemicals
o Core focus of the business is on water business, however this business is not going to be growing at 20-30% p.a. type
o Focus in this business is protection against metal corrosion, purification etc
o Largest business at the moment and a market leader in India
o Market size of this business is INR 550 Crores and is growing in a stable fashion. The market is consistently growing even years of downturn.
o One of the only companies to have NSF RO water sealant in India.
o Have references in every segment
o Feel there is a void in the international business, will like to get into export markets also
o Competitors in this business- ECOLAB (NALCO), ION Exchange, Vasu Chemicals (unlisted), Solanes, Thermax
• Polyamides
o Polymer biz is a growing business and capex will happen in this business. New plant will come on stream in the last quarter of FY19 and revenues to start flowing in FY20
o It will be the only company to make poly-amides in India. The marekt for poly-amides in India is already big
o Focusong on making bio-based polyamides. The world is moving towards bio-based products
o Monomers/building blocks - castor oil derivatives. India manufactures 80-90% of world’s output for castor Oil. Gujarat and Rajasthan manufacture 70-80% of this produce
o Castor oil is not very volatile and so are the derivatives.
o Focus here again is niche polymers which have limited competition. Globally polyamides are manufactrued by EMS.
o Polyamides have varied application - such as toothpaste bristles, engineered plastics used in automobiles, consumer durables, cable sheathing
o For all the products they have registered for- the technology/chemistry is very similar
o They will be able to compete with imports. Also looking at export markets
o Polyamides business will be in Polymers * Materials subsidiary.
o The capex outlay for this is 10-20 Crores; capacity is 1500 tonnes
o Market size of Brushes and Bristles will be ~ 4,500 tonnes.
o Nylon key players are - GSFC, EMS
o This is not a commodotized polymer
o Have got some approval for the polyamides. Have been working on this for the last 3 years. Have got some approvals in consumbales (bristles) and engineered plastics.

• Phiroze Shethna
o Acquired this company for ~ 55 Crores. Company manufactures, wipes, sealants and underbody sealents for auto market. Company has a very strong brand in the Indian market
o Primary reason for acquisition fwas entry into automobiles and also very strong brand.
o Fits into the overall product philosophy and chemistry of Chembond. Felt that they can scale up this business
o Business is profitable, however there is some other income in the profits in the last year’s number (need to check this
• Animal Nutriion
o This product was initially developed as an enzyme for Wockhardt. Wherein CC will develop the product and wockhardt will market it. However when Wockhardt got into some trouble in 2008-09, they stopped marketing this. Company didn’t want to waste it. Hence spent some time to come up with this product
o Expect 20% growth in this business, allthough very competitive and very cyclical business. This business has soft Q1 and Q2, Q3 and Q4 are stronger.
o Dont see much capex going into this business
o This business is prone to a lot of external vagaries such as bird flu etc.
• Tolling Business
o The tolling contract with Henkel has ended in Q1 19 and so has the non-compete. So will get into this business going forward. See 4-5 years to fill this capacity that is now opened up because of tolling.

[Anant]

Most of the notes are compiled by @salonihemnani011 and @rohitbalakrish_. Just a few additional points:

Each division is a Business Unit run separately and the company has competent people to lead each division.
When the mgmt said that the animal nutrition business is cyclical they probably meant that it is seasonal.
Mgmt is working hard to achieve the historical margins in Water Chemical segment.
It will take around 3/4 years for company to completely make use of the capacity freed by toll manufacturing. The capacity is fungible across various product segments.
The company will not sell PA 610 as it is but will have more complex products developed over PA 610 which could meet the exact client requirements.
Phiroze Sethna was acquired for 40 cr.
The company has significant cross selling opportunities with Phiroze Sethna products. There are multiple products here and the company competes with different MNCs like 3M, PPG, EFTEC.

@basumallick
The equity investments are not done directly by the company. They have given the money to a PMS (Kotak) and the PMS deploys the money.

[pgramle]

• Main Business units of the company are
o Construction Chemicals
o Water Chemicals
o Animal Nutrition
o Polyamides
Since you are tracking this business from a good time and from all your comments i could make out Water segment should contribute higher revenue, did management indicated any growth expectation and focus area going forward.
@salonihemnani011 mentioned in his previous link that the Water chemical is not likely to grow at 20-30% then which segment will drive the future of the company. Appreciate if you share your thoughts!

[Anant]

Chembond management is extremely averse to giving growth forecasts. The way I look at the business is more in terms of how each business can be in 5 years from year. If you exclude toll mfg from the business which is nearly 90 crores and does not contribute anything to bottomline the company has sales of around 250 crores. The way I look at the growth prospects of the company is that each of their segment can be of that size in 5 years.

Water Technologies: As mentioned in the corporate presentation Water Technologies was 40% of the sales last year which comes to around 140 cr. This is mature business and cannot grow at high rates. In 5 years at around 12% growth this business can be around 250 cr. This segment has generated a normalized PAT margin of around 10%+ (last year was challenging with 7% margin). The key competitors here as mentioned above in the thread are Ion Exchange/Vasu Chemicals/BASF Solenis etc. The key thing here is that this is a very sticky business and will provide stability until other business start contributing.

Industrial Technologies: This business vertical comprises of a very large set of products ranging from sealants/adhesives/coatings etc. Most of the products that they toll manufactured for Henkel would also start falling here. This will also include products from Phiroze Sethna and its subsidiary Gramos. Most of the products in this segment competes with various MNCs like 3M/Dow/EfTec/Henkel/PPG Asian Paints etc. Industrial technologies had 8% share last year implying around 25 crore in sales. Now if we add 40 cr from Phiroze and around 80 cr from the toll mfg for Henkel it gives a rough estimate of around 145 cr in sales. The entire Henkel capacity will get absorbed in 4/5 years as stated by management. Most of the industries that this segment caters to are growing at around 15%. Putting all this together one can expect the segment to be another 250 cr segment in next 5 years.

Animal Nutrition: This segment had a share of 10% in sales last year implying around 35 crores in sales. This is the fastest growing segment with around 100% growth last year. The management has commented that this is a growth area for them and they will grow north of 20% in this segment. There are two major MNCs which dominate the market here Kemin and Altech. The company has consistently introduced newer products here ranging from Enzymes to biosecurity products. A lot of products introduced in this segments are import substitute (Saccharomyces cerevisiae). The company is working on improving the reach and hence is focusing majorly on sales and marketing. My personal take here is this division too has the potential of reaching between 150cr to 200 cr in next 5 years.

Polyamide (PA): The company is setting up an intermediate 1500 MT PA 610 plant. The company is also looking to mfr other speciality PA like POLYMERS AND COPOLYMERS OF POLYAMIDES - 610,612 ,1010,1012,11,410,66,6, ETC. These are very specialized thermoplastics used in various applications ranging from toothbrush bristles to automotive/engg products. The company does not just plan to mfr these Polyamides but also customize them depending on the application resulting in significant value addition. The market size for specialized PA in India is around 50000 MT and are currently all imported. Once the intermediate plant settles down the company is working on a 10000 MT capacity plant which should be operational in 3/4 years. To give an example the filaments used in tooth brush were around 400/600 a Kg. The intermediate plant itself can generate revenues around 70 cr. and the large plant can generate revenues around 400 cr. If you look at the Global leaders like EMS group they generate around 25% EBITDA margins

Bonus: Construction/Chembond Calvatis

Overall the way I look at Chembond is a company run by an extremely competent and conservative mgmt. which has seeded multiple business in last many years and now these business are coming to fruition in a manner where each of these business have the capcity to become the size of company itself. All these business segments are now lead by strong teams and very capable set of heads. Some of these business have entry barriers, some of them are import substitute and some of them are into niche verticals. Most of these business could have PAT margins north of 10%+.

Finally it looks like the company is moving from a very long R&D phase to product development phase and a lot now depends on execution.

Discl.: Invested more than 5% of my portfolio.

[pgramle]

Thank you Anantji for elaborating each of the businesses in detail. Now i have better clarity to track the business.

[Anant]

This is not relevant since it was in intra promoter transfer necessitated due to the expiry of founder promoter Dr. Vinod Shah.

[ashwinidamani]

So what would be the turnover and blended margins we can expect 5 years down the line.

My understanding is
Based on data given by you, we can say that they will do 1250-1500 crore at blended margins of 15%.So something like a operating profit of around 200-225 Crores.

Assuming other costs of another 5-7% and full taxes, where would we land 120-140 Crore PAT in say 5 years.

Am I assuming right ?

[Anant]

Dont want to put out projections but I am working with two scenarios a conservative one and an aggressive one depending upon how PA business takes off. My estimates are more conservative than what you have put across. Also I am certain it wont be a linear journey and there are bound to be some hiccups.