Daikaffil Chemicals- A Microcap which can create enormous wealth?

Stock Opportunities Untested - but worth a good look
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I was surprised to find there was no thread on Daikaffil Chemicals or on Open Offer Investing, so I thought I just make one myself. This presents details on Open Offer Investing as well as my thesis on Daikaffil Chemicals with the anti-thesis and risk factors.

Open Offer Investing
One of the interesting methods of investing which I’ve learnt off late is open offer investing. This term refers to a regulation which requires any company that has acquired more than 25% equity in a business to necessarily launch an open offer for 26% of the equity. This regulation is meant to protect small shareholders and ensure they get a fair deal if a takeover takes place.

I learnt about open offers from @Tar in his Wrap subscription and also he was the first person to cover this idea.

Open offers are inherently slightly messy, so you have to leave behind he traditional ways of thinking about and valuing businesses and focus more on three objective factors:

1. Who is acquiring the business: What is their net worth and related businesses
2. What do they intend to do with this business and why are they acquiring it: What are the future plans and how will that lead to alpha creation
3. How long will this transformation really take

I’ve participated in 5 open offers, and I’ve only been successful with at least three of them: the open offers of Windsor Machines, Popees Cares(Archana Software) and Daikkafil. Other open offers have generated returns, but they have not been as sustainable. Here’s a list:

  1. Sir Shadi Lal Enterprises
  2. Windsor Machines
  3. Popees Cares
  4. Daikaffil Chemicals
  5. Zodiac JRD MKJ

Daikaffil is a stock which has already doubled from my first buying price and on my average buying is up by 50%. However in this correction, I am aiming to add more to the stock and just wanted to lead VP through my thesis on it once.

TLDR: I also made a video on Daikaffil which you can watch on 1.5X to just get through this quicker. It is linked here: https://www.youtube.com/watch?v=eBXpmxS3Q7g&t=561s

So lets just dive into this thesis:

1. Background on the Open Offer
2. Triggers and Potential Thesis
3. Upside Assessment
4. Risk and Antithesis

Background on the Open Offer

Background of Players: There are two major players in this open offer and their background is summarised below:

Essentially Heranba Industries which is a Agro chemical player engaged in manufacturing intermediates and formulations has acquired Daikaffil Chemicals at a price of 38.5 Rs.

Heranba’s core business is pretty cyclical and it has been their aspiration to start a CRO/CDMO business which is more structural as revenue.

Apart from core cyclicality, Heranba has also had several corporate governance issues in the past which have meant that it has always traded at a poor multiple as compared to other agrochemical companies. The details of this are highlighted in the VP thread of Heranba here:

Daikaffil was a shell company listed on the exchanges that owned a strategic plant in MIDC Tarapur, near Palghar.

Further their plant is extremely close to manufacturing locations of UPL, Aarti Pharmalab etc

Heranba sought to acquire this company to get access to the plant at a much cheaper price by buying the promoter stake in the company.

Timeline of Open Offer

This sheet shows the timeline of the open offer, Heranba’s Wholly Owned Subsidiary, Mikusu acquired 48.5% of the stake of Daikkafil off the market for 7 Cr and post this, they gave an offer for other equity.

In Novemeber, they shared a plan divided into two phases on what they want to do with the business. Since Sep 24, the promoter has continuously been buying shares in the company and they have acquired 2% of the company.

Objective of Open Offer:

The open offer is being done as discussed above to start a new CRO kind of business for the purpose of which the company has sanctioned 50 Cr for repairs of the plant and has stationed 30 scientists in the new entity.

Triggers:

There are three major triggers in the business:

*** The phase wise plan that has been shared**
*** Continuous promoter buying**
*** Entry of major shareholders**

Let’s dive into them one by one

Phase wise plan

The company shared a two phase plan on how they will develop the plant for Daikkafil. While the first phase will all be about setting up the place for production, the second phase is set to expand the capabilities.

I’ve summarised the plan in a tabular format below:

Further, my sense is that once the basic lab and its amenities are in place, Heranba will then look to get more funding for this business and grow it more rapidly in the coming few years.

Continuous promoter buying

The promoter has bought equity worth 2.91 Cr in the business which is about 1.82% of the company, starting from September 24 till December 24.

I am also attaching a table summarising the buying below:

Sourced from The Wrap tools by @itstarH

Entry of shareholders

Several good investors, like Sandeep Kapadia have entered into the business and have bought stakes in the business. Uday R Shah is another prolific investor who has bought in his own account as well as for his son

Sourced from Screener

These three make me feel that there is a disproportionate upside possibly in this business which can be utilised. This is extremely risky, but I suppose I really want to take the risk here.

Upside Assessment

To assess the upside, if you look at any CDMO, CRAMS company, you’ll see that they trade multiple times of their netblock.

Syngene for example trades at 20X their netblock. Syngene is the best CRO business in India, so we can assume a 2X-5X netblock kind of multiple, reasonably.

Till now, Daikkafil has put in a netblock of about 50 Cr in the business, if this is accelerated, and the company puts in more than this money which they would, considering the next phase is now lined up, the valuations and the company can move into a completely different orbit.

However, even with the current 50Cr net block, the company is valued justly at 150 Cr right now.

If this goes anywhere, literally the sky is the limit. However it might take an entire cycle of 3-4 years for this to actually fructify.

So I am willing to be patient here.

Risks and Anti Thesis

There are four major risks in the business:

  • A possible delisting
  • A possible merger
  • Change or delay in plans
  • No revenues in the company yet

A possible delisting:

According to Perplexity, even before the promoter buying in Septermber-December 2024, the promoter owned more than 80% of the business

Screener reflects otherwise, it says that the current stake is only 49%

If the perplexity bit is correct, the company may well be on its path to delisting.

A possible merger:

Since this is a much higher quality business than the one being run by Heranba, I’m not sure how well the investors in Heranba would take it that Daikaffil will now have all their scientists, they might push for some kind of amalgamation which will disrupt the thesis again.

Change/Delay in Plans and No Revenues:

Till now, this seems like a completely hope driven story. And I understand the pitfalls of falling into the trap of something like this, but I want to practice a kind of investing where Heads I win big and Tails and I don’t lose much and this company fits into that model. However for a conservative investor, this doesn’t make as much sense.

I would really like it if more senior members can comment on this or if other contributors add more to/critique the story.

If you want to learn more about open offer investing, I’m also linking my X posts on the Open Offer of Sir Shadi Lal here: x.com

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I have been struggling to figure out what kind of CRO business Daikafill does. Not all CRO is good CRO, Take solutions is one of those examples where it failed as their nature of contracts changed suddenly - from the functional service provider (FSP) to the FSO model… also due to the nature of CRO it was in which was hyper competitive… due to this smaller CROs sometimes perish, syngene is on a whole other level of ops

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I don’t know as much about the different kind of CRO businesses so it can be a big learning here. I’m just sharing a document which details the description by Heranba for their business.

But it does seem like this is all generic information for now.

70dd49c6-7752-4f80-bdc1-3f6d3571ee64.pdf (1.8 MB)

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No worries Devesh… been scratching my head here too as the oppurtunity seems interesting… thanks for bringing the idea to the community

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Also, I interacted with an investor who claimed to have spoken with the management team about their work, I’m just sharing the notes they shared with me:

Notes from management interaction:

  1. They will do R&D for Heranba on cost plus basis (not so good) BUT will take non Heranba business also & do its own R&D too.
  2. Not patent play, so earnings don’t depend on making novel discovery only. Mix of (a) manufacturing (will install a small plant on spare land of Daikaffil) & (b) R&D/Contract Research/ Test Studies business.
  3. Manufacturing in the plant to be set up will be for niche products which are smaller number but higher margin. Will take around 1.5 to 2 years for this to happen.
  4. Agrochemicals lots of headwinds currently as exports have shrunk drastically. Europe & US customers ordering min inventory due to higher interest rates & higher cost of carrying inventory. And these smaller orders mostly going to China only. When interest rates turn situation may improve.

PS : Currently no manufacturing with Daikaffil at all. Just an admin bldg which they will use for R&D to start with. No interest in Daikafil’s old pigment & chemical business. Will be in Agrochem space only.

Intention is to create value in Daikkafil is what they clearly said. Not to milk it.

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Very interesting write-up and thanks for introducing the concept of open offers.

Sorry if I missed it in your post but how do you track when a company acquires more than 25% equity in a business?

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So you can also open thread for Popees Baby care.

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Thank you!

So whenever a company acquires more than 25% of a business, an open offer gets triggered automatically. This is based on SAST regulations of SEBI.

This is in Daikaffil Chemicals case.

image
image910×325 45.7 KB

So you don’t need to track the equity stake but have to just wait for this announcement.

Attaching the pdf of the full open offer here too.
9689950f-16e8-42bf-a0b0-f97e8d047517.pdf (1.0 MB)

Usually, some insiders know about this before hand so price starts reacting. There is probably a volume based screen you can create to identify these before the takeover but otherwise its not possible to do this.

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Thank you for the explantation. I also just signed up for a trial of The Wrap after you mentioned it in your post and it looks like we can track these types of filings from TheWrap Insider data tool using the filter “Open Offers or Takeover”.

Another question - did you face any problems with liquidity i.e. are your buy orders going through instantly? Do you place market or limit orders? I checked the volume and on Friday, just 300 shares with traded.

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Don’t mention it. You can also go through the weekly wraps and the weekly meet ups they do. Special situations are highlighted in detail there.

So liquidity is a problem in this stock. I usually place limit orders and it is also a trade to trade stock, so to purchase it, you’d have to place the orders at a certain time.

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Thank you Ganesh ji for the suggestion, I will try to do that too and link it here once I do.

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Running the Idea of Daikaffil: A Discussion with an Investor I Admire

Recently, I pitched the idea of Daikaffil to a few more investors. One person whose opinion I deeply respect brought up the following pointers:

  1. Lack of Business and Experience
    There is currently no business in Daikaffil, and the promoters lack experience in this specific vertical. The ₹50 crore investment is solely for Repairs, making it difficult to value. Moreover, the business appears to have a long gestation period, while the market cap is already over ₹160 crore.
  2. Syngene Comparison Doesn’t Hold Up
    Comparing Daikaffil to Syngene doesn’t make much sense. Syngene is a much larger business with significant scale and goodwill in the market, which drives its valuation.

My Take on These Pointers

I largely agree with both points, and they should definitely inform your investment thesis if you’re considering this stock. That said, here are my counters, focused on tempering expectations while highlighting potential opportunities:

1. Lack of Business and Experience

While it’s true that the promoters lack experience in this specific vertical, they do have a background in the broader industry. This can potentially make it easier for them to secure supplier contracts.

The lowest-hanging fruit here is research and manufacturing for Heranba, which could generate stable revenues at the start. That said, I completely agree this is a long-gestation business. In my view, it’s a 4-5 year story before the full potential plays out.

It will likely take time for meaningful changes to transform the business. But that’s where the alpha lies—if you’re willing to deploy your funds smartly, allocate well, and hold on for 4-5 years.

With the recent market correction, don’t expect Daikaffil to hold its current levels; it may go down further. But remember these two points:

  • The promoter bought in at these levels earlier.
  • If you’re making a long-term investment (4-5 years), buying as cheap as possible can work in your favor.

2. Syngene Comparison Doesn’t Hold Up

I agree that comparing Daikaffil to Syngene is a stretch. However, I believe a good CDMO (Contract Development and Manufacturing Organization) should get at least 2-5 times their net block. If Daikaffil deploys funds further, it could potentially shake things up significantly.

Be Mindful of the Risks

That said, here are some risks you need to be aware of:

  • Nothing significant might happen. If that’s the case, you won’t lose much because:
    • There’s institutional holding.
    • The company has a substantial net block.
    • Some operations are likely to come online soon.
  • The story won’t play out in this agrochemical cycle. Instead, it may take another cycle before Daikaffil garners attention. By then, the price could be significantly higher than it is today.

Who Should Consider This Stock?

Because of these risks, Daikaffil is only suitable for a specific type of investor—someone comfortable with risk and willing to play the long game with tempered expectations. If you can handle the uncertainty, this stock looks like a “heads I win, tails I don’t lose much” situation.

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Daikaffil Chemicals: SHP Update

Some very interesting changes have taken place in the shareholding pattern of Daikaffil Chemicals, which should be noted and understood:

1. Promoter stake at 51%, this eliminates the Delisting Theory: Promoter has increased shareholding through its entity called SAMS Industries

2. Two popular SME investors have consistently bought and increased stake in the business

Sandeep Kapadia now owns 2.33% of the company

3. New Investor: Amit Chordia and World Foods LLP

The company has found a new investor with Amit Chordia and his company World Foods LLP, they together own more than 2% of the company now.

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For such small cos, one should not read too much into shareholding of 1-2% by investors. Most of the time, it is a fractional allocation for them (like spread betting, where they may be putting in a few crs in lots of small cos).

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