ValuePickr Forum

DCM Shriram Ltd (previously DCM Shriram Consolidated Ltd)

Again from Vivek Sukhani’s Top 5 picks of the moment. Think its interesting to investing this further.

Here’s what Vivek had to say about the opportuinity.

DCM Shriram Consolidated: A very well diversified company. Just think about it, Kanoria Chemicals’ 115000 TPA caustic soda plant went for 830 crores. Here is a company having a caustic soda capacity in excess of 270000 TPA available at a market cap of 725 odd crores. Sure there is a good amount of borrowings, but the company also has many other businesses, like sugar( 4 mills), retail( 275 stores), urea( reasonable size), agri-inputs and bio-seeds, cement( 0.4 MTPA) and a small textile unit as well. Also, its having a captive generation capacity of 283 MW of power. At 6 rupee per MW, the valuation for power capacity is more than 1700 crores.

Some further observations:

Think about it…this company will be the beneficiary of sugar-decontrol, urea-decontrol, multi-brand FDI in retail. Infact, I think it wont be long before this company ropes in a decent partner for its retail arm. The way they have persevered with HKB, its bound to reward them in future.

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Promoter Company has been pretty active in the recent period in accumulating it from the market…check the BSE’s website for more information.

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Conf Call details by Capital Market
DCM Shriram Consolidated
Fertiliser business shall undertake a maintenance shutdown in Q3 FY13
DSCL held a conference call to discuss the results for the quarter ended September 2012. Mr. Ajay S. Shriram, Chairman and Senior Managing Director, Mr. Vikram S. Shriram, Vice-Chairman and Managing Director, along with the members of the Senior Management team represented the call

Highlights of the Concall

  • Fertiliser Revenues were up 45% to Rs 141.9 crore in Q2FY'13 compared to Q2FY'12 led by higher volumes on account of planned maintenance shut down in Q2FY'12. PBIT stood at Rs. 7.1 crore vis--vis Rs. (9.8) crore as planned maintenance shutdown in Q2 FY12 resulted in loss of production along with shutdown related expenses.
  • Fertiliser Business continues to witness cost pressures due to non-finalization of the New Urea Policy. The company will be undertaking a maintenance shutdown in Q3 FY13.
  • Farm solutions revenues were up 72% to Rs 350.6 crore driven by sale of DAP & MOP (Rs 120 crore vs Rs1 crore in Q2 FY12) along with growth in value added inputs (up by 26%). PBIT was lower by 45% at Rs 10.1 crore. PBIT from Value added inputs was up by 44% for the period, however adverse FX movements pertaining to import of DAP and MOP moderated the earnings
  • In the medium term, the company expects farm solutions business to continue to witness healthy growth rates as the company continues to focus on expanding its product range especially in its higher margin value added segment and geographical presence. The near term performance will be driven by weather conditions
  • Bioseed Revenues lower were by 16% at Rs 32.3 crore essentially due to higher sales returns in Indian operations due to weak monsoon in northern regions, which has impacted product off take. However, the impact of the same has partly been mitigated by better performance of its operations in Philippines. PBIT were lower at Rs (24.5) crore. The earnings are lower due to higher sales returns than anticipated in Indian operations along with lower than expected off take due to poor monsoons
  • The company expects the Bioseed performance of its operations in Philippines and Vietnam to be healthy, however, will be driven by the weather conditions in Q4 FY13, which is their main season.
  • Medium term outlook for Bioseed business continues to remain strong. The company expects healthy growth rates to be driven by products launched in the last 1-2 years, healthy product pipeline, continued focus on R&D and strengthening of market development activities supported by normal weather conditions in key regions of operation
  • Sugar revenues were up by 89% at Rs 346.5 crore driven by increased free sugar sales volume (up by 71%) at improved realizations (up by 22%). PBIT swung from a loss of Rs. (2.7) crore last year to positive Rs 31.3 crore led by improvement in free sugar margins from Rs. 44 per quintal in the previous year to Rs. 483 per quintal along with higher volumes.
  • Going forward, the performance of sugar business will be determined by policy announcements the Government will make on Cane pricing and Import/Exports regulations. The company is taking several steps to further improve its capacity utilization levels through its intensive cane development program
  • Hariyali Kisaan Bazaar revenues were lower 49% at Rs 98.6 crore which is in line with company's plan as the company is implementing a restructuring and rationalization plan involving restricting activities to profitable product lines only. Losses were lower at Rs. (10) crore against Rs. (28.4) crore. On completion of restructuring and rationalization plan i.e. Q3 FY13; the company expects to stop financial losses by Q4 FY13
  • Chloro Vinyl revenues were up 13% at Rs 270.2 crore driven by improved realizations of all products, i.e. Chlor-Alkali, PVC Resin and Calcium Carbide along with higher volumes of Chlor-Alkali. Chloro-Vinyl PBIT up by 100% at Rs. 72.9 crore
  • The performance of Chloro vinyl business will be driven by realizations of Chloro-Vinyl products, which presently remain remunerative along with efforts to mitigate the impact of high input costs
  • Fenesta revenues were lower 16% at Rs 38.2 crore due to significant slowdown in the institutional segment partly mitigated by the increase in retail segment
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DSCL is trying to effect a turnaround, and as a result of which, the results may show a marked improvement over previous periods. The profitability is going to be majorly supported by chlor-alkali/caustic-soda business. Sugar should show seasonal variations, and so would farm solutions and fertilisers. If they can manage to control losses at HKB, profitability wont be any at all. Moreover, going ahead as the company is unlikely to take up any major capex and the lower depreciation should imply higher distributable surplus. So, while the stock price has appreciated a bit, the future is looking quite good as well to support price action.

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…profitability wont be any** issue…**

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this might get them some money? unless they are planning to make more subsidiaries. Buying this stock is like buying a mutual fund :wink:

  • DCM Shriram Consolidated to hold board meeting
  • DCM Shriram Consolidated to hold board meeting On 17 December 2012 The board meeting of DCM Shriram Consolidated will be held on 17 December 2012 to consider transfer, sale, lease, licence or otherwise dispose of the business, in full or in part, of Swatantra Bharat Mills, Tonk, Rajasthan, a division of the company to a subsidiary or any other person and to transfer, sale, lease, licence or otherwise dispose of the business , in full or in part, of Shriram PolyTech Business, Kota, Rajasthan, a division of the company to a subsidiary or any other person. The board will also consider options for the merger of the whole, or substantially the whole, business of Bioseed Research India (a subsidiary of the company) into the company, through a scheme of arrangement from the Hon’ble High Court of Delhi under sections 391 to 394 of the Companies Act, 1956.
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Highlights of Conference Call by Capital Market
Mr. Ajay S. Shriram, Chairman and Senior Managing Director, Mr. Vikram S. Shriram, Vice-Chairman and Managing Director, of the company addressed the conference call.
  • Net Revenues were higher by 7% at Rs. 1427 crore in Q4FY'13 led by growth in revenues of Sugar (up 32%) and Chloro-Vinyl businesses (up by 20%). Bioseed (down 17%) and Farm Solutions (down 2%) businesses revenues were impacted by delay in receipt of licenses from State Government to sell Bt Cotton. For FY'13 Net Revenues are up by 10% at Rs. 5539 crore driven by Sugar (up by 48%), Farm Solutions (up by 20%) and Chloro-Vinyl businesses (up by 15%)
  • Net Profit was up 66% in Q4FY'13 at Rs. 82.3 crore against Q4FY'12. For FY'13 Net Profit was at Rs. 202.9 crore as compared to Rs. 11.9 crore.

Fertilizer

  • Fertilizer revenues were up 9% to Rs 144.8 crore in Q4FY'13 compared to Q4FY'12. For FY'13 revenues were up 4% to Rs 525.9 crore
  • Fertilizer PBIT was down 6% to Rs 7.5 crore in Q4FY'13 compared to Q4FY'12. For FY'13 PBIT was down 45% to Rs 11.1 crore
  • PBIT in FY13 were lower due to continued uncompensated cost increases due to delay in non-finalization of New Urea pricing policy
  • The Business is witnessing pressure due to non-finalization of New Urea pricing policy which is now delayed by almost 3 years. Further impacting the business performance are high levels of subsidy outstanding. On the operational front, the company had undertaken a planned maintenance shutdown in Q3 FY13.
  • The company expects the plant to operate at optimal capacity in FY14

Farm Solutions

  • The portfolio comprises of value-added products such as seeds, pesticides, soluble fertilizer, micro-nutrients etc. along with bulk fertilizers (DAP, MOP, SSP)
  • Farm Solutions revenues were down 2% to Rs 304.7 crore in Q4FY'13 compared to Q4FY'12. For FY'13 revenues were up 20% to Rs 1302.3 crore
  • Fertilizer PBIT was flat at Rs 7.6 crore in Q4FY'13 compared to Q4FY'12. For FY'13 PBIT was down 16% to Rs 50.8 crore
  • Revenues in Q4FY13 was marginally lower due to dip in sales of value added inputs - delay in receipt of license required from State Governments in India to sell Bt Cotton which resulted in Nil sales of Cotton.
  • PBIT for Q4FY13 was flat due to dip in PBIT from value added inputs due to no sales of Bt Cotton seeds
  • The company continues to focus on expanding product range especially in the higher margin value-added segment and increasing geographical reach which will drive growth in the medium term

Bioseeds

  • Bioseed business is uniquely diversified across key crops (Cotton, Corn, Paddy, Bajra and Vegetables) and Asian geographies including India, Vietnam, Philippines, Thailand & Indonesia
  • Bioseed revenues were down 17% to Rs 111.1 crore in Q4FY'13 compared to Q4FY'12. For FY'13 revenues were up 13% to Rs 440.6 crore
  • Bioseed PBIT was down 11% to Rs 16.9 crore in Q4FY'13 compared to Q4FY'12. For FY'13 PBIT was down 18% to Rs 51.6 crore
  • 13% growth in FY'13 revenues was driven by growth especially in Philippines. Indian business revenues affected due to No Cotton seed sale in March 13 caused by delay in receipt of licenses from State Governments in Northern states.
  • PBIT in FY13 was lower by 18% due to lower margins on cotton seed sale due to rising costs and cap on selling prices by local Governments, expenses being incurred on increasing geographical presence and research programme and one-time credit received in the previous year due to write back for provisions made.
  • The company expects growth in this business to continue in all field and vegetable seeds. Cotton Seed business continues to face margin pressures given the oversupply of seeds along with rising costs and selling prices controls

Sugar

  • Sugar revenues were up 32% to Rs 368.5 crore in Q4FY'13 compared to Q4FY'12. For FY'13 revenues were up 48% to Rs 1345.5 crore
  • Sugar PBIT was down 67% to Rs 12.3 crore in Q4FY'13 compared to Q4FY'12. For FY'13 PBIT was up 111% to Rs 64.5 crore.
  • FY'13 PBIT was higher due to higher margins on sale of sugar stock of previous season, i.e. 2011-12.and higher PBIT from Sale of Power. However Q4FY'13 PBIT was lower by 67% due to inventory write down due to higher cost of production whose impact was partially mitigated by removal of 10% levy quota by Government
  • The company expects margins to be under pressure due to soft product prices and high cost of production
  • The closing inventory has been valued at expected NRV. Going forward, the company does not expect any significant loss on the carrying forward stock
  • The next seasons margins would be dependent on the Cane cost for 2013-14 along with the steps the Government takes towards de-control especially linking the Cane and Sugar prices

Chloro Vinyl including power

  • Chloro Vinyl including powerrevenues was up 19% to Rs 313.2 crore in Q4FY'13 compared to Q4FY'12. For FY'13 revenues were up 15% to Rs 1162 crore
  • Chloro Vinyl including powerPBIT was up 84% to Rs 100.6 crore in Q4FY'13 compared to Q4FY'12. For FY'13 PBIT was up 93% to Rs 344.1 crore
  • Better realizations of Chloro-Vinyl products along with several cost initiatives the company has undertaken helped in moderating the impact of cost increases which led to better margins and increase in PBIT of this business.
  • The company expects realizations to soften nominally given strong trend over the last few quarters

Cement

  • Cement revenues were down 10% to Rs 36.5 crore in Q4FY'13 compared to Q4FY'12. For FY'13 revenues were down 4% to Rs 135.2 crore
  • CementPBIT was up 39% to Rs 12.3 crore in Q4FY'13 compared to Q4FY'12. For FY'13 PBIT was up 15% to Rs 17.3 crore

Hariyali Kisaan Bazaar

  • Hariyali Kisaan Bazaarrevenues were down 49% to Rs 93 crore in Q4FY'13 compared to Q4FY'12. For FY'13 revenues were down 40% to Rs 515.6 crore
  • Hariyali Kisaan Bazaar losses at PBIT was Rs 0.8 crore in Q4FY'13 compared to loss of Rs 18.9 crore in Q4FY'12. For FY'13 losses at PBIT was stood at Rs 34.8 crore compared to loss of Rs 106 crore in FY'12
  • Hariyali losses were lower in line with restructuring and rationalization plan by the company involving restricting activities to profitable product lines only.
  • Going forward, the company does not expect any losses from this business

Others

  • Fenesta business witnessed a decline in revenues in Q4FY13 by 18% at Rs. 34 crore due to dip in revenues in the project/institutional segment
  • The company's Net Debt stood at Rs. 1,386 crore as compared to Rs. 1,521 crore in March 12.
Conference Call Highlights by Capital Market
Mr. Ajay S. Shriram, Chairman and Senior Managing Director, Mr. Vikram S. Shriram, Vice-Chairman and Managing Director, of the company addressed the conference call.
  • Net Revenues were higher by 8.5% at Rs. 1549 crore in Q1FY'14 led by growth in revenues of Sugar (up 21%), Farm solutions (56%), fertilizers (5%), Bioseeds (15%) and Chloro-Vinyl businesses (up by 2.4%). Cement revenues were down 21%
  • Net Profit was up 268% in Q1FY'14 at Rs. 114 crore against Q1FY'13.

Fertilizer

  • Fertilizer revenues were up 5% to Rs 143.8 crore in Q1FY'14 compared to Q1FY'13. Fertilizer PBIT was down 12.4% to Rs 6.8crore in Q1FY'13 compared to Q1FY'13.
  • Sales Volumes higher by 4% as compared to same period last year
  • PBIT continues to be under pressure due to non-revision of Retention prices due 3 years ago
  • The company expects earnings of this business will continue to be under pressure till Government revises the Retention prices. It also hopes Subsidy payments does not get into arrears going forward

Farm Solutions

  • The portfolio comprises of value-added products such as seeds, pesticides, soluble fertilizer, micro-nutrients etc. along with bulk fertilizers (DAP, MOP, SSP)
  • Farm Solutions revenue was up 2% to Rs 463.6 crore in Q1FY'14 compared to Q1FY'13. Fertilizer PBIT was up 42% to Rs 21.3 crore
  • The growth in revenues was driven by growth in both segments, i.e. value-added inputs (up by 34%) and Bulk Fertilizers (up by 110%). In the Bulk fertilizers, the Company sold DAP (Rs. 80 crore Vs Nil in Q1 FY13)
  • Growth in value-added inputs was mainly due to shift in sale of BT Cotton seed to Q1FY14 from Q4 FY13 due to delay in receipt of licenses from State Governments
  • Margins from Hybrid seed sales were lower as compared to last year
  • The company continues to focus on expanding product range especially in the higher margin value-added segment combined with increasing geographical reach
  • The company expects the value-added segment to witness healthy growth rates in medium term

Bioseeds

  • Bioseed business is uniquely diversified across key crops (Cotton, Corn, Paddy, Bajra and Vegetables) and Asian geographies including India, Vietnam, Philippines, Thailand & Indonesia
  • Bioseed revenue was up 15% to Rs 289 crore in Q1FY'14 compared to Q1FY'13 driven by healthy growth in Indian operations, however overall growth was moderated due to higher sales returns in Philippines. Bioseed PBIT was down 2% to Rs 66.1 crore
  • Last year had recorded high sales returns in India in Q2. Do not expect that in current year and thus expect better results on "To September" basis
  • The Company believes that this business will deliver healthy growth in medium to long term given continuous investment in research (both conventional and biotech) along with geographic and product diversification
  • Cotton seed oversupply situation likely to normalize after a year
  • Quarterly results are not representative of annual performance as this business is seasonal in nature

Sugar

  • Sugar revenue was up 21% to Rs 338.3 crore in Q1FY'14 compared to Q1FY'13. Sugar PBIT was a loss of Rs 1 crore compared to Rs 3.9 crore in Q1FY'13.
  • PBIT was negative due to negative margins. Realizations stood at Rs. 3,160/quintal with cost of production of Rs. 3,331/quintal. The company had valued sugar stocks on 31st March, 13 on expected NRV
  • Power dues outstanding for more than six months making Power generation un-remunerative
  • Sugar margins continue to be negative due to low Sugar prices
  • Going forward, the performance of this business will be driven by rational Cane prices for Sugar season 13-14, positive support to increase Sugar prices and implementation of the Rangarajan committee report to full extent

Chloro Vinyl including power

  • Chloro Vinyl including powerrevenues was up 2.4% to Rs 285 crore in Q1FY'14 compared to Q1FY'13. Chloro Vinyl including powerPBIT was up 11% to Rs 81.3 crore
  • Operations at both, Kota and Bharuch continued to deliver optimal Chlor-Alkali production with improving cost efficiencies
  • Chemicals revenue down by 6% with realizations down by 19%; volumes have been up as last year had an extended shutdown of plant at one location
  • Despite the dip in realizations by 19%, the margin in this business has dipped from 32% in the previous year to 28% as the Company has implemented several cost initiatives which have improved the cost structures of this business
  • The Company is continually working towards improving its cost structures by optimizing fuel mix and driving efficiencies that are sustainable to enable better earnings

Cement

  • Cement revenues were down 21% to Rs 29.6 crore in Q1FY'14 compared to Q1FY'13 driven by lower volumes (down by 18%) and lower realizations (lower by 3%)
  • CementPBIT was down 60% to Rs 2.6 crore in Q1FY'14 compared to Q1FY'13 due to lower volumes and dip in margins in this business

Hariyali Kisaan Bazaar

  • Hariyali Kisaan Bazaarrevenues were down 43% to Rs 121.8 crore in Q1FY'14 compared to Q1FY'13.
  • Hariyali Kisaan Bazaar losses at PBIT was Rs 0.3 crore in Q1FY'14 compared to loss of Rs 20.3 crore in Q1FY'13.
  • Revenue and PBIT performance in line with plan as the Company has implemented a restructuring and rationalization plan involving restricting activities to profitable product lines only.
  • Hariyali Bazaar is presently engaged in Fuel ( petrol, diesel, LPG etc) retailing activities at 37 outlets in 6 states.
  • Going forward, the Company is focused on sale of surplus Hariyali properties which is progressing as per plan

Highlights of the Concall by Capital Market:

Mr. Ajay S. Shriram, Chairman and Senior Managing Director, Mr. Vikram S. Shriram, Vice-Chairman and Managing Director, of the company addressed the conference call.
  • Net Revenues were higher by 25.9% at Rs. 1,689.9 crore in Q2FY'14 compared to Q2FY'13 driven primarily by âShriram Farm Solutions', up 88.2% at Rs. 659.8 crore
  • PBIT stood at Rs. 40.9 crore in Q2FY'14 vs. Rs. 71.0 crore in Q2FY'13 as Losses in Sugar business was Rs. 24.7 crore from a profit of Rs. 31.3 crore, a negative swing of Rs. 56 crore. In Q2, margins declined from positive Rs. 449 per quintal to negative Rs. 249 per quintal
  • PAT stood at Rs. 1.4 crore in Q2FY'14 compared to Rs. 28.9 crore in Q2FY'13. Higher profit in Q1FY'14 was a result of seasonality in some of its Agri businesses, primarily Bioseed

Fertilizer

  • Fertilizer revenues were up 2.3% to Rs 145.2 crore in Q2FY'14 compared to Q2FY'13. Fertilizer PBIT was down 58% to Rs 3 crore in Q2FY'14 compared to Q1FY'13.
  • Business continues to witness margin pressures due to uncompensated costs, a result of delay in finalization of the New Urea pricing Policy â partly mitigated by improved savings on account of energy consumption
  • Plant operating at almost optimal capacity
  • High subsidy outstanding impacting the overall returns from the business

Farm Solutions

  • Farm Solutions revenue was up 88% to Rs 659.8 crore in Q2FY'14 compared to Q2FY'13. Farm Solutions PBIT was up 91% to Rs 19.3 crore
  • Topline driven by Bulk Fertilisers viz. DAP & MOP (higher by 222% in Q2 and 269% in H1) and SSP (increased by 20% in Q2 & 22% in H1) along with growth in value-added inputs (up by 15% in Q2 & 28% in H1)
  • Value-added Input segment accounts for majority of the earnings and has grown by 14% in H1
  • Outstanding Subsidy levels are high
  • Expect growth to sustain in the medium term, given the focus to expand product range especially in the higher margin value-added segment and increasing geographical reach
  • This business is seasonal in nature and the results in the quarter are not representative of annual performance

Bioseeds

  • Bioseed revenue was down 3.4% to Rs 31.2 crore in Q2FY'14 compared to Q2FY'13
  • Revenues driven by growth of BT Cotton and Corn in Indian operations â partly offset by sales return in Vietnam and Philippines
  • Muted earnings in Q2 primarily on account of subdued international operations and off season in India
  • International business likely to face pressured in the immediate term
  • Cotton Seed business continues to face margin pressures given the oversupply of seeds along with rising costs and selling price controls
  • Strong growth rates expected in the medium to long term driven by new products, healthy product pipeline, continued focus on R&D and strengthening of market development activities supported by normal weather conditions
  • Quarterly results are not representative of annual performance as this business is seasonal in nature

Sugar

  • Sugar revenue was up 9.2% to Rs 378.4 crore in Q2FY'14 compared to Q2FY'13. Sugar PBIT was a loss of Rs 24.7 crore compared to profit of Rs 31.3 crore in Q2FY'13.
  • Revenue growth driven by increased sugar sales volumes
  • Sugar business remains challenging as the sugar realizations do not commensurate to higher cost of production
  • Cost of production stood at Rs. 3,313/quintal and the inventory was valued at Rs. 3,125/quintal as at March 31, 2013. The Company in Q2 undertook further write-downs at current NRV
  • Lower sugar realizations vis--vis cost of production impacted earnings performance. Margins in Q2 at Rs. (249) per quintal vis--vis Rs. 449 per quintal. H1 margins stood at Rs. (207) per quintal
  • The Company is continuing its efforts to increase capacity utilisation and sugar recovery through various cane management programs
  • Government policy action to determine the prospects of this sector, especially if a rational policy that links cane prices to sugar realizations is put in place

Chloro Vinyl including power

  • Chloro Vinyl including powerrevenues was up 5.9% to Rs 286.2 crore in Q2FY'14 compared to Q2FY'13. Chloro Vinyl including powerPBIT was up 16.2% to Rs 84.7 crore
  • Operations at both, Kota and Bharuch continued to deliver optimal Chlor-Alkali production with improving cost efficiencies
  • Weak realizations at both locations vis--vis last year. Decline largely offset by, higher production and savings in power cost
  • Despite the dip in realizations by 13%, the margin in this business has declined from 32% in the previous year to 30% as the Company implemented several cost initiatives to improve the cost structures of this business
  • The Company is continually working towards improving its cost structures by optimizing fuel mix and driving efficiencies that are sustainable to enable better earnings

Cement

  • Cement revenues were down 8.1% on account of weak realizations to Rs 29.4 crore in Q2FY'14 compared to Q2FY'13
  • CementPBIT reported loss of Rs 1.3 crore reflecting decline in realizations combined with input costs pressures compared to profit of Rs 2.1 crore Q2FY'13

Hariyali Kisaan Bazaar

  • Hariyali Kisaan Bazaarrevenues were down 5% to Rs 93.7 crore in Q2FY'14 compared to Q2FY'13.
  • Hariyali Kisaan Bazaar reported profit at PBIT of Rs 1.2 crore in Q2FY'14 compared to loss of Rs 10 crore in Q2FY'13.
  • Topline and earnings performance in line with plan to expeditiously arrest financial losses from Hariyali Kisaan Bazaar and improve overall corporate performance given the deep focus to stabilise corporate earnings and return on the capital employed across all businesses
  • Current revenues primarily from fuel sales
  • Commenced liquidation of land - will generate cash flows for the Company

IMHO, the issue of losses with the sugar business is giving us an opportunity to accumulate this value stock at an attractive price for the long term.

i went through the post. what is the competitive advantage for this firm? can someone please help me understand? it looks like most of the lines are commodities.

Thanks in advance

balaji

Revenue contribution EBIT Contribution
Fertiliser 9.3% 4.7%
Shriram Farm Solutions 29.1% 16.1%
Bioseed 9.5% 16.5%
Sugar 22.0% -19.1%
Hariyali Kisaan Bazaar 6.6% 0.0%
Chloro-Vinyl 19.5% 82.0%
Cement 2.1% 0.6%
Others 5.0% -0.7%
Inter Segment -3.0%

Numbers are for FY 2012-13

I have tried to look at the current business prospects, prospects of individual business in general and then have done a valuation (which attracted me to the company in the 1st place).

Business is surely going through a rough patch at the moment- fertilizers and sugar (for obvious reasons- fertilizer in absence of new urea policy and sugar due to higher cane price in UP and a weak global sugar market), are in trouble. Last couple of quarters was not so good for the seeds business as well with sale return from the two foreign countries it is operating and 3rd quarter as always will be seasonally weaker.

Chlor-Vinyl business is doing well though the cycle has started to come off and realizations have come down in last couple of quarters. Barring the capacity addition (which will come in next 3-4 quarters and will add about 4% capacity in chlorine business), think the upside in EBIT contribution is limited at the moment. PVC business though is going strong and there is a scope for some growth there (5-10% yoy).

On the positive side farm Solutions is doing well- which is the trading business of imported bulk fertilizer (DAP etc with negligible margin) and some value added products like Pesticide etc (5-10% margins). Here also there is a receivable issue on subsidy from the government which is increasing the working cap requirements.

Business Outlook- Personally I donât

think that

the situation in the fertilizer and sugar segment is going to improve in the near term. Post-election we might see some clarity emerging on them but thatâs a tough call to take and is a known unknown factor. I wonât buy the stock betting on that event happening too quickly though I belong to the camp that believes it would happen eventually.

Global sugar cycle is obviously down- I have not studied much on this though I have seen some threads in the forum exclusively on this. I have taken a view that this is not going to change in 2014- but we might get some indication by the middle of this year looking at demand supply projections for 2015.

Seed business- though the last couple of quarters were bad outside India on account of sale return (Management has said that this is on account of inventory stuck in trade channels and not on quality issues but you will tend to take this with a pinch of salt), I think the situation in India is relatively better and it has gained a lot of ground in cotton seeds market in North India. In South India it has started aggressively and though the competition is tough I would tend to think that given its success in North Indian market it should make good inroads (quality comments is positive though I have not been able to verify it independently). Management is also confident on this- looking at the transcripts of the calls. Management thinks that over medium term it can maintain a growth rate of 25-30% in this business which seems reasonable to me. One comment here is that sale price is capped by state governments(so not a runaway story) and such higher cost is difficult to pass to the consumers, but with scale and experience I think the company should be able to increase margins in this business. Also, to maintain such kind of growth not much capex is needed which is good.

Farm Solutions- Farm Solutions outlook is closely linked with outlook on agriculture. This is low margin high volume business and company has given a CAGR of more than 50% over past 4 years. And expects to maintain 30-40% kind of growth in the medium term- again investments required to maintain the growth are not high. Company is also focusing on higher margin products- company has already established a very good distribution network and dealers and should benefit from that in the medium term.

Chlor-Vinyl- This is the business

which has contributed to more than 70% of group EBIT in all the last 4 years so effectively it has funded the losses in the rural retail Hariyali business. Margins have increased on account of higher realization (uptick in the chlor-vinyl cycle) as well as through cost rationalization. Company is in advantageous position on account of its captive power plant which is a very high contributor to total cost. Although the realizations have come down in the recent past and the cycle has turned, company is well placed in the segment (captive power) but not insulated. Demand of end products is still growing in India and though additional capacities are coming up India is still importing. Rupee depreciation has also benefitted the company.

PVC business is directly linked to economy of the country- Import duty is less India currently imports 1mmtpa and total demand is ~2.3mmtpa. No additional capacity is coming on account of lower import duty. Company is better placed due to in house chlorine and power.

As part of value addition company has also expanded in to PVC windows business under the brand Fenesta Building Systems. This manufactures UPVC windows (Un-Plasticized PVC) and door systems under the brand "Fenesta". Business has broke even in the last quarter and company expects to grow substantially in this segment- both retail and as well as industrial. Sales for this business was 42 crores in 2Q 2013-14 and it was profitable- company expects this to grow by 25-30% every year.

As per company a factor which can potentially drive demand of PVC is the expectation of per capita increase in the consumption of PVC resin which is currently at about 1.6 kg in India as against countries like Brazil which is about 4.5 kg and China which is about 9.2 kg

Hariyali Kisan bazar- Company has substantially downsized the operations in this business and only selling fuel which is a profitable business. Donât expect this business to grow. Company is disposing off lands- book value of which was 220 crores as at 31st march 2013. In last 2 quarters company has done 7-8 deals. Company expects to at least realize the book value over next 12-18 months which will directly flow through cash.

So overall the story- Seed and farm solutions to provide growth (with very less capex needs) though the business would remain quite volatile quarter over quarter- linked to kharif season in India. Chlor-Vinyl business will provide stability to earnings. While fertilizer and sugar business will remain the problem- might be even loss making in near term (facing a lot of head winds) and also will block a lot of working capital- government subsidy payments are very slow in last 3-4 months (current subsidy outstanding 420 crores which normally is in range of 200-225 crores)

After the story we come to the valuation - This is what attracted me to the company- company trading at 0.65 times its book value with decent growth expected in the medium term.

On the paper valuation surely looks attractive- with current m cap of 933 crores and a debt of 1000 crores the company is available for 2000 crores. Take out the 200 crores which will get realized from land in the Haryali Kisan bazar the value comes to 1800 crores. Again, the working capital is at elevated levels at 950crores from a level of 636 crores in FY 11-12. Out of this 200 crores is the land but balance is on account of higher government receivable- accounting 100 crores out for that the company is available for 1700 cores.

Now coming to individual business valuation:

1st is the Chlor Vinyl business- two parts here- Chlorine and Plastics- Chlorine business capacity is approx. 245000tonne- valuing this on the basis of an expansion taken by the company (adding about 10K tonne of capacity for about 30 crores) valuation comes out as around 735 crores. With a business earning close to 250crore of EBIT and 170crores post tax (assuming both chlorine and plastic business to be of similar margin profile), this is on lower side.

Plastics business- have not dig deeper here- business is good, demand is good, turnover for 2012-13 was close to 300 crores- assuming 27-28% margin and 10% growth and a tax rate of 30%, I think a multiple of 5-6x is OK - using this we get a value of approx. 300 crores (1x sales)

Fertilizer Business has 3.79 lakh metric tonne annual capacity- surely the business is barely making profit at the moment and a lot of capital is blocked. Historically this business has earned a margin in high single digit. Conservatively valuing this at 75% of capital employed (most of this is their money anyways as subsidy would take a lion share of this, LNG payment is surely upfront) in the business we get a value of 150crores. Though my guess is that it would be valued higher but better to use this number till we get clarity on government policies.

Shriram farm Solutions- did turnover of 1302crores in 2012-13 and earned 51crores at a margin of 3.9%.Company expects a 30-40% growth in this business and expecting margins to improve little on account of scale and value added products we are looking at an EBIT contribution of 100 crores in 2 year time frame. Valuing at 6-6.5x we get a value of 320crores which is surely conservative if we are believing those growth numbers.

Bioseed Business- this

is a promising business with 440 crore turnover and 51crore EBIT in 2012-13, growing at 25-30% in the medium term. Though the business is more valuable for the sake of simplicity I give it the same value as the farm solutions business at 320 crores.

Sugar business- 4 factories in UP with total turnover of 1325 crores- business is in a downturn but makes about 50crore profit in a decent year- value this at 400crores (current capital employed is 774 crore and a lot of that is inventory).

Other residual business we value at 100 crores- this include Hariyali Kisan bazar, Cement, textile, and fenesta business- 420 crores turnover

Now, in addition the company has a captive power plant of 270MW- in the sugar plant and in Kota- admittedly the benefit of this is passing through the profit and loss account, but in the valuation above we have not considered any premium valuation on account of this. Generally a power plant coal based cost around 5 crore per MW, this gives a value of 1350crores- though this has not been captured fully in the valuations above, letâs give a random 50% discount- this gives a value of 675 crores.

Overall this gives a value of business around 3000crores-giving a conglomerate discount of 30% brings the value down to 2100crores- reduce 1000 crore of debt, add to this 200 crore of land and 100 crore of current excess working capital we get a value of 1400crore which compares to current market cap of 950crores (around 45% upside).

This is very much a pessimistic scenario-What could go wrong here, probably not much- sugar is a cyclical business and will turn around (company can survive the downturn)- fertilizer- India imports a lot and government would not do such a thing to kill the domestic players though it may remain in government controlled mode for a long time capping the upside.

Other businesses are also valued conservatively- seed business, agri solutions and chlor-vinyl. Recent deals in chlor Vinyl business are done at higher levels. Captive power is also more of an upside provider.

So the downside is very much limited even if the quarterly results are bad this time round- how much upside is debatable but with the current earnings, probable earnings growth in the agri businesses, presence in agri seed sector, probability of reforms in sugar and fertilizer sector, fair value of the company is much more.

Comment on management- Promoter familyis fullyinvolved in the business- they have good grip over numbers and business which is evident from the call transcripts- good disclosures- quarterly call transcripts are available on company website for last 5 years. Ajay Shriram, Chairman & Senior Managing Director and Mr. Vikram Shriram, Vice Chairman and Managing Director are promoters.

Mr. Rajiv Sinha, Joint Managing Director; Mr. Ajit Shriram, Deputy Managing Director and Mr. JK Jain, CFO of the Company

Triggers-

- Announcement on spinoffs or sale of some divisions- a lot of talk in the market I see on this but this is not going to come in a hurry.

- Recovery in sugar prices

- Margin and volume improvement in seeds and agri business- 1-2 years time frame

- Fertilizer policy clarity- again not coming in a hurry

So overall- a very solid company with very limited downside- upside is good if you are going to hold it for 2-3 years timeframe- many triggers but uncertain- can double or even triple from these levels. Need to weigh against other investment opportunities.

Not invested at the moment.

Views invited.

1 Like

Highlights of the Concall by Capital Mkt;

  • Net Revenues were higher by 8% at Rs. 1452.2 crore in Q3FY'14 compared to Q3FY'13 driven primarily by Fertilizer, Bioseed and Chloro-Vinyl
  • Overall PBIT stood at Rs. 77.5 crore in Q3FY'14 vs. Rs 102.5 crore in Q3FY'13. PBIT (excl. Sugar) was at Rs. 107.4 crore vs. Rs. 77.6 crore. Sugar PBIT stood at negative of Rs. 29.9 crore from profit of Rs. 24.9 crore in Q3 FY13, an impact of Rs. 54.8 crore. Margins turned negative at Rs. 383 per quintal from positive Rs. 558 per quintal, consequent to high Cane prices and declining Sugar prices.
  • PAT stood at Rs. 44.3 crore compared to Rs. 60.8 crore. Cash Profits at Rs. 75.3 crore vis--vis Rs. 98.0 crore. Net Debt as on Dec 31, 2013 stood at Rs. 474.4 crore vis--vis Rs. 1,385.9 crore on March 31, 2013

Fertilizer

  • Fertilizer revenues were up 65.4% to Rs 169.7 crore in Q3FY'14 compared to Q3FY'13. Fertilizer PBIT was Rs 5.2 crore in Q3FY'14 compared negative of Rs 11.3 crore in to Q3FY'13.
  • Business continues to witness margin pressures due to uncompensated costs, a result of delay in finalization of the New Urea pricing Policy â partly mitigated by improved savings on account of energy efficiencies.
  • Plant operating at almost optimal capacity
  • Early finalization of the new Urea policy will help in negating the impact of uncompensated costs

Farm Solutions

  • Farm Solutions revenue was down 1.7% to Rs 343 crore in Q3FY'14 compared to Q3FY'13. Farm Solutions PBIT was flat at Rs 18.2 crore
  • Revenues of value-added inputs' improved by 34%; overall topline moderated due to lower sales of Bulk Fertilizers (DAP/MOP). For 9MFY'14 the top-line overall grew 47% and DAP/MOP grew 107%
  • PBIT from value-added input were higher by 35% for the quarter; however, margin pressure in DAP/MOP negated the impact . For nine months PBIT grew 21% in value added inputs
  • The company is continuing focus on expanding the product range, especially in the higher margin value-added segment, combined with increasing geographical reach expected to drive growth in the medium term.
  • This business is seasonal in nature and the results in the quarter are not representative of annual performance

Bioseeds

  • Bioseed revenue was up 50.2% to Rs 67.4 crore in Q3FY'14 compared to Q3FY'13 driven by growth of Corn hybrid seed in Philippines and Vietnam operations
  • Sales returns, a onetime exercise carried out in Q1 and Q2 of FY14 to clear the trade channel is completed. Operations stabilized during Q3. The inventory on account of sales returns is now undergoing quality checks and may lead to some inventory write-off in Q4 FY14
  • Muted earnings performance on account of higher spends towards research and market development which will deliver benefits in the long term
  • Growth rates in the medium to long term expected to be robust driven by products launched in the last 1-2 years, healthy product pipeline, continued focus on R&D and strengthening of market development activities supported by normal weather conditions in key regions of operation.
  • Quarterly results are not representative of annual performance as this business is seasonal in nature

Sugar

  • Sugar revenue was down 9.2% to Rs 337.9 crore in Q3FY'14 compared to Q3FY'13. Sugar PBIT was a loss of Rs 29.9 crore compared to profit of Rs 24.9 crore in Q3FY'13.
  • Management feels Sugar business remains challenging as current sugar realizations are not commensurate higher cost of production
  • Despite higher sales volumes, revenues declined due to lower realizations. Lower sugar realizations vis--vis cost of production impacted earnings performance. Sugar margins in Q3 was at Rs (558) per quintal vis--vis Rs. 358 per quintal last year.
  • The company expects better recovery will partly cushion the sharp reduction in prices
  • Cane area expected to come down for the ensuing season
  • Government policy action likely to determine the prospects of this sector, especially if a rational policy that links cane prices to sugar realizations is put in place. Till then environment will continue to be uncertain

Chloro Vinyl including power

  • Chloro Vinyl including powerrevenues was up 10% to Rs 330.4 crore in Q3FY'14 compared to Q3FY'13. Chloro Vinyl including powerPBIT was up 13.5% to Rs 110.8 crore
  • Operations at both, Kota and Bharuch continued to deliver optimal Chlor-Alkali production with improving cost efficiencies
  • Marginally weak realizations at both locations vis--vis last year â decline partly offset by power saving. Realizations, however, have improved on a Q-o-Q basis, the impact of which is reflected in bottom-line
  • Sustained cost containment initiatives have improved the competitiveness of businesses
  • The Company at its Bharuch Chlor-Alkali facility has commissioned the 9th Electrolyser in December 2013, at an investment of Rs. 22 crore. This will help in achieving cost economies

Cement

  • Cement revenues were up 4.6% to Rs 30.5 crore in Q3FY'14 compared to Q3FY'13
  • CementPBIT reported loss of Rs 4.7 crore compared to profit of Rs 3.6 crore Q3FY'13 as a result of subdued realizations along with input cost pressures

Hariyali Kisaan Bazaar

  • Hariyali Kisaan Bazaarrevenues were up 1.4% to Rs 112.1 crore in Q3FY'14 compared to Q3FY'13.
  • Hariyali Kisaan Bazaar reported profit at PBIT of Rs 1.7 crore in Q3FY'14 compared to loss of Rs 3.7 crore in Q3FY'13.
  • Topline and earnings performance in line with plan to arrest financial losses from HKB and improve overall company performance
  • Current revenues only from fuel sales
  • Liquidation of land progressing - to generate cash flows for the Company over the medium term

Hi AK, I really hope you had bought at 55 in Jan14, when you posted the case for DCM Shriram. It is already a near four bagger since then. I read these posts just yesterday, but I had bought it in Jan-14.

In Q1FY15, Seeds busienss (domestic), specially hybrid cotton has turned in Jun14 qtr, truning good profits. But Seeds busienss (international) has not turned around. But inventory returns/write-offs have finished.

Selling of HKB assets is ongoing.

Sugar business has not turned around as such. Today only, they informed exchanges that UP mills have stopped operations, won’t crush due to high sugarcane prices to farmers.

Fensesta has broken even operationally, but yet to do so at net level.

Chloro/PVC is still an amazing cashcow, throwing huge cash at 35-40% margins, and 60%+ ROE. Emkay ‘initiating’ report has good details on this business, and process cycle.

At CMP of 195, DCMS is quoting at 10.5 PE. I am a victim of price ahnchor bias, but looks good even at these prices.

For anyone finding DCMS good now, should also look at DCM Shriram INDUSTRIES limited, which is not from same group, but from same family. It threw up FCF that is approx. 80% of EV as of today. Mainly becasue of reduced wkg cap needs (evident in increased payables, and reduced short term loans). Looks like mkt dynamics are changing for them + they are doing process improvements, which is exapnding margins. Is extremely cheap nonetheless. Will try to start a thread on DCM Shriram Industries.

Disc: own both, DCM Shriram Ltd and DCM Shriram Industries Ltd.

Rajul

Highlights of the Concall by Capital Mkt;

  • Net Revenues was down 18% to Rs. 1197.1 crore in Q3FY’15 compared to Rs. 1452.2 crore in Q3FY14 primarily due to lower volumes in Sugar and Bulk Fertilizers. PBDIT stood at Rs. 54.5 against Rs. 112.2 crore last year led by sharp decline in realizations in the Chloro-Vinyl businesses, lower sales to farmers resulting in higher sales returns and inventory write-offs in international Bioseed operations, sharp decline in sugar prices leading to negative margins and inventory write down partly offset by better performance in Farm Solutions and Fertilizer businesses. Finance charges were lower by 19.3% y-o-y at Rs. 26.1 crore. PAT was Rs. 27.4 crore vs. Rs. 44.3 crore. Tax during the quarter was negative Rs. 25.9 crore due to higher tax provisioning in earlier quarters.
  • Net Revenues was down 8% to Rs. 4329.9 crore in 9MFY’5 compared to Rs. 4703.0 crore in 9MFY14 primarily due to lower volumes in Sugar and Bulk Fertilizers. PBDIT stood at Rs. 417.2 crore against Rs. 396.5 crore last year. Finance charge was at Rs. 84.2 crore, lower by Rs. 36.6 crore vs. last year. PBT stood at Rs. 249.3 crore against Rs. 172.1 crore last year and PAT at Rs. 251.0 crore vs. Rs. 159.6 croreDebt as on December 31, 2014 stood at Rs. 763 crore (Dec 31, 2013 - Rs. 1,153 crore, Mar 31, 2014 Rs. 1,178 crore), Net Debt was at Rs. 491 crore.

Fertilizer

  • Fertilizer revenues were up 24.6% to Rs 211.5 crore in Q3FY’15 compared to Q3FY’14 due to higher prices, a result of increase in gas prices. Volumes were also up marginally. Fertilizer PBIT was Rs 18.1 crore in Q3FY’15 compared to Rs 5.2 crore in to Q3FY’14.Better energy efficiency and compensation of Rs 500/MT w.e.f. 1st April 2014 towards increase in conversion costs has augmented Fertilizer business earnings.Subsidy payments is outstanding since August 2014.The company has planned maintenance shutdown in end Q4 FY15.Management expects earnings of this business will continue to be sub-optimal until the Government fully compensates the conversion costs and ensures timely payment of subsidy.

Farm Solutions

  • Farm Solutions revenue was down 17.9% to Rs 281.6 crore in Q3FY’15 compared to Q3FY’14 due to lower sales volume of Bulk Fertilizers in line with the company’s plan. However Farm Solutions PBIT was up 25.1% to Rs 22.7 crore.Value-Added segment’s revenue was up by 3% y-o-y for Q3 and 4% for 9M period, a result of drought in some regions.Overall operating margins improved vis–vis last year, led by Bulk Fertilisers.The company is focused on expanding the higher margin value-added portfolio.High subsidy outstanding in Bulk Fertilizer business (DAP/MOP/SSP) is an area of concern

Bioseeds

  • Bioseed revenue was down 56.2% to Rs 29.5 crore in Q3FY’15 compared to Q3FY’14. Lower sales to farmers in international operations led to sales returns and inventory write offs.International operations taking longer than expected time to stabilise.Healthy performance of Indian operation was driven by growth in BT Cotton Seed in Kharif '14 partly moderated by lower off-take of Corn Seeds.Bioseed India expected to sustain revenue growth â going forward led by sales of cotton seeds in South and Central markets.The company is taking all steps to augment product portfolio and strengthen marketing efforts to achieve growth in international operations which may take couple of years.Quarterly results are not representative of annual performance as this business is seasonal in nature.

Sugar

  • Sugar revenue was down 49.8% to Rs 169.6 crore in Q3FY’15 compared to Q3FY’14 due to decline in sugar sales volumes, a result of lower production in the last season. Sugar PBIT was a loss of Rs 21 crore with continued downward movement in prices compared to loss of Rs 30 crore in Q3FY’14.Sugar prices in Jan 2015 was around Rs 2750 per quintal leading to inventory write downs.Earnings reflect increase of Rs. 0.49 per unit in co-gen power tariff w.e.f . April 1, 2014.Crushing for SY 2014-15 has started. Progressing satisfactorily.Not accounted benefit of proposed Cane subsidy announced by UP Govt, pending issue of the Notification.Cane Policy for SY 2014-15 is a step forward. Full implementation in right spirit will help.Need policy steps to arrest the downward movement in Sugar prices.Cane crush expected to be marginally lower, may get mitigated partly by higher recoveries

Chloro Vinyl including power

  • Chloro Vinyl including powerrevenues was down 11% to Rs 293.7 crore in Q3FY’15 compared to Q3FY’14. Chloro Vinyl including powerPBIT was down 45.8% to Rs 60 crore.Chlor Alkali realisations continue to move downward, dropped 13% over Q2FY15, leading to lower margins.Salt costs and imported coal prices have softened which going forward will help margins to improve.Prices have stabilised in January 2015. Further movement in prices is linked to global developments

Cement

  • Cement revenues were up 2.3% to Rs 31.2 crore in Q3FY’15 compared to Q3FY’14 driven by higher sales volumes at stable realisations.CementPBIT reported loss of Rs 6.8 crore compared to loss of Rs 4.7 crore Q3FY’14 on account of input cost pressures.Realizations were up on a y-o-y basis but down sequentially

Hariyali Kisaan Bazaar

  • Hariyali Kisaan Bazaarrevenues were up 7% to Rs 119.9 crore in Q3FY’15 compared to Q3FY’14.Hariyali Kisaan Bazaar reported profit at PBIT of Rs 3.2 crore in Q3FY’15 compared to profit of Rs 1.7 crore in Q3FY’14.

Highlights of the Concall by Capital Mkt;
Net Revenues was lower by 11.5% y-o-y in Q4FY’15 to Rs. 1309.3 crore on account of lower sugar volumes as well as decline in realizations, lower volumes of bulk fertilizers in Shriram Farm Solutions business while sales of BT Cotton seed during the month of March’15 was impacted due to delay in receipt of licenses from the State Governments in North India. PBDIT was at Rs. 33.1 crore vs. Rs. 162.4 crore last year due to steep fall in sugar realizations leading to negative margins and writing down of inventory, lower realizations and higher input costs in chloro-vinyl businesses leading to lower margins, maintenance shutdown of 21 days in fertilizer business and lower earnings of Bioseed India as sale of BT Cotton seeds could not be made due to delay in receipt of licenses in Northern states. PAT stood at –ve Rs. 40.2 crore compared to Rs. 82.8 crore in Q4 FY 14. PAT adversely impacted by Rs 21.6 crore on account of charge of MAT credit related to previous years
Net Revenues lower by 8.8% in FY’15 to Rs. 5,639.2 crore primarily on account of lower sales of Sugar and Bulk fertilizers while PBDIT was at Rs. 450.3 crore vis-à-vis Rs. 558.9 crore last year. Finance charges fell by 24.8% y-o-y to Rs. 111.8 crore. PBT stood at Rs. 228.4 crore vs. Rs. 272.4 crore. PAT stood at Rs. 210.8 crore vs. Rs. 242.4 crore.Net Debt as on March 31, 2015 stood at Rs. 688 crore vs. Rs. 683 crore in Mar 31, 2014
Fertilizer
Fertilizer revenues were up 2% to Rs 170.1 crore in Q4FY’15 compared to Q4FY’14. Fertilizer PBIT was Rs 2.3 cr. compared to Rs 8.2 cr. in to Q4FY’14.For FY’15 revenues was up 16.1% to Rs 726.2 cr… Fertilizer PBIT was Rs 37.4 cr compared to Rs 23.2 cr.in to FY’14. Higher revenue on account of increase in gas prices which is a pass through.Scheduled maintenance shutdown of 21 days spread over 11 days in March 15 & rest in April 15, impacted volumes & efficiency leading to lower earnings in Q4 FY15.Plant has commissioned & stabilized after the scheduled maintenance shutdown.Improved profitability in FY 15 was due to higher reimbursement towards conversion costs & energy savings during the year. Reimbursement towards conversion costs went up by Rs. 500/MT under NPS III w.e.f. April 1 2014 although it still does not adequately reimburses for the overall cost increases.Business would continue to face cost pressures until the Govt. adequately increases the retention prices to compensate for cost increases.
Farm Solutions
Farm Solutions revenue was down 20.9% to Rs 247.6 crore in Q4FY’15 compared to Q4FY’14 due to delay in receipt of licenses for sale of BT Cotton seed from State governments in North. However Farm Solutions PBIT was up 9.2% to Rs 16.4 crore due to better margins in the Bulk Fertilizers.Volumes of DAP/MOP lower in FY 15 - in line with market conditions.Performance of ‘Value Added’ inputs vertical was stable despite weak monsoons & erratic weather.
Bioseeds
Bioseed revenue was up 10.9% to Rs 77.8 crore in Q4FY’15 compared to Q4FY’14. PBIT was at a loss of Rs 10.8 crore compared to loss of Rs 29.2 crore in Q4FY’14.For FY’15 Bioseed revenues was up 24.6% to Rs 570.3 crore while PBIT reported was Rs 32.1 crore compared to Rs 4.2 crore in FY’15.
Bioseed’s domestic business’ performance was strong during the year on account of 63% higher BT Cotton volumes for Kharif 2014 season, led by Yuva and Bindaas which received good response in the south and central India. In Q4 the sales in north was restricted due to delay in receipt of licenses from State Governments.
Sugar
Sugar revenue was down 26.7% to Rs 326.8 crore in Q4FY’15 compared to Q4FY’14 due to decline in sugar sales volumes, a result of lower production in sugar season 13-14. Sugar PBIT was a loss of Rs 56 crore compared to profit of Rs 50.1 crore in Q4FY’14.Sharp decline in prices from September 2014 onwards, adversely impacted business. PBIT Margins have declined to –ve Rs. 528 / qtl. Sugar inventory valued at Rs. 2,575 / Qtl. In FY 14 inventory write-down was nil.Losses partly mitigated by Co-gen Power sales and sale of Renewable Energy Certificates.Crushing has ended in all 4 factories, Sugar production this season was around 7% lower than last season.Not accounted for cash subsidy on sugar cane announced by UP Govt, pending issue of the Notification.Sugar industry is working with negative margins for last few years; urgent policy intervention required to support sugar prices and to improve industry viability, especially linking cane prices and sugar prices.Company expects UP Govt. to fully implement its sugar cane policy for FY2014-15 and disburse the cash subsidy immediately as it will help timely payments to farmers.
Chloro Vinyl including power
Chloro Vinyl including power revenues was down 3.4% to Rs 308.3 cr in Q4FY’15 compared to Q4FY’14. Chloro Vinyl including power PBIT was down 26% to Rs 72.2 cr.Revenues were impacted by chlor alkali realisations which have been on a declining trend in the first three quarters with steep decline in Q3.
Realizations have improved in Q4 but are lower than last year. Prices expected to follow global commodity price trends, have seen firming up.Lower realizations and higher inputs prices (Salt, Coal) created margin pressures.Govt. of Rajasthan has imposed electricity duty on captive power and Central Govt. has imposed green cess on coal during the last budget putting cost pressures
Cement
Cement revenues were down 16.6% to Rs 34.2 crore in Q4FY’15 compared to Q4FY’14.Cement PBIT reported loss of Rs 1.2 crore compared to profit of Rs 3.1 crore Q4FY’14 on account of input cost pressures.Volumes up by 6% y-o-y in line with higher production during the year while realisations were under pressure
Hariyali Kisaan Bazaar
Hariyali Kisaan Bazaar revenues were down 4.1% to Rs 97.3 crore in Q4FY’15 compared to Q4FY’14.
Hariyali Kisaan Bazaar reported profit at PBIT of Rs 0.9 crore in Q4FY’15 compared to profit of Rs 5.6 crore in Q4FY’14.

A few important takeaways from the concall that I heard yesterday:

a) Production of cotton seeds has been affected for all players due to unseasonal rains. DCM basically said that there would be a 10% growth impact in sales.

b) They sold 44 lakh packets last year, and the growth came in Karnataka, AP and Maharashtra (my read: The ban on Mahyco seems to have helped). They sold about 19-20 lakh packets in these three states. They were targeting growth of 30% (on the 44 lakh), buit will be able to do only 15-20% due to non-availability of seeds.

c) They don’t see any reduction in acreage in both Cotton and Corn from last year to this year.

Obviously, the immediate implication is, ‘what happened in Kaveri’. Kaveri already had an inventory from previous year, but we don’t have an idea on current production/inventory. Maybe the concall that might happen this week/next week on the release of Q4 results will throw some light. But definitely a question to ask.

Highlights of the Concall by Capital Mkt
Net Revenues increased by 6% YoY to Rs. 1806 crore primarily on account of higher sales of Bulk fertilizers during the quarter. PBDIT stood at Rs 191 crore vs. Rs 269 crore last year.PAT stood at Rs 123 crore compared to Rs. 177 crore in same period last year
Net Debt as on June 30, 2015 stood at Rs. 696 crore against Rs 688 crore on March 31, 2015
Fertilizer.Revenue stood lower by 8.3% YoY to Rs 156 crore due to lower volumes, a result of extended maintenance shutdown during the quarter. Maintenance shutdown also impacted average efficiencies which led to fall in energy savings and contributed to operating losses during the quarter. PBIT reported a loss of Rs 4.9 crore compared to profit of Rs 11.5 crore.
Higher realizations during the quarter was primarily on account of increase in spot gas prices and gas pooling mechanism under the New Urea policy effective 1st June 15.Lower average efficiencies due to the shutdown led to fall in energy savings and contributed to operating losses during the quarter.Revised energy efficiency norms under new Urea policy (effective 1st June 2015) also impacted the earnings.Going forward new Urea policy will impact earnings primarily due to increase in energy efficiency norms. Pooling of gas prices likely to lead to higher subsidy bills and hence higher working capital.The company continues to work towards improving energy efficiencies
Farm Solutions:Revenue went up by 36% YoY to Rs 610.33 on account of higher sales volumes of bulk fertilizers during the quarter.Revenue of the ‘Value Added’ input vertical stood lower vis-à-vis last year due to uncertainty over monsoons and shift in sowing patterns that adversely impacted volumes.PBIT was up 4.8% to Rs 21.8 crore due to better margins in the Bulk Fertilizers.High subsidy outstanding in bulk fertilisers continues to result in higher working capital requirements
Bioseeds:Bioseed revenue were down 7.5% to Rs 365.2 crore in Q1FY’16 compared to Q1FY’15. PBIT was down 11.7% to Rs 84.3 crore.Uncertainty over monsoons and stress in farmer finances, led to lower volumes in BT cotton Seeds and Field crops International operations taking time to recover.Augmenting product portfolio and marketing efforts to drive growth in international operations is expected to take couple of years
Sugar:Revenue increased by 9% YoY to Rs 305.2 crore due to higher volumes. This increase in revenue was limited by lower realizations that stood 20% down vis-à-vis last year
Sugar prices declined to multi year lows which led to historically low negative margins and inventory losses during the quarter resulting in losses at the operating level
Current sugar margins are negative of Rs. 810/qtl.Sugar inventory revalued at Rs 2250/Qtl from earlier Rs 2575/Qtl leading to an incremental inventory loss of Rs 40 crore during the quarter (Rs. 98 crore in Q4FY15), including revaluation of Molasses inventory .Business accounted for a cash cane subsidy of Rs 8.6/Qtl in Q1 FY 15, post the notification on the same by the UP Govt., amounting to Rs. 25.7 crore.Output in the next season is also expected to be surplus
Chloro Vinyl including power:Chloro Vinyl including power revenues inched up 0.4% to Rs 187.7 crore in Q1FY’16 on the back of a marginal YoY increase in volumes amid lower realizations vis-à-vis last year compared to Q1FY’15. Chloro Vinyl including power PBIT was up 10.6% to Rs 66.2 crore. Realisations have witnessed significant improvement sequentially.
Costs of key raw materials like Salt and imported coal have witnessed decline viz last year. However cost of Power has risen at our Kota complex post budgetary changes by Centre as well as State governments wherein increases in coal freight, electricity duty and Green cess limited the earnings improvement.The company is continuing focus on improving cost structures to sustain margins
Cement:Cement revenues were down9.7% to Rs 33.2 crore in Q1FY’16 compared to Q1FY’15.Decline in revenue on account of lower realizations, a result of continuous sluggish demand in the sector.CementPBIT reported loss of Rs 0.8 crore compared to profitof Rs 4.8 crore Q1FY’15onaccount of input cost pressures
**HariyaliKisaan Bazaar:**HariyaliKisaan Bazaarrevenues were down17.3% to Rs 113.5 crore in Q1FY’16 compared to Q1FY’15.HariyaliKisaan Bazaar reported profit at PBIT of Rs 0.5 crore in Q1FY’16 compared to profit of Rs 1.1 crore in Q1FY’15

CONFERENCE CALL - from Capital Markets.

DCM Shriram Consolidated

Global PVC prices are trending lower

DCM Shriram Consolidated conducted a conference call to discuss the results for the quarter ended December 2015 and way forward. Senior Management of the company addressed the conference call.

Highlights of the Concall

Net Revenues increased by 5.5% YoY during Q3FY’16 to Rs 1263 crore. PBDIT increased to Rs 101 crore, up 85% YoY, contributed by Sugar business – with lower losses, primarily due to lower inventory writedowns, a result of higher current prices and lower cost of production led by better sugar recovery, Chloro-Vinyl business – Improvement in earnings vs. same period last year is because in Q3FY15 there was unprecedented drop in prices, Bioseed business - losses stood lower vs. last year as last year had a one time inventory writeoff in international business and Cement business’ had lower losses driven by lower input costs vis-à-vis last year. PAT increased to Rs 60 crore, up 121% from Rs 27 crore in Q3FY’15.
Subsidy Outstanding stood higher by 33% to Rs 584 crore as compared with on Rs 441 crore as on Dec 31, 2014
Net Debt as on Dec 31, 2015 stood at Rs. 435 crore vis-à-vis Rs. 432 crore as on Sep 30, 2015 and Rs 491 crore as on Dec 31, 2014.

CHLORO VINYL

Current PVC prices have seen a significant drop compared to prices in April 15. Chemical prices also have declined in the same period. Global PVC prices are trending lower
Input costs are declining at a slower pace
New taxes and levies on coal based power are imposing additional burden
Overall margins declining in the current year, though better than Q3 FY15 wherein the decline was very sharp led by unprecedented low prices
Increase in Capital Employed of the segment is due to the undergoing capacity expansion at Bharuch
The Business is vulnerable to cheaper imports, with limited custom duty protection. The domestic prices will follow global price trends
Expect higher Chlor Alkali volumes in Q1FY17 as the company commissions its expanded capacity at Bharuch
New captive power plant at Bharuch to start by Sep 2016
Maintenance shutdown in Chemicals and PVC businesses planned in Q4FY16 at both the Kota and Bharuch plants

SUGAR

Lower revenue in Q3FY’16 vis-à-vis last year was primarily due to lower volumes and realisations, a result of lower opening inventory this quarter
Operating losses stood lower during the quarter vis-à-vis last year on account of lower inventory write-down, a result of higher sugar recovery in the current season and improved current realizations
Sugar recovery in the current season till December 2015 stood higher at 10.7% vs. 9.9% last season
Current prices are around Rs 3,000/Qtl only marginally less than the cost of production
Recently announced UP Cane policy is in line with last year’s scheme; SAP unchanged but State Govt’s subsidy reduced by Rs 5/Qtl of cane consumed
Establishing cane and sugar price linkage will provide long term direction to the industry
Sugar production in India is expected to be less than last year. Govt. / Industry pursuing for exports also
Sugar co-gen expansion project is on schedule, to be commissioned before the next sugar season

SHRIRAM FARM SOLUTIONS

Revenue increase during Q3FY’16 vs. last year was due to higher sales volumes of bulk fertilisers
‘Value Added’ inputs vertical’s revenue stood lower by 5% YoY on account of Delayed sowing in the Rabi season amid distressed farm economics that adversely impacted off-take of crop care chemicals and micronutrients during the quarter
Lower business earnings during the quarter was primarily on account of weaker margins in bulk fertilizers and lower sales of Value added inputs
Business’ capital employed increased substantially due to rise in subsidy outstandings and higher inventory of bulk fertilisers
Overall performance will depend on weather pattern in Kharif season
Central Govt. has recently issued Cotton Seed Price Control order. Govt’s decision in the matter will affect the performance
High subsidy outstanding in bulk fertilizers is resulting in higher working capital requirements
Company continues to focus on marketing initiatives and efforts towards growing distribution network, demand creation and product portfolio to drive growth over medium term for ‘Value Added’ business vertical

BIOSEED

Q3FY’16 revenues increase was primarily due to higher sales (Corn) in the international business
Domestic business’ revenue also stood higher due to higher sales of vegetable seeds during the quarter vis-à-vis last year
Earnings improvement was primarily in international operations, as corresponding quarter last year there was one time inventory writeoff
Weather plays a vital role in performance of this business, which has been adverse in our areas of operations, impacting growth
Central Govt’s decision under the newly promulgated Cotton Seed Price Control order will affect the performance
Business expected to witness growth in the medium term driven by high focus on R&D and a strong product pipeline
New product offerings and increasing marketing efforts to drive growth in operations

FERTILIZER

Increase in Q3FY’16 revenue was due to higher volumes vs. last year
In Q3FY’16, energy efficiency stood better both sequentially and vis-à-vis last year
Earnings benefited from allowance by Govt. of Rs 200/Thscm of gas as marketing margin
Tightening in energy efficiency norms under the new Urea policy (effective 1st June 2015) weighed on earnings
Subsidy outstanding substantially higher vis-à-vis last year, a result of high pooled gas prices
Continuous focus on improvement in energy efficiencies
Higher subsidy outstanding leading to downward pressure on earnings due to higher finance costs
Retention prices are not in line with cost increases impacting earnings of this business

CEMENT

Higher revenue during the quarter was due to higher sales volumes
Cement realizations continue to remain soft and stood 2% down sequentially
Improvement in earnings during the quarter vs. last year was on account of higher revenue and lower cost of key input materials

DCM Shriram Limited is a conglomerate which operates in multiple businesses from Caustic Soda/Sugar/Plastics/Fertilizers/Seeds etc. Most of the business here are commodity and regulated and hence there isn’t much that separate them from others in the same. Instead of going in detail of each business I am going to present a snapshot of financials and how each business has performed over the years.

Chlor Alkali/Vinyl: DCM Shriram is India’s 2nd largest Caustic Soda manufacture considering the newly commissioned capacity. India is a net importer of Caustic Soda and its production is constrained mainly because of the by-product chlorine, which cannot be transported over longer distance and the growth of Caustic Soda consumption to Chlorine is in 2:1 ratio. One of the Caustic soda units (Kota) is forward integrated so that the by-product Chlorine can be used for manufacturing PVC or Carbide depending upon realization. Their PVC manufacturing is through Carbide/Acetylene instead of ethylene route which is the general way of manufacturing PVC in India. This results is nigher margins when PVC/Crude goes up and lower margins otherwise. The Chloro-Vinyl business of the Company has highly integrated operations with multiple revenue streams and captive power generation facilities. Chlor-Alkali operations are at two locations (Kota – Rajasthan and Bharuch – Gujarat). The multiple revenue streams enable the Company to optimize operations in a manner to maximize the contribution per unit of power (sell power to grid or used it for production). The following financial data gives a rough idea about the Chlor Vinyl business:

The entire Chlor/Vinyl business has been very good in terms of RoCE, being consistently high ranging 30% to 60% depending upon the capex cycle and depreciation. It is very difficult to imagine a commodity business driving such high return ratio but looking at other players like Gujarat Alkali /Andhra Sugar/ Chemfab it does appear that the industry as a whole seems to have decent return ratios.
Key triggers: The Company has recently expanded capacity by 70% and the sales growth this year is mainly due to volume increase. The company has commissioned the expansion and newer capacity should result it increased sales volume coming year. This should also result in some incremental operating leverage. The company is likely to have a 100% capacity utilization level as the year goes ahead. The Caustic Soda Q4 sales volume have increased by 60% YoY from 58604 MT to 93731 MT. The entire Chlor Vinyl division sales have gone up from 330 cr to 455 cr YoY in Q4. The company is expanding its chemical division in Kota by incurring a capex of 100 cr.
Key Risks: Caustic Soda is a global commodity. Any appreciation in Rupee can result in imports getting cheaper and realizations going down. Also Caustic Soda production is heavily dependent on power and in turn Coal prices. Any changes there can impact input prices significantly. Gujarat Alkali has plans of increasing capacities significantly. As other commodity industries a supply glut can result in realization coming under strain.

Sugar: There isn’t much that I can write about Sugar which is not covered in this forum on the Sugar thread. The current economies make the business look very attractive hiding the extreme cyclical nature. DCM Shriram is one of the most efficient as far as recovery % is concerned and has managed the debt and balance sheet well.

Other than the sugar prices the key drivers for profitability is the recovery rate. DCM’s recovery rate has been among the best in industry.

Key Points: The company has not increased sugar production capacity, but has constantly upgraded itself. It has also add co-gen and has currently adding a distillery. The crushing capacity has remained at 33000 TCD in last 7 years.

Key risks: Sugar is regulated commodity and has a direct bearing on the farm community. Both the cntral govt and state govt defines MSP/Subsidies. Wholesale sugar prices have fluctuated between Rs 21 to Rs 40 in last few years. As can be seen the current return ratios hide the pain that sugar companies has gone in previous years.

Fertilizer (UREA): The company has a capacity of 3,79,500 TPA of under the Shriram Brand. It is a highly regulated industry where the government determines everything from raw material sourcing to conversion price to subsidy to import. The returns generated by the industry has been sub-optimal and has led to closure of lot of fertilizer factories. The following are the financials of this division:

Key Points: One of the major issues here is that the government subsidy remains pending for over 6 months resulting in high working capital. The govt is current testing a DBT (direct benefit transfer) where the subsidy can get credited within 15 days of farmer buying urea. The pilot program is running in 20 districts and if it succeeds it will be slowly ramped up in rest of the country. The company has not increased its urea capacity in last 7 years.

Key risks: Highly regulated, capital intensive agri sector.

BioSeed: Bioseed business is intensely research based and is diversified across key crops (Cotton, Corn, Paddy and Vegetables). India is the key market with presence across all above crops. International presence is in Vietnam , Philippines and Indonesia wherein the key crop is Corn. The performance of the business has seasonality, with Kharif being the major season in India. Out of total sales roughly 60% are from Bt. Cotton licensed from Monsanto. The company also sells GM corn in international market with technology licensed from Monsanto. The company in the last few year has invested 8-10% of revenues into research. The Company is focused on strengthening the research activities by strengthening its internal capabilities and forging alliances with State Universities, International companies and Universities etc. The company has taken several steps to strengthen its Biotech program so as to leverage that opportunity as and when it arises in India. The company has around 30% of cotton seed market in north India with Brand Names Yuva, BioSeed 100, BioSeed 105, BioSeed 6588 and Bindass. The company has been able to enter Maharashtra and parts of Telangana and is looking to increase its footprint there. The following are financials of this division

Key Points: Bt Cotton industry is regulated and heavily dependent on the monsoon with a markt size of around 5 Lac packets. The company does seems to have some edge in technology and s also working on field trials of GM Corn in India. The current season cotton acreage is expected to go up by 8% to 10%.

Key risks: Highly regulated, dependent on Monsanto and limited opportunity size.

Shriram Farm Solutions: The portfolio comprises Value-added products such as Seeds, Pesticides, Soluble Fertiliser, Micro-nutrients etc. along with Bulk Fertiliser (SSP). This business is seasonal in nature.

Key Points: Company does not have a manufacturing presence but is majorly marketing and distributing products in different segment.

Key risks: Dependent on monsoon.

Other Business:
Along with the above business the company is also into other business like Fenesta, Cement (small cement plant mainly to handle waste generated by Carbide ) and Hariyali Kisan Bazar assets which sells fuel and the PVC Compounding business which makes advance polymers in tie up with WestLake (earlier Axiall 50:50 venture).
Most of the business that I have mentioned above is commodity, regulated and cyclical in nature and generally companies like this have high working capital and mediocre return ratios. The promoters consistently incorrect capital allocation decisions throwing good money after bad money. What got me interested in Shriram is Fenesta:

Fenesta:
Fenesta Building Systems manufactures and sells UPVC windows (Un-Plasticized PVC) and door systems under the brand “Fenesta”. It offers complete solutions starting from design, fabrication to installation at the customer’s site. The product has gained acceptability across the nation with higher consumer recall and the brand has become synonymous with UPVC windows.

The business caters to 2 segments.

  1. Institutional segment/Developers segment which comprises of residential including Group Housing and Villas and Commercial building.
  2. Retail Segment which includes the new construction and replacement market

UPVC doors and windows are one of the fastest emerging segments and have gone up from a market size of 0 to 1500 cr in 10 years. Fenesta is the most recognized brand in this segment with around 20% market share. The company manufactures UPVC at its Chlor-Vinyl plant at Kota (Fenesta division can independently source it) which is used in manufacturing the doors and windows. The business has set up self-owned Fenesta branded showrooms along with dealers and distributors in nine cities across India. Fenesta is now “The Superbrand” in Windows & Doors Industry in India. In my discussions and Scuttlebutt with builders an interior designers it was quite evident that Fenesta is considered as highly aspirational with very high quality parameters like sound-proofing, resistance to humidity etc. The key competitors for Fenesta in this segment are LG, Rehau and cheaper Chinese imports. But they all fall behind in pricing, quality and service. Fenesta windows have 10 years warranty and can be installed in a day. The company has been reluctant in disclosing the numbers of Fenesta and has only provided sales numbers and has clubbed it with other business. The business turned PBIT level +ve last year. The key reason behind Fenesta’s quality is the process by which UPVC is manufactured. A Carbide/Acetylene process used by DCM (only company in India to make PVC with this route) results in a high quality compound resulting in high quality windows.

Business Quality: Although the management does not provide numbers in terms of profitability or capital deployed it has consistently said that it is not a capital intensive business. The current capacity is 18000 windows per month and the management is expanding it to 32000 (75%) windows per month with a capex of 18.5 cr. which implies an asset turn of over 11 times on expanded capacity. Further there is 10% advance on booking and the rest of it is paid at the time of delivery implying a very health working capital cycle. Management has indicated a margin of around 7% but there is a large amount of advertising and marketing expenditure used for building future business which significantly reduces the margins.

Risks: The management has little experience in brand building and the dynamics. Unlike CPVC which is patented there are multiple UPVC manufacturers and there are a number of small brands and there is very high competition.

Management :

Capital Allocation: The record here is not great but is improving. The management ventured into a rural retail business and expanded it very quickly taking undue risks. This resulted in heavy losses and the business had to be called off. The management still carries around 200 cr of fixed assets from this business. Further the capital employed in Fertilizer and Bioseeds has gone up significantly with very ordinary return ratios. To their credit they haven’t expanded sugar and fertilizer capacities.

Fairness towards minority Shareholder: DCM Shriram sold land to DLF in 2007 and the entire amount of 837.5 crores was brought into the books of the company.

Accounting: There have been multiple instances of conservative accounting practices followed by management. In their seed business the company paid taxes taxes citing that the case is in court. Also the company paid full royalty to Monsanto last year again citing that it will wait for final court order. The company. In another example the company refused to bring the subsidy declared by the government on cane into books until there was an official notification.

Valuation:

It is extremely difficult to value a conglomerate that involves multiple business which are cyclical in nature. Some of the general parameter used are sales to mcap (.5 to 1 entry 1.5 to 2 exit), replacement cost, capital employed or peer comparison. I will be doing a peer comparison in detail but a rough comparison for various business gives the following:

Without going further it is quite evident that at a MCap of 5600 cr DCM trades quite cheap when compared roughly to its other peers and discounting the Fenesta business. In the next few years Fenesta could possibly be the most defining business of DCM Shriram limited.

Discl.: Invested. Forms more than 5% of my portfolio. This is not a recommendation and I am not a SEBI registered analyst.

Financial highlights:

Annual reports:
http://www.dcmshriram.com/annual_reports

Presentation/Conf Calls
http://www.dcmshriram.com/results_presentations

Fenesta:
https://www.fenesta.com/




http://www.prismma.in/upvc-doors-and-windows-leading-companies/

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