DE NORA INDIA, poised for growth

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DE NORA India is a niche zero debt, small cap MNC, with a tiny equity capital of ₹ 5 crore of which 54 % is held by the parent oronzio De Nora of Netherlands

. This firm has 3 divisions 1) electrode technologies 2) water technologies 3) Anti corrosion systems.

This 30 year old company was in corporated in technical & financial collaboration with De Nora group, by erstwhile MD & their families of Alfa Laval India & Hoganas India, mainly to cater to re coating of electrodes & replacement of damaged electrodes in chlor alkali industry in india, which required re coating of electrodes every 2 years, in the then mercury cell process. In the past 10 years, the entire chlor alkali industry in india has migrated to energy efficient membrane cell process, which requires recoating every 6 to 8 years, which implies that Denora India will have work only for 2 years & will have to sit idle for the next 6 years.

. That’s exactly what has happened, & Denora India has mastered the art of hibernation, with annuity model income from AMC as well as interest income from fixed deposits of ₹40 crore. However the major obstacle was the prolonged tussle with the Indian promoter Devika Khanna family for the past 8 years, as a result, the parent refused to supply technology & support. Ultimately with the threat of cutting oxygen supply to the Indian subsidiary ( it was done) the Indian promoter was declassified from promoter quota & they sold their shares on the bourses in late 2017 at ₹250 levels, which was fully absorbed.

  Now,  this, is is the reason, why returns on all parameters,  for Denora India has been poor, for the past 10 years. Now the parent has taken full control & its anticipated that with the support & control of the parent, technology will flow, as also the Indian subsidiary will be able to seamlessly import, knocked down kits, components & spares on credit from Denora subsidiaries worldwide. (This was not possible earlier). Now on the bourses, with cyclical quarterly spurts in profits, it has surged to life time high of ₹560 in 2016 & ₹633 in 2018, & now corrected to ₹230 levels, in the aftermath of small cap carnage.

With nil holding by mutual funds, 54 % is held by the parent, 20 % by HNI & NRI investor groups. No analyst has ever given coverage on Denora India, except for sp Tulsian in 2016. With low floating stock & equity capital, it’s easily manipulated by operators, in trend with volatility in quarterly profits.

Now coming to the 3 divisions, 1) Electrode technologies, worldwide Denora has electrodes repair & electrode manufacturing in the same plant for synergy, but in india major role is for re coating, while manufacturing of electrodes is limited to chlor alkali industry, however presently exports of electrodes pertaining to chlor alkali industry is being undertaken, as cost of manufacturing in USA plant is high. Worldwide, Denora manufacturers electrodes for all applications, including those used in fuel cells for industrial & electrical vehicles in joint venture with AFC energy plc. So in india, we can expect manufacturing of electrodes for all applications, in future, as its only plant in Goa has land bank, for future expansion.

  1. water technologies. Denora India manufacturers standard as well as those catering to client specifications, All types of electro chlorinators for water purification for drinking water in railways, townships, residential flats, hotels, industries, swimming pools water theme parks etc. Electro chlorination is the most convenient & cost effective process for commercial water purification. After parent, taking full control, De Nora India bagged tender for industrial electro chlorinators from Bhel in Tamil Nadu for ₹12 crore. Now industrial electro chlorinators are a must in coal, power, steel, nuclear, oil & gas, & all industries that use sea water. Typically Desalination is done, followed by electro chlorination,which kills microscopic algae in sea water, which otherwise grow & occlude equipments & machinery, resulting in sudden shut downs & extensive repairs. Now these projects typically have a gestation of 12 to 18 months, after approval of drawings, for installation & trial runs. The Bhel order is now in the last phase of execution & Denora India typically plans to bag 2 to 3 tenders for industrial electro chlorinators every year & steadily grow in the segment. Now these industrial electro chlorinators are imported in knocked down version from Denora subsidiaries in Singapore or China & assembled & installed in india, along with AMC, spares, maintenance & after sales services. I don’t think these industrial electro chlorinators will ever be manufactured in india, as dedicated plants in China & Singapore do the same thing. However because of imports, forex & dollar rupee comes into play. Further the company caters to entire spectrum of waste water treatment plants for industrial waste, Municipal waste, river purification etc, These kits & components & spares, are again imported from Singapore & China.

  2. Anti corrosion systems are used in steel, construction, marine, ships, industrial etc for prolonging life & durability. Further immense potential as, anti corrosion coatings are used in oil & gas pipe lines for prolonging life, as also railway tracks & structures, bridges etc.

Risk factors. The management is trustworthy, with integrity & unalloyed passion to electrochemistry. However the parent & all its subsidiaries in Italy, Europe, Netherlands, Japan, Canada, USA, Singapore, China are privately owned & not listed on the bourses. The only exception is the Indian subsidiary. Therfore its difficult to get info on Denora India from the management, also no quarterly concall, only limited material is revealed in AR & AGM. With parent in full control & immense potential for its products in india & neighborhood nations, Denora India is a potential multi bagger, if all goes well. Even delisting cannot be ruled out at a future date, as the Indian subsidiary is the sole listed subsidiary in the world. Being a small cap, No mutual fund holdings. Share is also volatile, with volumes from less than a thousand to 3.5 lakh per day on strong cyclical quarter results. With focus on all 3 divisions, volatility in profits should iron out. However all depends on the intentions & will of the parent to focus on the growth of its only listed subsidiary.

I would request one & all especially, Rohit Balakrishnan & sri Krishna bhutra to provide perspectives.

As of last year, electrode technologies contributed 78 %, water technologies 1% & anti corrosion systems 20 % to the turnover. With parent, in full control, all 3 divisions are expected to grow, substantially, & volatility in profits or cyclical nature of business & profits are expected to be ironed out.

On the financials, December quarter, 2017 was the best, with net sales of ₹13.42 cr & EPS of ₹ 8.54, due to surge in re coating orders for electrodes. In March 18, Q, Net sales dipped to ₹ 5.02 cr, with loss, in the Q with negative EPS of ₹3.30. This is due to dip in recoating orders, showing cyclical nature & also, since re coating of electrodes is the major, contributor to revenues with 79 %, This share corrected from ₹633 levels to ₹220 levels. Now with the parent, focusing on ramping the other 2 divisions, volatility should iron out in future.

For June 18 Q, on a net sales of ₹9.13 cr, EPS was ₹3.58, while for Sept 18 Q, Net sales were ₹ 7.86 cr, with EPS of ₹ 0.95. Company has been regularly paying dividends for past several years , with 10 % for the last fiscal.

Discl Holding for the long haul.

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Why is the stock beaten down so much 633 to 220??

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For, December quarter of last year, there was strong order pipeline for Recoating orders & replacement of damaged electrodes in chlor alkali industry. EPS for the quarter was ₹10. On the strength of good quarter results, plus bagging tender for industrial electro chlorinators from Bhel for 12 crore, plus with the parent, taking full control, anticipated growth in water technologies & anti corrosion systems ( the other 2 divisions of this company) created Euphoria, taking it to ₹633 levels. In the next quarter, EPS was negative at ₹2, resulting in downturn to ₹220 levels. Since equity capital is low at 5 crore, of which 54 % is held by MNC parent, operators can easily cause wide swing in share prices, though the MNC parent is trustworthy.

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The point, I’m emphasizing is, electrode re coating & manufacture of electrodes, for replacement of damaged electrodes, is the major business of this company, around 80 % of Net sales. There is a steady flow of other income, from ₹40 cr, deployed in fixed deposits, as well as annuity model income from AMC, from chlor alkali industry. The other 2 business viz, water technologies & anti corrosion systems, have immense potential in india. With parent in full control, technology will flow, to the Indian subsidiary, also Denora India can seamlessly import components, spares & knocked down kits, from Denora subsidiaries worldwide, on credit. So I anticipate steady growth, in these 2 divisions in coming years.

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Few Queries for which i am seeking answers myself.

  • As per annual report, for FY18, top 5 customers contribute 67%(17.54 Cr) out of total revenue of 25.97 Cr from India operations. Who they could be? (One is BHEL) What bargaining power they could have?
  • Even when Khannas were part of the company, parent MNC had controlling stake. What prevented them in transferring technology?
  • What’s the total size of opportunity for Electrode technologies sector in India?
  • Is there disruption threat? Like businesses moving to membrane cell replacement rather than re coating?
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I) Top clients are all from re coating & replacement of damaged electrodes from chlor alkali industry in india, viz GACL, DCW, DCM Shri Ram, chemfab alkali & Grasim, Aditya Birla chemicals. However as a matter of policy, names of clients are not disclosed.

There is pricing power, coz of technology & lack of competitors. Denora technologies provide, durability ( long life) of electrodes along with high or optimum output ( production of chlor alkali is maximized) with minimum energy consumption.

Of there are several small desi competitors, doing this work, for small scale chlor alkali producers, but virtually all major chlor alkali manufacturers in india, have AMC with Denora India for re coating & replacement of damaged electrodes.

Prospects of this division is linked to chlor alkali industry in india. When there is demand for chlor alkali, with producers running multiple shifts, life of electrodes gets reduced & needs Re coating & replacement, conversely in a situation of glut or low demand, re coating orders are delayed.

Again, there is economies of scale in operation. When there is surge in demand for re coating, economies of scale comes into play, & profit margin goes substantially higher, when there are sparse orders, operating costs are substantially higher & not viable. Therefore the company has a habit of bunching or accumulating orders & doing the work, when economies of scale are obtained. However emergency orders are attended immediately, even in sparse season, but then the operations are not viable for Denora India.

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  1. The gist of the matter, is that the parent oronzio De Nora used the lethal weapon of refusal to supply technology & support & with no qualms in bleeding this subsidiary to death, to evict the Indian promoter from this firm. It was a bitter, protracted & painful struggle for the past 8 years. During this period, growth & Profitability has been very poor.

Since inception 30 years ago, the Indian promoter was running this company, with parent oronzio De Nora of Netherlands having a stake of 20 %, which was later hiked to 40 % & ultimately hiked to 54 %, when the bitter feud began, affecting the growth of this company. I call it stunted or retarded growth, no wonder the growth has been poor & negative to say, the least.

Ultimately, as I mentioned, the Indian promoter was declassified from the promoter category, & Krishnan khanna who was holding post of executive director since long, resigned & erstwhile Indian promoters sold their shares on the bourses at ₹250, in 2017.

Further, Denora India which was previously supplying standard electro chlorinators to Indian Railways & PSU on DG & SD rate contract as well as to private sector, stopped production of water technologies products, whose contributions to net sales became zero. It was after the parent took full control in late 2017, that sales of standard electro chlorinators have resumed, including exports, Also the first maiden order for industrial electro chlorinators from Bhel was bagged in competitive bidding in tenders floated.

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  1. The estimated market for electrode technologies & consumables in india is around ₹50,000 million. However Denora India manufacturers electrodes, for replacement of damaged electrodes, in chlor alkali industry in india alone. Electrodes for other applications like welding, transformers, etc are not manufactured in india, though the parent manufacturers them in their overseas plants.

It is anticipated, that the parent will start manufacture of electrodes, for all applications at the Goa plant, since it is cost effective, feasibility for exports due to proximity to Port & also infra exist at Goa plant for future expansion.

However, manufacture of electrodes for all applications is lucrative & its for the parent to take a decision on the Goa plant.

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  1. There is no disruption threat, as of now. Just like all, those who buy new vehicles, do periodic maintenance, during the useful life of the vehicle, rather than buying a new vehicle every year, AMC for chlor alkali industry, will continue without disruption.

However, there is a possibility of membrane cells getting obsolete in future, & being replaced by more energy efficient cells, like how mercury cells became obsolete & got replaced by membrane cell. Despite whatever cell comes out in future, electrodes are the major component of the cell, & they are consumables, that is they are consumed during the process of manufacture of chlor alkali. Therefore periodic maintenance, in the form of re coating & replacement of damaged electrodes will continue, until its useful life span, when the cell is replaced with a new cell.

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Denora posted a good set of nos esp during the lockdown i.e the June quarter (+42% growth in topline). Could be pent up demand as there is a significant increase in the FY20 inventory. However, since the parent got full control of its subsidiary sales have been growing consistently for the last 3 years. In the latest AR co mentions its foray into middle east for IEM refurbishment. In 2019 it also made a foray into water electrolysis however revenue is negligible on that front so far. Its main biz still remains recoating of electrodes used in the chlor-alkali industry. Concern is the WC mgt due to inventory buildup and receivables. The co remains debt free

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Hypo is produced with their products and that with only Salt (NaCl) and water as ingredients. This product may have had high demand in COVID times which can subside with time. What could be the market size they are servicing right now? As per their lates AR desalination plants are taking too much time in completion and that may affect their future revenue. Tech with its Italy holding company is phenomenal but how will they use it and.what is there vision is not clear in all the past ARs. At the same time they do talk of cyclical nature of their electrode biz and danger of becoming it obsolete. Thats why they have started their water tech biz but nothing has come out meaningful from this also.
Disc: tracking

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Denora globally is a major supplier of electrodes for the chlor-alkali industry and is at the forefront of innovation there like the zero gap technology mentioned in the denora India AR. I think there was a change of guard in 2019 at the parent with a renewed focus on water technologies and hence the new vertical in India as well. Fy20 was good in terms of profitability and sales and if the same continues in fy21 it would be interesting.

If one is technically inclined, prices seem to have been consolidating in the 200-240 range for the past many weeks with improved volume

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Any views currently? company’s margins have crashed

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Q3 EPS is 64 paise . Raw materials cost have consumed 50 percent of costs ,16 percent spent on wages. A typical cyclical stock. currently overpriced, better to switch to more promising scrips & re enter on declines.

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Yes, even though the company is in a cyclical industry , results have been disappointing and the company doesn’t seem to have recovered which is surprising as it serves the chlor alkali industry.

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  1. The major money spinner is coating & recoating of damaged electrodes as well as it’s replacement in Chloe alkali industry, which is a cyclical business & occurs every 5 to 6 years.

  2. Despite this, the company receives stable income through out the year from Annual maintenance contract from its customers in Chlor alkali industry.

  3. Recent entry into water treatment business is characterized by long gestation period & capital intensive, though electro chlorinators is a money spinner, catering to railways & hotels, apartments etc for water purification.

  4. Anti corossion treatment business also generates a stable income.

  5. In my view, it’s best to sell & switch to more promising scrips. One can re enter at ₹120 to ₹200 range, the lower, the better.

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@Balki What could be reason behind this bumper quarter?

Is it structural or just a cyclical upturn?

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It’s a cyclical uptrend. Denora shows cyclical uptrend every 4 to 5 years, due to recoating & replacement of damaged electrodes,in chlor alkali industry in india & neighborhood countries.

It survives 24x7 especially during lean season,on stable AMC ( annual maintenance contract for recoating electrodes in chlor alkali industry)

Other than that, it’s has electrochlorinators for purification of water, for railways, hotels, swimming pools, as well as export of electro chlorinators.

Again it’s into anti corrosion systems, as well as purification of marine water used for industrial purposes.

However all these divisions are miniscule & the major contributor to profits is the cyclical re coating business & it’s AMC income.

So, Enjoy the ride, while the going is good, book profits , during a rally & exit before the next down cycle.

Despite all, it’s an MNC , trustworthy, the parent is privately owned unlisted entities with its subsidiaries in operation, world wide

Denora india is the only listed entity in the world. Unfortunately , Denora india is miniscule, in comparison to it’s Chinese subsidiary, which is a behemoth.

Will china plus one policy, create shift from China to india? I don’t think so,at least for near term.

Further, many of the precious metals , used in re coating electrodes ,is imported from its parent.

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