Dharamsi Morarji Chemicals (DMCC)

Stock Opportunities Untested - but worth a good look
81

Hi Rohit, others

As you are aware, DMCC’s products currently cater to a variety of end-markets. While this mitigates the risk of customer concentration, I feel it makes the analysis of growth expectations a tad difficult.

The management talks about giving more focus towards specialty products. Well, this is good for the company in the long run. But, my concern is that size of the markets for their products itself is so small and they have sizable share in most of them. Is there legroom for further growth?

Now, in the hindsight, the company has had one-off spot market gains in terms of Sulphuric acid for FY19. This has led to an inflated bottom-line, which makes the stock appear cheap in terms of P/E multiples. Now, that Sulphuric acid is a pure commodity, the sustenance of its high prices is only a matter of time. With financials returning to normalcy, the stock looks priced in at PE 12x-15x with no clear visibility on growth.

Would like to hear your views on growth and valuation.

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82

Hi Shreyas,

Agree with you that it is difficult to predict/forecast growth for DMCC. I would argue that is true for most of the chemical companies.

Coming to this FY- yes there is an element of windfall gain due to sulphuric acid prices. But even beyond that I think if we see the numbers there is very good growth. This driven by new products that they have been working on for the last 3 + years. From a quarterly run-rate of ~ 4-5 Crores of profits I think the company seems to have moved to ~ 7-8 Crores of sustainable profit.

Discl: I am invested and thus biased.

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83

Rohit hi,
Do you know the status of their expansion in morarji’s facility in Dahej (sulphuric Acid and Multi purpose plant).?
Also, on Boron products - why is it not possible for company to achieve similar (if not more) margins as that of indoborax (peers).? (Though this question was asked to Bimal in concalls, some how answer was not clear.)
Thanks

84

Good results by Dharamsi

Profit before tax up 3x. Partly a result of high sulphuric acid prices (closure of Sterlite plant). Also seems to have shrugged off the Borax Morarjee merger with its high liabilities. ROCE at over 36%.

Next stage of growth will come from its proposed expansion plans. Debt levels are very reasonable (Total debt/ebitda at 0.4x).

Key risk is impact on realisations of Chinese competition though it has some niche speciality chemical products.

https://tinyurl.com/y3kapv5b

March 2019.pdf (1.0 MB)

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85

Thanks for the update. Gross margins seem to have compressed a bit. Do you know what could be the reason? Is it that the commodity biz contributed more than the specialty one?

Also what risks do you see from Chinese competition? From what I understand, DMCC exports to China and isn’t a play because of whats happening in China (something that is benefitting most other players).

Thanks in advance for your response.

86

In the con call of August 21, 2018 Goculdas did allude to margins being higher due to impact of Chinese availability in the speciality products market (page 7)

In the same call (page 13), there was a larger discussion on the Chinese threat/opportunity for the Indian chemical industry which I am quoting verbatim. Does show that Chinese threat cannot be ignored.

QUESTION:
Is China a threat or an opportunity, how do you see it in the current scheme of things?

GOCULDAS:
Good question, I mean it is on everyone’s mind right now. I look at it as both in the sense that we know that currently the Chinese are cracking down on companies that are polluting. And while some industries and some sector are really benefiting from this, my caution is twofold, one caution is that India should not fall into the same issues.

So, Indian chemical industry needs to be very conscious and very active on pollution prevention, not just treatment but prevention.

And second caution is that by not having some intermediates from China, it could affect other intermediate sales from India as well. For example, in a particular pharmaceutical if you need a product from India and a product from China, but the product from China is not available, then the product from India may also not be bought between the customer just cannot produce his finished product.

So, in that sense it is a threat as well, but on a different thing than what you are thinking. There is one more thing that the Chinese, while they are shutting down they are also reorganizing, they are moving all their industries which are standalone into the equivalent of our industrial zones. So, they are insisting on manufacturing only in designated zones, no standalone factories will be allowed in the future. So, that is another thing which in the short-term may be good but in the long-term will make the Chinese stronger as well.

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87


although the market has reacted quite negatively , i would say a decent of results . PAT of 7. 36 cr on a quarterly basis should be definitely be sustainable. Annualised PAT turns out to be around 30 cr then. At a market cap of 350 cr the stock seems to be at forward P/E of < 12 from here . The boron chemistry does not seem to be contributing to the company as of now,( not sure of this though). Growing on a base of 30 cr PAT does not seem difficult with the capex plans in place.
Disc- Invested

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88

Any idea why Employee expenses have shot up by 35% i.e 4.2 Cr vs 2.96 Cr both QoQ and YoY?
has some expansion happened?

89

Reading balance sheet 2019

NO RECOMMENDATION; only for analysis; worth following

Positives

  1. FY2019 was extraordinarily positive partly due to high sulphuric acid prices. PBT up 3x to Rs 47 cr

  2. High profitability during FY2019 so it could incur capex of Rs 14 cr on plant/machinery. Another Rs 12 cr on repair & maintenance (passed through p&l). Large amount spent (Rs 26 cr) for size of company

  3. Exports are up 53% to Rs 75 cr (32% of sales)

  4. Sulphuric acid expansion plan will to be announced soon

  5. RoCE 33%. RoE 26%. Reduced profitability assumed to remove one-time high profits in FY2019

  6. Total debt reduced marginally by Rs 3 cr to Rs 22 cr. Comfortable debt/ebitda at 0.5x

  7. High payables getting corrected. Possibly a legacy of Borax Morarjee which got merged into Dharamsi

  8. Dividend increased to 15% from 5% last year

Concerns

  1. Produces high margin niche speciality chemicals but difficult to assess impact of Chinese/other large Indian players entering same segment. Dharamsi is still a small player in the speciality chemicals industry.

  2. Contingent liability has increased to Rs 17.5 cr (demand from customs dept)

  3. How will expansion plan be funded (debt/equity dilution)? Capex is large (Rs 50 cr to Rs 100 cr)

Valuation

  1. MCap Rs 299 cr

  2. PE 10x (reduced profitability assumed; Rs 30 cr pat assumed for FY2020; 1st quarter FY2020 pat was Rs 7.3 cr

  3. EV/ebitda 8x

  4. Dividend yield 1.25%

Multiplier777 (@Multiplier777)
2019-08-25, 9:12 AM

1/

Dharamsi Morarjee

Reading balance sheet 2019

NO RECOMMENDATION; only for analysis; worth following

Positives

  1. FY2019 was extraordinarily positive partly due to high sulphuric acid prices. PBT up 3x to Rs 47 cr|

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90

Is it the same 1,00,000+ Sq.mt land of Borax Morarji? I read somewhere it is worth 30cr at current prices. At 80cr valuation, you’re considering only land or the plant as well?

91

I am still not clear about the EC status for both - Sulfuric Acid pland and Multi-purpose plant.
Especially, I am concerned more about Sulfuric Acid plant.

Promoter last told on August’18 Con-call that they are waiting for financial closure but no mention about environment clearance.

I tried to dig in and I was unable to find any EIA filings by Dharamsi in Dahej. Seems like they had filed it through Borox Morarji.

In my limited understanding, Borax Morarji already had EC issued on 15/07/13 for Sulfuric Acid of 11,000 MT/M among other products but they later wanted to amend the approvals

Borax_EC_Dahej.pdf (316.3 KB) and ultimately they withdrew the proposal for amended EC on 06/02/19 due to minor changes.
Borax_EC_withdrawn.pdf (2.8 MB)

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16%20PM818×213 74.8 KB
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If anyone knows the current status of Sulfuric Acid plant and MMP plants at Dahej, kindly update.

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92

Hi Aashav,

As per my understanding they have the approvals for both sulfones and Sulphuric acid plant. They have been slow to do the sulphuric acid capex as there are a lot of players putting up the capacity in Dahej. So I guess they don’t want to add to that. The more exciting part is the dedicated Sulfones capex which also has been a bit delayed. In the AGM I think we will come to know the timelines.

However, they have the EC and the financial closure for both these projects should they go ahead.

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93

Sales turnover at 231 cr vs 176 cr

PBT at 47 cr vs 15.57 cr

PAT at 46 cr vs 12.25 cr

Company has taken credit of MAT entitlement of Rs.908.78 Lakhs as the Management is confident of payment of Normal tax in the foreseable future

Company is emerging as an important specialty chemical company in India with technological expertise in Sulphur and Ethanol chemistry

Company adding new specialty chemicals for pharma and agricultural industry.

Company is offering custom manufacturing services from Multipurpose plants at Dahej and Roha.

Company is on the look out for opportunities for manufacturing new chemicals.

The ability of the Company to handle hazardous chemicals safely and responsibly has resulted in your company becoming a Prime Supplier in its area of operation.

The Research and Development Laboratory at Roha which has been recognized by Government of India, has given an impetus to development of new products and processes in Boron Chemical Business as well at Dahej.

The Company is planning to set up a Sulphuric Acid Plant at Dahej, which would be a backward integration.

Company will also invest in multipurpose plant at Dahej

Company will invest in debottlenecking existing plants , improving energy recovery and change product mix at Roha.

Promoter holding has decreased from 53.42% to 53.28 %.

The Company has received Differential Duty demand of Rs.14.33 Crores

The Appeal is pending at CESTAT, Mumbai, and will come up for hearing in course of time. Based on the legal advice the Company is confident to successfully succeed in the appeal.

Remuneration of BL Gokculdas has more than doubled from 63 lakhs to 132 lakhs. However this is still less than 3 % of PBT.

Overall I believe the company had an exceptional year aided due to better operational performance , higher prices of the company’s products and favourable macros. Company’s future looks to be exciting as it is developing new products in the Sulphur, ethanol, boron chemistry of molecules. The company operates in very niche areas – It is a truly speciality chemical company . Although these supernormal profits ( FY 19 profits) are not sustainable , the company can have a PAT of 25-30 cr and grow from this base. At a market cap of 300 cr the company looks pretty undervalued to me .

Disc - Invested

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94

DMCC - AGM 2019 - 20/09/19
I attended the AGM and Compiled mostly from Q&A done by several shareholders. There might be errors on my end in listening so please confirm the data

CAPEX

  • New product ideation- customers, suppliers, R&D, exhibition, export data.
    Co. doesn’t go by me-too products, rather identifies the advantage
    Prefers products which are below the radar of MNCs and larger cos
    Products with an element of service and customization

  • All EC for Dahej plant is in place. Also for sulphone products in pipeline, EC approved. Will not need another EC for next 3 years
    Roha only debottlenecking is possible, EC for new capex is very difficult so further capex would be at Dahej

  • Sulfuric Acid plant: SA plant is re-looked at due to upcoming many suppliers at Dahej, so higher supply.
    Wants to set up integrated plant & not procure from others so that, can use steam and readily available sulphone products. Also, handling SA is very hazardous, so integrated is preferred

  • Planned Sulfuric Acid plant would be 300 MT/day

  • MMP: 5-10 crores capex done for MMP, this would be operational by December. Usually it takes 9 months to set up MMP

  • The expansion plan of 100 crores over 3 years, the majority is yet to be executed

  • Massive migration in China from standalone plants to Industrial areas, so Chinese manufacturers will come up eventually but with different price level because of safety and environment norms
    Pace for this manufacturers relocation has slowed due to bad macros in China

Operation & Products

  • Testing clients for Diphenyl sulfone & dihydroxy diphenyl.
    its 100 crores potential with a marginal investment of 20 crores
  • Boron EBITDA +ve. Producing 300-400 tons/day commodity boron
  • Boric Acid: Govt suddenly implemented compulsory ISI norm for it. Sales of 3-4 month lost due to same. Completed with the approval, now will resume same
  • Boron speciality expanding & also adding zinc products
  • Foreseeing growth over the long term is not possible, as co. is not inventing new molecules but a new process
  • Researching products catering to pharma and agrochemicals like Lasamide (not sure)
  • All products based on in house R&D
  • Fertilizers: mainly earning royalty from brand licensing, as still the brand is well known.
  • Completed REACH registration via EU subsidiary
  • Participating at various exhibitions for marketing current and newer products
  • Proactive in environment protection, Roha plant would be zero liquid discharge from this month, same would be done for Dahej eventually

Financials & Segments

  • Volumes of Sulfuric acid were slightly lower but realisations improved by more than 50% YoY
  • Speciality volumes & realization both up by 30% YoY
  • FY19 margins were exceptional because of higher sulfuric acid realization, don’t see it continuing on longer-term
  • Did interest rate swaps, as were earning sufficient foreign exchange. Some of the loans would be converted into foreign currency borrowings and interest payment would half on them
  • Contingent liability is regarding customs matter related to sulfuric acid imports, which co. is very confident to settle in its favour
  • Specialty- 30% domestic; 70% exports
    Commodity- 90% domestic
  • Long term margin profile
    Commodity: 5-10%
    Specialty: 15-20%
  • Newer products margin benchmark: 30%+
  • Dahej plant land rates around 2,000-2,500/Sq Mtr. In the resale market
  • Top 5 customers would not be high part of revenue but top 5 product constitutes a significant chunk of revenue.
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95

FY20 Q2 Results: https://www.bseindia.com/xml-data/corpfiling/AttachLive/6b5b0385-1676-480f-a937-39e6738c331f.pdf

96

Rohit Hi,
Any idea on the subdued results?
When is the Dahej Multi product plant going on stream? Any idea?
Thanks

97

Hi Praveen,

My understanding is that they had losses in Boron segment this quarter owing to some license issue, which prevented them to import Boron and thus subsequently impacting production.

Apart from it I think general slowdown is impacting them.

The Dahej multi-purpose plant should be up by the end of this FY, I think. I could be wrong on this though.

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98

During AGM, management had mentioned that the 2nd multi purpose plant should be up and running by end of Dec 2019. DMCC takes ~6 months to set up a multi purpose plant at cost of ~Rs. 7-8 cr.

1 Like
99

Was there discussion on specialty products in boron chemistry??

100

DMCC Q2FY20 Concall Summary

Business Updates

  • Last year was an exceptional year in terms of high finished product prices and low material prices which led to above normal profitability
  • There is a global slowdown prevalent across sectors and companies have been destocking materials which is affecting the company

Participants

Alpha Asset Management

NS Advisors

IIFL

Lucky Investments

Vriddhi Capital

India SME

QnA

  • The management expects revenue to flow in from both of the new capacities from Q3FY20 onwards
  • The asset turns from these facilities will be between 2.5-3 times and total amount spent on it is Rs 10 crores as of now
  • The financial closure and environmental clearance for the Rs 50 crore expansion announced earlier has been achieved
  • The company is not immune to global slowdown and if industries across the board are de growing the company will face problems in growing top line as well
  • No single segment is more than 8-10% of the total revenues of the company
  • The total investments over next two years will be Rs 100 crores on capacity expansion and will be part funded by debt and part by internal accruals
  • The process of relocation and restart of Chinese companies is happening gradually albeit at a higher cost
  • The management is looking at import substitutes and also improving on some existing products in the market
  • The Indian chemical industry is well placed as an alternative to China because apart from India there is no other country in the world after China that has the depth and scalability in this sector
  • Current times are not the most appropriate for investment but taking a long term view capex done at this moment will hold good
  • The management is expecting to run these plants at full capacity utilization in two years time after September 2021 when they will be commissioned
  • It will be difficult to make up the volumes that were lost in the Q2FY20 over the upcoming two quarters
  • The management is keenly focused on keeping working capital low so if there is a customer with a lengthy credit cycle it will add a distributor in between
  • The commodity part of business is 30-40% of top line while the rest is a part of specialty products which is a constant business
  • The sulphone capacity will be operational in the next 6 months and capex on that will be to the tune of Rs 20 crores
  • The top 5 products excluding sulphuric acid will be around 30-40%
  • No forecast or guidance on EBITDA margins going forward
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