Dynemic Products

Yes, they have recently got the approval

I think we should not be worried, Even if vidhi starts capacity in a year , the entire size of the Pie is going to increase. I think China production would remain benign .

1 Like

Why is vidhi gross profit and PE higher
Strange if they are both in the same sector
Can anyone shed some light
Just looking at investing into vidhi or dynemic

1 Like

From the little I have understood, microcaps generally are where the “efficient market hypothesis” breaks down the most. This also makes it remunerative to invest if one can identify these pockets of inconsistencies. Regardless, here are a few differences I found which could explain the differences in valuations:

  1. Vidhi is into natural colors which fetch 10x (got this number from this thread) the realizations. This means that they could sweat their assets more, at higher profitability.
  2. Vidhi seems to be doing capex of 90cr resulting in 500cr additional topline at full utilization compared to Dynemic’s 150cr capex resulting in 400cr additional revenue.

The big advantage for dynemic of course is that their EC happened in Sep’18 and they intend to begin production in Apr’21 compared to Vidhi who only got the EC in Dec’20. Would be surprised if they can start production before CY23/FY24.

Disc: Have a tracking position in dynemic, studying it more. No position in Vidhi.

5 Likes
  1. Vidhi is not into manufacturing natural colours until now and they intend to not venture into the same.
  2. They mentioned 90 Cr of total CAPEX in FY20 AGM but need to see whether it includes the amount for both Roha & Dahej CAPEX and capacity increases by how much MTPA? Also they have got EC only in Dahej and not in Roha which is expected to manufacture 2x Dahej capacity as per EC data
10 Likes

Thanks for the clarification. I was going by the 1st post on Vidhi thread: Vidhi Specialty Food Ingredients (Formerly ‘Vidhi Dyestuffs Manufacturing’)
where in last question they mention that they were looking to foray into natural colors.
Also, their website mentions that they do make some natural colors:

Form the looks of it, yes. I quote from Vidhi thread “Revenue potential: Total CAPEX outlay is Rs.90 Crores. Post CAPEX, co’s topline is expected to be 700 Crore at full utilization (remember couple of years back management gave a press release wherein they targeted 500 Cr topline by FY20 but that didn’t happen until now)”

Thanks for the clarification. Agreed. This puts the vidhi capacity coming online to be even slower than i currently expected.

2 Likes

Dynemic Q3FY21 results out. Highest ever Q Sales at 54Cr 26% YoY growth & 8% QoQ. EBITDA at 11 Cr and 9MFY21 EPS 20 EPS

7 Likes

Business Description

The company has 2 broad divisions: Food colors and Dye intermediates.
Dynemic Products is a manufacturer & exporter of food colours, Lake Colours, Blended Colours, US-FDA certified FD&C Colours & Dye Intermediates. Food colors are added to food and drinks to create a specific appearance. The global food colors market is primarily driven by the increasing demand from the bakery & confectionery and the beverages industry.

Various end user applications listed on Company website are:

  1. Soft drinks & Beverages, Alcoholic & Non-Alcoholic Drinks
  2. Pickles, Sauces & Seasonings, Cheese, Jams & Jellies, Dessert Edible Ices & Confectionery, Baked Goods
  3. Animal Feeds
  4. Bath Soaps, Shampoos, Washing Powder
  5. Toothpaste
  6. Decoration & coatings
  7. Pesticides
  8. Tablets & capsules
  9. Writing Inks
  10. Toiletry Products
  11. Canned Products

Financial Analysis

One can find on screener that the center of the investment thesis is the Capex (CWIP) (which is 4-5 times Net fixed assets).
I compare Dynemic’s financials with those of Vidhi Dyestuff (listed indian peer) and Sensient Technologies (Largest food color maker). All the data here is for FY19/20.

Company Dynemic Products Vidhi Dyestuff Sensient Technologies
Total Revenue 180 225 9400
Revenue from Food colors (in INR cr) 140 182 3850
Capacity Utilized (in MT) 2950 3799 20000
Realization (per kg) 474.57 479.07 1925
Gross Margins (%) 45 46 31
Operating Margins (%) 20 22 19
Assets Deployed 138 150 5284
Non-Current Assets Deployed 34 37 3480
Asset Turnover 1.01 1.21 0.72
Non-Current Asset Turnover 4.11 4.91 1.1
Employee Costs 9.3 7.34 ?
Employee Costs/Revenue 0.05 0.03 ?
Employees 216 66 4058
MD Salary (in lakhs) 42 200 ?
MD Salary to Median Salary Ratio 22 70 ?

Notes/Caveats: 1. Food color is the more interesting segment to analyze (higher value added, higher realization, higher volume) which is why most analysis is about that segment.
2. Figures in bold apply for the entire company whereas those in normal font apply for the Food color segment.
4. Sensient does not have salary/Employee costs related data. Food color is only 25% of the revenue for sensient. Food colors segment is most profitable for Sensient (highest operating margins). Food Color segment also saw slowest degrowth, largest acquisitions and largest amount of accounting goodwill (indicating previous acquisitions).
5. For Dynemic, I have excluded the CWIP while calculating asset deployment since it would not tell us about the operating efficiency of already deployed assets. To find the segmental assets deployed, I have multiplied the company level number (eg: Total Assets for the segment = Total assets for Company*(Percent of revenue from the segment). This assumes that the asset turnover is the same across segments. Due to lack of any granular data, this simplifying assumption had to be made.
6. For Vidhi, they do not provide a breakup between Food and dye segments. Only between Manufactured and traded products. I have excluded the traded products.
7. Sensient provides the cleanest segmental data (except gross margins). Used as is from 2019 AR.
8. For capacity utilized, for Dynemic I have relied on 100% utilization. For Vidhi, number is taken from AR. For Sensient, number is taken from VP public threads.

Observations from the data:

  1. Operating margins are very similar across the companies.
  2. Gross margins are very similar for Vidhi and Dynemic. Gross margins might be low for Sensient due to the number available being company wide number.
  3. Asset turnover is much higher for Indian producers. This stands out specially when looking at Non-Current Asset turnover.
  4. Realizations are much higher for Sensient. This either means that Sensient sells much higher value products or it means that if Vidhi and Dynemic can produce the same product, then for any client, buying from Dynemic/Vidhi makes a lot more sense. (This can be a reason for high export growth).
  5. For driving the same topline, Dynemic employees a much larger number of employees. This needs to be investigated further. This could either be a source of advantage (if they are hiring employees for the new plants) or a source of weakness (if they are simply less efficient as a company). Looking at FY15,16,17 numbers for number of employees, it appears to be more of latter.
  6. MD salary is much higher compared to median salary for Vidhi than it is for Dynemic.

Product Analysis

In this part, I have looked at the synthetic food colors that Vidhi and Dynemic make.
Raw data is attached.
Key learnings:

  1. Dynemic and Vidhi make exactly the same food color products (except 1).
  2. Even the USFDA approvals are for the exact same colors.
  3. Export Prices have broadly increased by 60-70% in last 10 years implying a CAGR of 5%.
  4. Export Volumes have broadly increased 2x in last 10 years, implying a volume increase of 7% CAGR. Together these imply a broad realization CAGR of ~12%.

Next steps for this analysis:

  1. Extending for other colors (eg: natural food colors)
  2. For some food colors the export price/volume data is not easy to parse. More effort needs to be invested in figuring these out.
  3. Few colors have higher import volumes than export volumes with import prices being higher. This implies that for these colors, domestic demand outstrips supply. These could be clear growth drivers for Vidhi and Dynemic.

Upcoming Capex

Company Dynemic Vidhi
Location Dahej X in dahej and 2X in roha
Capex Size 110 90
Revenue from Capex 400 500
Status of EC Got EC in Sep’18 Dahej got EC in Dec’20, Roha has not received yet
Status of Capex 110 CWIP already. No CWIP
Expected current Start date Apr’21 FY24

Sensient has no planned/ongoing capex. Dynemic is clearly ahead of Vidhi in terms of status of capex.

Key Open questions

  1. Understand why Vidhi has higher asset turns. Any efficiencies?
  2. Understand sensient’s products and whether Vidhi/Dynemic’s products are of similar quality.
  3. Understand nature of contracts between Dynemic/Vidhi and clients. Whether these are long term/can RM price increase be passed on etc.

(Google sheets version of same data which is attached, if anyone prefers that).
Dynemic Products (2).xlsx (81.4 KB)

Disc: Invested, full latest PF here.

19 Likes

Good info, keep up the good work!!!

Good investigation, lets also try to find out why Dynemic is trading with say lower valuation than that of Vidhi—13 of Dynemic vs 20 of Vidhi-----with Dynemic leading the expansion, growth should be way faster for Dynemic than Vidhi , at least next 4 to 6 quarters—so I think with that excellent growth, it should get re-rated as well----whats ur thought on this?

Disc- invested.

Thanks
Hafiz

1 Like

Agreed. This is also why I am invested in dynemic. With their capex coming online in April 2021, they should see materially better results in fy22 imo with better profitability as well with operating leverage playing out.

2 Likes

Thanks - yes, thats the primary reason of investing in Dynemic at this point of time, along with it being in the food sector, which is recession proof and good demand of food colors at domestic & export market, US FDA approved facility, quality and moderate entry barrier in this industry with strict quality control ( edible color has to be as good as medicine) , where EC clearance takes 3-4 years!!!

Very rough calculation, pls correct or add, if needed.

Valuation Analysis

:white_check_mark:Revenue post capex​:point_right:600 cr
:white_check_mark:Current PAT margin is 15%,with b/w integration, margin to be 17%
:white_check_mark:Total PAT​:point_right:102 cr
:white_check_mark:With such a growth, PE should be min 22
:white_check_mark:Total market cap​:point_right:2200 cr+
:white_check_mark:Share price​:point_right:2000

Disc- invested

Thanks
Hafiz

1 Like

@hafizul88 Market most of the times will test our patience when we invest with an expectation of PE expansion. As you said CAPEX will increase the top line and EPS so stock price should move up but have a couple of questions on the calculation.

  1. Did you include the interest in PAT calculation as the capex is being carried out through debt
  2. Did company give any insights on the demand? Any guidelines on the targeted capacity utilization post capex.
  3. Margin remains steady in the recent years so we can safely assume it will remain so at-least until vidhi’s capex comes to production.

@sahil_vi Please shed some light if you have insights.

While everybody is so bullish on the prospects, I would like to throw some caution as a devil’s advocate :grinning::

  1. The project cost has overrun from 100Cr (planned) to 160Cr (Actual).
  2. Interest cost and depreciation should hit the P&L in Q1 FY22.
  3. While management has assured of commercial production from April '21, It need to be seen how the production/sales ramp up happen.

Hence in short term ride might be bumpy.
Regards,
Raj
Disc: Invested

4 Likes

Hi Siva - sure, please find my response.

  1. As on Sep, 2020 - the long term debt of 80 cr is already accounted but due to lower interest , the interest outgo is negligible ( pls see above on this thread , there is a good post with the ~5% interest cost). So, largely, interest outgo should not hamper margin in any significant way. With asset light model ( Fixed asset turn 4X+), depreciation should also not be that significant.

  2. As per Vidhi management (AGM) - demand is excellent, all time demand. So, Dynemic should be able to take advantage of this high demand scenario and scale up the production/utilization.

  3. Margin will improve significantly because of backward integration in the new Dahej plant - management guided that gross margin to be 50%+ (FY22 little less) whereas current gross margin is 45%. New products have higher margin than the current, so blended margin profile should improve meaningfully.

Company also has plan to produce several Pharma API, Food Preservatives chemicals etc ( see the EC doc for all details) - they should also help increase revenue/margin/diversification and thus improve the valuation.

Overall, I see, good times ahead for this company with respect to Business, Financial and thus the stock price!!!

Disc - invested

Thanks
Hafiz

3 Likes

Just a point. Since the plant was not commissioned the interest cost related to the project would have been capitalised… So interest rate appears artificially low.

Once the plant is commissioned the interest expense will kick in.

Please read the post above by “salonihemnani011” in Sep 2020 - The foreign currency loan at sub 5% interest and thus interest cost will not be significant after the plant commission as well.

2 Likes

https://drive.google.com/file/d/1zXeOtYx4hH6mi2E0TlVqYcRQb2txE8kT/view?usp=sharing

Sharing audio recordings from the AGM, some of answers regarding business and competition in there.

From volumes one can guess some part of ex-promoter selling(Dashratbhai) is coming at higher levels, need to see how much he is left with at the end of the qtr.

10 Likes

@Donald
On the Addressable Market size of Food Colors market (natural + synthetic), the best source of the overall market size comes from CHR Hansen’s FY19 roadshow presentation (Fruitmax brand - Natural Colors Division)

Based on above slide:

  1. Total Market size is EUR 1 Billion and growing at 5-7% CAGR.
  2. More interestingly is the conversion volume from synthetic to natural of 35%.

With respect to conversion volume found the below slide from Frutarom - Jan 2018 ppt (before it got acquired by IFF)


Source: https://mayafiles.tase.co.il/rpdf/1144001-1145000/P1144574-00.pdf

Does it warrant some concern?

Googling various market research reports give inconsistent figures for the current market size.

The global food colors market is estimated at USD 3.88 billion in 2018
The food colors market size was valued at $2.1 billion in 2019
The global food colors market size was estimated at about USD 3.9 billion in 2020

Roha Dyechem has done 300 cr capex due to be completed by March 2021 and commercial production to begin in FY22.
Source: Rating Rationale

4 Likes

Shareholding pattern came out and it shows no change in promoter shareholding, so entire price volume action post results happened with 2 large individual investors acquiring stake from retail & clearing members.

I checked with the management on the Dahej Plant and the update is that it has not been commissioned. Company is expecting to start by April end subject to Covid.

5 Likes

Mona Laroi - looks like connection with Oldpine Advisors
Retail have reduced ~2.5%, clearing members ~1.9%

2 Likes