Dynemic Products

salonihemnani011 · September 4, 2020, 7:59am

I also came across this interest cost in 2018-19 but after cross-checking the numbers and referring to notes to accounts, it turns out that the company has always been taking working capital loan in the form of PCFC (Pre-shipment credit in foreign currency). That’s the reason behind low interest cost.

Going forward the term loan that the company has taken for the capex, the promoters mentioned in AGM of FY19 that half of the term loan is availed in foreign currency for 5 years at 5.6% p.a.

As you can see in the snapshot below, the interest charged in P/L and in cash flow from financing is same. Capex derived from the Balance sheet and capex taken from Cash flow also match which means it couldn’t be capitalising interest.

FY20 Capex numbers in balance sheet and cash flow statement show a difference of 25 cr but this can be seen in other current assets till 31st March 2020. This can be found in other bank balance or other current asset change in Q4 results.

I am putting across the snapshots below.

Disc: Invested.

easwar · November 16, 2020, 4:24am

Hi

The borrowing comprises of Rs 80 crs (non-current) and Rs 24 crs ( current ) . It seems that substantial portion of their borrowings might be towards their on going capex, interest on the same will get capitalized.

Their cash flow statement , shows that their operating cash flow is positive for current year, hence loan for working capital might be very small portion.

RamanTiwari · January 7, 2021, 1:54am

Management discussion during AGM:

Overall market size: 50k MT per annum, India market share: 40%
Natural vs Synthetic: Natural is not an option to replace synthetic, Synthetic colours are stable than natural colours. Blending of synthetic colours is possible but not in natural colours. Synthetic food market is growing at 8-10%pa

Revenue at full capacity in Dahej plant would be 300-400 cr at higher margins. 150-200cr in 1st year and 350-400cr in 2-3yrs, Total revenue target for all facilities would be 550-600cr.

Impact on margins post expansion: Since we are going for backward integration, so margins would increase accordingly. Gross margin can increase to 50%(1st year can be slightly lower)

Competition:
Roha - Capacity planned is other than food colors
Vidhi: Would take 2-3yrs for capacity to get ready
Backward+Forward Integration would help Dynemic acquire market share. Post dahej backward integration there is no question of competition as Dynemic will produce all raw materials.
Quality control is best with backward integration and ensures better pricing. Company plans to produce all raw materials, so dependency on raw material suppliers would reduce and give company better quality control & prices.
Pharma products to be manufactured in phase 2 - no timelines yet

On ex-promoter family selling: This is their personal decision and can’t comment.
Current promoters are acquiring from time to time.

Capex: Dahej plant would be ready for production in April2021. Long term loan to increase to 130cr. Total Capex 165cr (120-130cr loan)

Disc - Invested, increased allocation recently

kashish24 · January 21, 2021, 3:03pm

Vidhi will be ready with the new capacity by April 2022 with a capacity of 300MT/month of synthetic water soluble food colors and 60 MT /month of synthetic food grade lakes

sagarbhadury · January 21, 2021, 4:59pm

Has vidhi got the environmental approvals yet? Env approvals are a big thing in this industry. I know Dynemic was waiting for the approvals for a long time after acquiring the Dahej land.

kashish24 · January 21, 2021, 5:38pm

Yes, they have recently got the approval

sagarbhadury · January 21, 2021, 5:42pm

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 .

edwardlobo · January 21, 2021, 9:38pm

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

sahil_vi · January 28, 2021, 5:08am

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:

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.
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.

aashav23 · January 28, 2021, 8:19am

Vidhi is not into manufacturing natural colours until now and they intend to not venture into the same.
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

sahil_vi · January 28, 2021, 11:02am

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.

aashav23 · February 5, 2021, 9:22am

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

sahil_vi · February 9, 2021, 9:05am

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:

Soft drinks & Beverages, Alcoholic & Non-Alcoholic Drinks
Pickles, Sauces & Seasonings, Cheese, Jams & Jellies, Dessert Edible Ices & Confectionery, Baked Goods
Animal Feeds
Bath Soaps, Shampoos, Washing Powder
Toothpaste
Decoration & coatings
Pesticides
Tablets & capsules
Writing Inks
Toiletry Products
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:

Operating margins are very similar across the companies.
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.
Asset turnover is much higher for Indian producers. This stands out specially when looking at Non-Current Asset turnover.
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).
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.
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:

Dynemic and Vidhi make exactly the same food color products (except 1).
Even the USFDA approvals are for the exact same colors.
Export Prices have broadly increased by 60-70% in last 10 years implying a CAGR of 5%.
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:

Extending for other colors (eg: natural food colors)
For some food colors the export price/volume data is not easy to parse. More effort needs to be invested in figuring these out.
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

Understand why Vidhi has higher asset turns. Any efficiencies?
Understand sensient’s products and whether Vidhi/Dynemic’s products are of similar quality.
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.

hafizul88 · February 11, 2021, 12:26pm

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

sahil_vi · February 11, 2021, 12:50pm

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.

hafizul88 · February 11, 2021, 12:58pm

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

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

Disc- invested

Thanks
Hafiz

sivaramtvl · February 11, 2021, 3:08pm

@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.

Did you include the interest in PAT calculation as the capex is being carried out through debt
Did company give any insights on the demand? Any guidelines on the targeted capacity utilization post capex.
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.

raj1968 · February 11, 2021, 3:17pm

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

The project cost has overrun from 100Cr (planned) to 160Cr (Actual).
Interest cost and depreciation should hit the P&L in Q1 FY22.
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

hafizul88 · February 11, 2021, 3:31pm

Hi Siva - sure, please find my response.

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.
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.
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

Shankar · February 11, 2021, 4:11pm

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.