Excel Industries : Experience Certanity

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Excel Industries Limited has announced that the likely date for completion of the acquisition of the chemical manufacturing unit of NetMatrix Crop Care Limited located at Plot no. 15 & 15A, APSEZ, Atchutapuram, Visakhapatnam, Andhra Pradesh is on or before 30th September, 2019 subject to fulfillment of the conditions precedent.

At the meeting of the Board of Directors of Excel Industries Ltd held on Jun.27th, 2019, the Board had approved the acquisition as a going concern by way of slump sale.

The Business Undertaking is a chemical manufacturing unit in APSEZ, having the manufacturing plant for a pesticide intermediate.

The cost of acquisition is Rs. 95 crores (subject to working capital adjustments on Closing Date).

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After the acquisition of the NetMatrix Crop Care when EXCELINDU touched roughly Rs 970 levels, but the Stock has suddenly come down to the levels of Rs 840.

I see 2 reasons in it -

  1. The sales have fallen roughly 9% for H1FY20 (Rs 370 Cr) as compared to H1FY19 (Rs 407 Cr)
  2. LIC has redued its stake from 7.66% to 7.63% which in my opinion should not have such a significant impact.

Also is it important to note that Mr Musaddil Rawat continues to stay invested.

Need insights from Moderators and fellow members for this sudden fall in the Price of the Company!

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can you indicate what can be size netamatrix

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The above screenshot is from Company’s credit rating…
I read somewhere that Netmatrix also has a plant in Gujarat that manufactures chlorpyrifos… Company’s APSEZ plant which they have sold to Excel mfres NaTCP, which in turn is used to manufacture chlorpyrifos… why would they sell their intermediate manufacturing plant if they are also having chlorpyrifos plant?

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I had a question regarding the operating margins. Is it fair to assume the OPM margins will be stable around 16-18% going forward?
Also, what is the outlook regaring the DETC prices going forward? Looking to Initiate a position but want to wait for the bottoming of the Operating margins. appreciate the feedbacks.

Thanks

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The company earns around 52% of its revenue from DETC. DETC is an important intermediate in making of Chlorpyrifos. As per recent reports, Chlorpyrifos is one of the 27 chemicals under review which may be banned by the government citing hazards to environment and human health. A ban of such kind may be a huge risk for the company as it may lead to a substantial decline in revenues and margins. Margins have improved last year due to China’s stricter pollution control norms and shutting down of factories which lead to increase in prices. But all of this may be temporary if impact on revenue due to the recent ban is substantial (as it was suggested in the credit rating report). If ban stays, DETC prices are most likely to go down due to supply glut and weak demand.

The company is trading very cheap and is debt free with large amounts of cash and investments. It could make a great investment if business is more stable and has good growth prospects. Now this may be unlikely for at least a few years.

Does anyone have any idea what percentage of their revenue is going to be affected by this ban?

Disclosure: Was invested. Exited recently and looking for clarity to re-enter.

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To predict the impact we need to know how much sales came from domestic market out of 52% revenue from DETC but that data is nowhere provided. I guess it can be still exported but still the price could be fall due to less demand… Definitely if there is a ban, it will shake their business and investers need rely on company’s plan B.

Let’s wait since Chlorpyrifos is still under review. If no ban, good for investment (it will be banned in comming years if not this year) otherwise ban is good for our society:) It’s under review because identified as possible causes of neurological damage in children.

Please go through this if interested,

https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Excel_Industries_Limited_December_17_2019_RR.html#:~:text=CRISIL%20has%20also%20noted%20the,wide%20usage%20of%20the%20chemical.

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Hey Nosh,

Did you get any comment on the stability of operating margins? And how much of the DETC is exported vs domestic?

Thanks

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@Adhiraj abd @remi have made fair points on this regard. The percentage of sales coming from India is not clear as of yet. the upcoming concall should clarify the concerns.

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I came here to find answer about this same question. sadly, nobody has answered on this in last 5 years. any expert?
Sumitomo chemical brought stake in Excel, Excel crop care got merged with Sumitomo and now called Sumichem. excel is still in the same field.
Excel separated crop care and now focus on chemical that can be used in crop care am I right? what is the connection that still remains between Excel and Sumichem?

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Excel inds is owned by Shroff family which also owns transpek.

Excel crop care was owned by Shroff family but was sold to Sumitomo of Japan and was merged with unlisted sumitomo and renamed sumitomo chemicals, and now not owned by Shroffs.

Hope this clears things.

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Chlorpyrifos has already made a lot of headlines in the recent past in the global market. New York, California banned chlorpyrifos recently… But this is not something new… In countries like USA, several NGOs were against the usage of Chlorpyrifos stating that it causes brain damage to the new born/infants. However, nothing has been yet proven scientifically.
The promoters are veterans in the industry. They are smart. If it were a dying product, why to not try and diversify into some other product? Instead, during the same time, they go and buy another company making chlorpyrifos. Overall, the company’s fundamentals look attractive.

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Chemicals - Opportunities in coming years

The company see good demand for the Organophosphorous (OP) intermediates manufactured by the Company. The reason is that the good rabi harvest has helped in depleting the channel inventories. The IMD has forecast a normal monsoon in 2020 which augurs well for the demand of downstream agrochemicals in the Kharif season.

The Phosphonate range of products finds application in segments like water treatment, soaps, and detergents, industrial and institutional cleaners (I & I), etc. The emphasis on sanitization and cleaning in the wake of Covid 19 has meant a good demand for these products. The demand from the US market has been good and we expect this to continue for the balance of the year.

The Company has been able to establish itself as a serious player in the pharmaceutical intermediates and API segment. The company is backward integrated into these APIs and expects to consolidate its position and grow in these products and it is also working on developing new APIs and intermediates.

In light of the supply disruptions from China in recent years, there is a conscious strategic drive on the part of customers to mitigate the risk of sourcing from China.
Environment & biotech – Two major projects inline

The company bagged two key projects in the FY 2019-20. Operations and Maintenance contract of 600 TPD Municipal Solid Waste Plant at Varanasi for a period of two years starting January 2020.

Bio Mining of 900 TPD Legacy Waste at Ahmedabad starting January 2020 The ENBT business recorded a turnover of INR 17.78 Crores in the financial year 2019-20. The major contribution to the turnover is mainly due to the two key projects mentioned above. The FY 2020-21 will be a challenging year. The demand for Organic Waste Converter systems will below.

The Company will focus on additional sources of revenue to make existing projects profitable, namely through the sale of Segregated Combustible Fuel (SCF) and Refuse Derived Fuel (RDF).

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Even if buyback price is 275 which is more than CMP at that time. Still its good as CMP has increased in all these years and management is aware of business growth of company.

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Q4 results

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Nice summary of results from a reputed handle in twitter

Disc: Invested

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Anyone tracking this ?

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Numbers looked good but this video highlighted few concerns that stopped me to research this business any further.

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Let me make the case why Excel deserves a study despite this.

Chlorpyrifos, the pesticide in the ban list, is made out of a chemical called DETC.

Question 1: Set DETC revenues to 0, how much is the rest of the company worth?

In 2018, Excel decided to expand capacities, doubling the fixed assets:

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This came live in Q3FY22, and explains the jump in top line in the last two quarters:

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Now let’s look at the plant expansion itself:

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Before expansion, DETC which goes into Chlorpyrifos forms 31.8% of the chemicals produced annually. Post expansion, it forms 24.4% of the chemicals produced.

In addition, Excel produces some intermediates before DETC. Revising some basic chemistry, here’s how DETC is made:

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Phosphorus Pentasulfide + Ethyl Alcohol → Intermediate + Chlorine → DETC

You can see Phosphorus Pentasulfide in number 3 on the table above. This process is also confirmed in their raw material requirement:

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D. Spirit is another name for Ethyl Alcohol (has impurities added to it to prevent people from drinking it recreationally).

So taking P2S5 + DETC as DETC allied products, the total amount of DETC allied products before expansion forms 67% of the chemicals produced, and 49.87% post expansion.

This is a large portion of the pie, but in reality, P2S5 is used for other chemicals too, not just DETC so it’s up for discussion if you want to include P2S5 in the DETC pie.

A number of chemicals have also been added to the plant’s capacities including DMPAT, more PSCl3, a number of pharma intermediates and speciality chemicals that could potentially be low volume high margin.

Open question: can we work out the end uses and margin profile of everything else that isn’t DETC?

Question 2: Will Chlorpyrifos be banned immediately, or in a phased manner?

There are several articles that suggest the goverment’s move to ban chlorpyrifos could be brought out in a phased manner over 3-5 years. Other reports suggest the committee investigating the 27 pesticides have only just met to deliberate, and there are delays due to change in officials. In an environment where food security is crucial, will it be the government’s priority to have stability to the pesticide sector?

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CRISIL thinks it will be phased, but I wouldn’t trust just one source.

Question 3: Is Chlorpyrifos the only use for DETC?

CRISIL also tells us that the management is actively selling DETC to non Chlorpyrifos uses:

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Open question: Can we work out the TAM for DETC excluding Chlorpyrifos? Remember that is an intermediate, while the final pesticide is in the ban discussion. What are the other end uses, and the breakup of landscape?

Ultimately, this company is trading at a PE of 9, and the next two quarters should see growth on account of the new CapEx.

In addition to this, company is debt free and has investments of 500 Cr., 33% of the market cap and is even cheaper considering this.

Disclosure: I have a tracking position. There are hundreds of companies to understand, and not enough time to dedicate to all of them :slight_smile:

I would have liked the new capex to have been a complete shift away from DETC, but it was planned in 2018, well before the ban discussion.

@harsh.beria93 as the resident agrochemicals expert, would appreciate your thoughts too!

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Half of the 500cr investment is on their unlisted subsidiary.

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