Thanks a lot Sagar for the concall update and clearing the doubts…
Disc : Invested
Thanks a lot Sagar for the concall update and clearing the doubts…
Disc : Invested
I am looking at this company seriously - any VP-er, who works in this industry - would love to hear your views on what drives demand and what do customers of tocopherol
etc. look for.
My worry is that the company may be in too small a niche and hence might find it difficult to scale up from here.
Raghunathan , Regarding scalability , due to huge increasing demand of their product AFL have doubled the capacity (interms of input capacity) to 18,000 MT in 2011 from 8,000 MT in 2010. With expandedcapacity operating at 90% utilization in FY13, it further increased the capacity by 39% to
25,000 ton in September 2013, which is running at 90% utilization at present. AFL is further
increasing its capacity by 80% to 45,000 ton at cost of Rs 22 cr by October 2014. 150%
capacity expansion from 18,000 ton to 45,000 ton over FY13-FY15 would lead to healthy
41.2% volume CAGR over FY14E-FY16E against 28.8% CAGR over FY10-FY13.
Also, the company generates a higher proportion of their revenues from oleochemicals such as dimer as opposed to tocopherols (1/3 and 2/3) and this mix is likely to skew further towards the dimer side. The company has a much better competitive advantage in dimer as it is an import substitute as opposed to tocopherol which it exports. This is good for margins going forward. The company has guided for 18% EBITDA. They are currently at 22%. I think there is a good chance that the company will maintain margins at atleast 20% in the coming 6-8 quarters.
The shift towards oleochemicals is a negative. The ASP for oleochemicals is Rs 0.5 lacs per tonne as compared to Rs 3.5 lacs per tonne for tocopherols. The company doesn’t disclose the segment profitability but it is not difficult to surmise that the profitability is much higher for tocopherols given that the raw material is the same and processing is almost similar.
Tocopherols is supplied to a few large customers under long term contracts. Hence, the demand for tocopherol is not an issue. There is a worldwide shortage of natural vitamin E and hence most of the new supply is getting absorbed.
From what I gather from the con-call, the decrease in tocopherols will not be much and hence it should not be an issue.
Although nothing new in it
Hello Sharmaji, could you point me towards the source where you found data on the margins of various products of Adi? They dont seem to mention anywhere. I always imagined that Dimer would be a higher margin product since it is sold domestically and it doesnt have competitors in the local market. Also what do you mean by ASP?
All of the details are mentioned in the FY14 AR. One needs to put the various pieces of information together. The details are given below. ASP is the average selling price.
So clearly the increased profitability in the last two years in on account of the increased ASP for tocepherols. As the management guided, the prices seem to have cooled off a bit and hence there might be an impact on the overall profitability this year.
May I also request you to please drop the ji.
Was reading on this company.. the turnaround from 2010 looks interesting..with strong return ratios. The fact that company is the sole producer for Dimer Acid, which is 17% of its revenue in FY14, and also the sole producer of Vitamin E (Mixed Tycopherol) which contributes ~ 36%. to the revenues makes the case very interesting.
While, the company has brought a lot of process efficiency which is evident in the decline in lot of fixed costs, the gross margins have been very volatile. The gross margins have been falling over the last 3 years as soya oil prices have risen.
The management has said that they are able to pass on prices to the customers.. but their GM/Tonne has actually come down.
In their con-calls the management has mentioned that their RM and sales are directly co-related with vegetable oil prices, but I tried to plot both on a chart, but I couldn't find any co-relation. Am I missing something here..
|Avg Soyabean Oil Prices- (Indian Rupee per Metric Ton)||22,329||26,748||38,118||44,979||38,874||46,696||57,000||62,290||57,318|
|Source: Indexmundi.com; Company Annual Reports|
As mentioned above in the thread, the tocopherol prices have increased sharply. The question that is confusing me is has this benefited the company's profitability?
The reason for this confusion is that though realizations have gone up, the gross margins have gone down. Indicating, that any increase in realizations have been offset by RM prices increase. Now there could be two scenarios-
1. Either the overall RM costs have shot up and thus impacting gross margins at an overall level
2. The GM for nutraceutical products have increased sharply but the oleochemical RM costs have increased rapidly which impacted the overall margins...
Any idea what's happening here and what is the likely scenario?
|FY06A||FY07A||FY08A||FY09A||FY10A||FY11A||FY12A||FY13A||FY14A||8Yr CAGR||5Yr CAGR||3Yr CAGR|
EBITDA could be up while GM is down because of improved asset turns or any improvement in process/technology. I found out that tocopherol does not have a very high entry barrier and it’s only the B2C part of it (converting tocopherol into a consumable vitamin E) that creates a lot of value.
Given inconclusive evidence, I suspect vitamin E supplement market might start stagnating soon - if not grow. In that case, I am not too bullish about the outlook for tocopherol
if the global vitamin E market is < 0.5 Mn and 40% of the COGS is tocopherol, the size for adi fine chem is not too big - say $ 100 mn or so even if you get a 50% global market share. At $ 1200/tonne, it’s an output of 80,000 tonnes or so and the company is already at 50,000 tonnes installed capacity.
My sense is that law of diminishing returns is going to catch up and my sense is that the company is either going to see slower revenue growth or falling margins or both
At 18 x PE, this is infact slightly overvalued given the low head room for growth - infact, this would shrink to 10-12 if the company can’t maintain growth.
I see an asymmetric downside here and at the CMP, won’t touch the stock. Below Rs. 200-225, this could be a value buy with a 8-9% OCF yield.
As per the FY 14 AR, Adi Finechem produced 1504 tonnes of tocopherol. Also the selling price per tonne of tocopherol is $6000/tonne and not $1200.
The total installed capacity at the end of the year would be 45000 tonnes. This is the total installed capacity including dimer acid,fatty acid etc.
If we are to assume a $500 million global market for natural Vitamin E and a 40% tocopherol input, it gives us a market of $200 million.
At $6000 per tonne of tocopherol, it translates to 33000 tonnes.
Therefore ADI finechem is supplying around 5% of the world market. A simple doubling ortriplingof this share can add up to big revenues.
The opportunity in front of Adi finechem is huge and they have the customer relationships to supply the additional production.
I agree with you that this is a basic convertor type business where the whole argument rests on the prices of Natural Vitamin E remaining buoyant.
Thanks for the correction sharma - appreciate it.
I think in a global market with modest entry barriers (got that vetted from someone in the nutraceutical space that there are at least 200 companies who can supply tocopherol), it’s not easy to move up from 5% market share.
Also, there are concerns about vitamin E supplements causing cancer and it is now increasingly recommended to have natural foods containing vitamin E (
quite logical and intuitive).
So, I do not think it;s a fast growing market and it’s at best a 2-3% growth market and it won’t be easy to shift market shares in such a market.
There have been some preliminary studies that suggest thatsyntheticVitamin E derived from petrochemicals causes cancer.
Vitamin E derived from alpha tocopherols is natural vitamin E and not very different from what you get from other sources like walnuts. Most of the natural tocopherols are derived from soya oil which is a natural source.
Adi Finechem uses the distillate of soya oil and has a streamlined supply chain to collect this from a number of places. It has developed this process to take raw material of varied quality and manufacture tocopherols. There is a limited amount of proprietary process knowledge involved. A lot of tocopherol manufacturers abroad use virgin soya oil which adds to the cost.
Yes the market is not growing very fast but if you have strong relationships with players like BASF and there are no quality issues, the incremental demand should come to Adi Finechem. We must remember that over the past few years, the prices of natural vitamin E have been driven upwards by the shortage of natural tocopherols. This dynamic is not changing any time soon and the prices should stay steady.
It is a simple play of adding more capacity and gaining market share by having strong customer relationships.
More information on MQ is required … Is it professionally run or personally run. Future Road Map and Focus of the management on core business. Promoters … Is thiz the bread winner for promoter or is one of many ???
Where are you getting data that tocopherol prices are steady - infact, the company itself acknowledged that the prices are falling and it’s anyone’s guess if they will stay high.
On what basis did you make a sweeping statement like “This steady” ?
Remember that it’s a business without entry barriers and whenever prices rise and existing producers make super normal profits, new guys come in and add capacity. This is not a high entry barrier business for the record, supported by several data points.
Look at oil now which is also a slow growth market - a far far tougher business than producing tocopherol. 2 years back oil was $ 120 and now it’s $ 60. That’s because the new guys who come in in their bid to grab market share will always sell at marginal costs to keep cash flows going.
At 18 x PE, I am not sure if this is such a great risk reward ratio. At single digits, yes. I do not see them grow their EPS at 20 % + for the next 3-5 years linearly
If we are to believe mgmt it would be wrong to say that there are no entry barriers. As per mgmt, they have to collect RM from many sources which is a logistics nightmare for many in the industry as refineries will get only 2% or so as waste products (RM) out of total refined veg. oil. So, 10,000 tons capacity refinery will produce only 200 tons of RM and I think they require 2000-2500 tons of RM/month. After this, to produce quality output, they have to do complex processing on this RM depending on RM’s quality as there is no standard there, which is quite complex and this know how can be acquired only after many years’ experience and trial and error.
Mgmt is quite bullish about demand situation and very confident that the increased capacity will easily be absorbed by the market. If that turns out to be true, This can be an interesting bet in the short to medium term.
Disc: I’ve taken a small position
If we take decisions based on our belief in what the management alone says, it does not allow us to appreciate business risks fully.
This is a global business and I do agree that sourcing RM is complex in India - but the reality is
compete against a China where this is easier.
I am not saying management is not good - infact, are quite capable and have executed well but the business is’nt as tough as they make it out to be.
I would buy below Rs. 225-250 types
Results Announced, not looking so good.
Yet another example of scuttle butt working - I am of the firm belief that one kicks tyres and talks to competitors/customers, you recognize the trend ahead of financial markets.
A guy I spoke to said that the best times for adi are behind them as the perfect tail wind of production issues in china leading to high prices and a craze for vitamin E supplements (generating strong demand) are getting watered down.
China is back on its legs and demand has been watered down since now people are shifting to eating healthy natural foods that can provide vitamin E. Why pop a pill when you can eat healthy ?
It’s going to be that much tougher for adi to scale this up. On last count, there were at least 200 people in the world capable of making tocopherol.
Of course, at the right price, this risk might be worth taking.