Ion Exchange (India) Limited

[devarshi84]

I am invested in this stock and looking at a wonderful story unfolding. My only serious doubt is their lack of penetration in the consumer space where Ion exchange had a first mover advantage.

The company is making a loss here while others are pulling in millions. Aquaguard for eg. sells service contracts for 6000 a year.

Also, their railyway neer project seems to have vaporised in contrast to what they have said in the concall. I have personally seen machines unplugged and put to other uses.

Rest of the stock story is intact.

Disc: Invested

[spatel]

Presentation that I did at recent VP Chintan Baithak 2019. Linking it here for us all to continue stock specific discussion in this thread.

ValuePickr - Chintan Baithak 2019

Super experience and pleasure again this year. Thanks to guru, seniors and young turks for accelerated learning. Hiren Ved’s session will linger in mind for long. Generous sharing. Practial gyan shared in straightforward and humble way. Will share my notes (incremental) in next couple of days. Presented a stock idea where I ventured out of my comfort zone. A sector that is new to me. A business that probably has no moat, no competitive edge, no uniqueness; but is about to enter and/or in middl…

[dineshssairam]

Another excellent set of results!

https://www.bseindia.com/xml-data/corpfiling/AttachLive/4880f4b2-254c-43a7-8dc1-3d14fe05d762.pdf

[gautham1]

I understand they are mainly into B2B. But does anybody know why they have a 5 month debtor days?

[dineshssairam]

Intimation For Setting Up New R&D Centre At Patancheru, Telangana

d41593e5-5aa3-468f-a5f7-a7412e45e344.pdf

[dineshssairam]

You have answered your own question. They have high receivables, as well as payables because they’re in B2B. Looking at the Cash Conversion Cycle (Receivables - Payables + Inventory) will give you a wholesome picture.

[dineshssairam]

The Concall is out on ResearchBytes.

Here are the major updates:

• Order Book: Order Book is ~1,621 Crores (Of which Srilanka order is ~800 Crores). Also later in the call, the management said they expect to land “significant, new, large orders” in the next 2-3 quarters.
• Bidding Pipeline: 6,000 Crores. The management expects a higher win rate, as opposed to the historical ~10% win rate. Bids are in the areas of Refineries, Steel, Food & Beverages, Oil & Gas companies. Some general comment about the current slowdown impacting some industries and hence lower projects from them. But the management expects a reversion to mean.
• Question about GOI’s interest in water management projects, especially after the Chennai water crisis. Management said they’re expecting increased orders for water treatment. They stressed they are seeing increasing demand all across India. There is also increased focus especially by the GOI (This was one of the reasons why I invested in the company in the first place. There was an alarming lack of government focus of water management in India, and I thought such a move was just inevitable).
• Excellent question about interest from Oil & Gas players for water treatment. But the management was very vague, generally positive about orders from huge water consumers (Like Oil & Gas players).
• The management isn’t overly aggressive about capturing a piece of the Namami Gange pie, but they are actively pursuing it. The management wants to maintain a “degree of caution”.
• Question about Nal Se Jal project. The management said that this government scheme is still some ways away.
• Engineering segment under-performing was due to the mix of orders (If you’re a serious investor in Ion Exchange, you should already know this). The management said the Engineering division won’t have stable Margins or Growth.
• Explanation on the R&D investment. They said the new products developed there will largely be useful for the Chemical segment growth (“The market size is large”).
• An interesting question about opportunities in Lithium extraction from sea water (For usage in EV batteries). The management said they don’t want to directly be engaged in the EV value chain, but they would be open to helping a company with the process if it came to them.
• Some discussion about Ion Exchange Enviro Farm case that’s going on. The results are pending, but the management does not expect any big impact or loss due to this outcome.
• General updates how the company is “preparing itself for the future” and are “cautiously optimistic”. A boring answer for an equally boring question (At least it’s good to continuously hear that the management is taking it slow and not going into this head first).
• 50 Crore Capex for Chemicals division confirmed. Capacity utilization for Chemicals is on average ~80% usually.
• Question about legal charges being high as a percentage of Profit. The management expects legal charges to go down substantially in the future.
• The chemical segment will continue to grow in double digits according to the management, especially supported by exports.
• Government orders are minuscule compared to industrial orders, so impact on WC is not that much (I’m sure the question was asked with VA Tech Wabag in mind).
• Management maintains the ~50% YoY growth guidance.
• Capacity utilization of Membrane plants is ~30-35% only. The management thinks the capacity utilization will move towards full capacity eventually. They are so confident of this, that they are going to expand the capacity too.
• The management says they have “never given guidance for the future” (Which if funny because they did in the last concall - but true that they have never done it before that)
• The quintessential question about the Consumer Segment. The management said the demand has been growing and they remain optimistic. The profitability will also improve by the end of the year, they said. The management dance around a follow-up question about volume growth (Because it wasn’t very much, TBH)
• Export Margins are usually better than Domestic Margins, but no specific numbers disclosed.
• Trade wars in China may help the company positively. The management said they are making sure the relations built during this turmoil will last.
• The management said as the business scales, Margins will expand.
• No significant impact on WC for the next quarter (Because the Srilankan Order is actually running on Negative WC)
• The industry’s competitive scenario remains the same, according to the management.

Overall a good concall. I just wish the management was more open to discussing in-detail about the business and actively take it upon them to simplify the business for the shareholders.

[sukhlani1]

The company looks interesting :
Pros

1. Growth Perspective
2. Good Return Ratios : ROE, ROCE etc
3. Lowered its Total debt from last year and manageable cash position as compared to debt
4. Growing Order Book

Cons

1. Low Margins : Under 10%
2. High Receivables and DSO

One thing that I need help is 91 Cr of Loans & Advances (50.93 on Current Asset and 40.3 Cr on Non CA) that they have on their books as Assets. Has anyone done any research on this , pls share details

[dineshssairam]

1. Don’t look at Receivables alone. Look at CCC.
2. The Loans are made to subsidiaries, so they’re essentially Assets on which they receive interest.

[sukhlani1]

Thanks Dinesh…

Just a quick check the CCC days have actually gone up from 5 days (four years back) to 34 days in the current year.

Also do we have the details as to which Subsidiaries have they loaned and how much interest have they received interest over the last year

[dineshssairam]

Ion Exchange (IEI_Ltd)

[dineshssairam]

@sukhlani1

Just a quick check the CCC days have actually gone up from 5 days (four years back) to 34 days in the current year.

Not sure where you are checking, but I generally consult RateStar: https://www.ratestar.in/company/ionexchang/500214/Ion-Exchange-(India)-Ltd-100214

@sukhlani1

Also do we have the details as to which Subsidiaries have they loaned and how much interest have they received interest over the last year

Yes, it should be in the Annual Report.

[sukhlani1]

@dineshssairam

quick check the CCC days hav

If we look at the CCC days in Ratestar : for Mar 14 it was 5.24 days and 30 days in 2019

[dineshssairam]

Oh, I get it now. You are looking at the Standalone figure. Ion Exchange has several subsidiaries (Refer to Page 20 of the latest Annual Report) that bring in revenue. Here’s the Consolidated CCC of Ion Exchange for the last decade:

It has been pretty stable.

The simple thing is, “Working Capital” is not cash. It’s Receivables, Payables and Inventory. So something has to ‘fund’ the Working Capital. If you think Working Capital has spiked out of control, you should expect to see a spike in intake of Debt and/or Equity or a drop in Sales. These things have to happen together.

This has not been the case with Ion Exchange. Its Cash Flow profile has improved over the years (And so its Cash / Investments on the books). The Debt/Equity Ratio has stayed on relatively the same levels, although now they can service it faster due to the cash flows.

[pratikkothari14]

These details would be in the standalone RPT, under loans given.

[dineshssairam]

My presentation and notes on Ion Exchange during the recent 20-20 Ideas Summit conducted by Tamilnadu Investors Association:

https://www.dropbox.com/sh/5hdfa3iscnoqys7/AACvNusvrGDC_aIysh6fx6cwa?dl=0

[dineshssairam]

Also, something I didn’t include in the presentation: Ion Exchange has always had a high tax rate.

(Source)

Also, as far as I know, the company does not claim any exemptions from Income Tax Act (Please do correct me if I’m wrong). So the savings on income tax is going to be substantial. All the better, since it will help all the upcoming Capex.

[jamit05]

Why is the tax as high as 52%. Corporate tax is 33%, including other charges?

[dineshssairam]

I’m guessing this is what’s happening. This must have something to do with representation in sites like RateStar or Screener. Ion Exchange pays a lot of Excise Duty, so that might have been wrongly classified as Taxes. Technically, all Excise Duty should be removed from Sales, since they are operational expenses and not Taxes.

You can take a couple of Annual Reports and search for the key phrase “The highlights of the financial results are as follows”. You will see that the Taxes as a percentage of PBT is around ~35% for most years. For instance, here’s the Taxes and PBT for 2013-14 when RateStar actually shows a ~67% Tax:

The actual Tax is only about ~34%

[shankar_1979]

The management remuneration is higher than similar companies, but I wanted to see the trend of remuneration.

When I chart the past 5 years Sales, Net Profit and total management remuneration (from Annual reports) after baselineing them, I see that the remuneration is rising in line with Sales.

We can also see the company is becoming more profitable (margin expansion).

Disc: Not invested.

Here is the source code:

import pandas as pd
import matplotlib.pyplot as plt

data = {  
    'Remuneration':[5.76, 6.44, 7.39, 8.08, 8.59],
    'Sales':[732, 802, 926, 986, 1102],
    'NetProfit':[26, 34, 47, 48, 67],
    'Year':['2015', '2016', '2017', '2018', '2019']
}

df = pd.DataFrame(data, columns = ['Remuneration', 'Sales', 'NetProfit',  'Year'])
df.Remuneration = df.Remuneration / df.Remuneration.min()
df.Sales = df.Sales / df.Sales.min()
df.NetProfit = df.NetProfit / df.NetProfit.min()

# multiple line plot
plt.plot(  'Year','Remuneration', data=df, marker='o', markerfacecolor='blue', markersize=8, color='skyblue', linewidth=4)
plt.plot(  'Year','Sales', data=df, marker='o', color='brown', linewidth=1)
plt.plot(  'Year','NetProfit', data=df, marker='o', color='green', linewidth=1, linestyle='dashed')
plt.legend()
plt.draw()