National Peroxide

Stock Opportunities
1

CMP Rs. 490.

PE - 4.87

Debt free. Belongs to reputed Bombay Dyeing group.

Capacity expanded by 25% in June 2011.

Dividend yield 2.5%.

Operating Profit Margin(%) 47.67
Profit Before Interest And Tax Margin(%) 43.45
PBDTM (%) 47.29

There are currently four companies which manufacture Hydrogen Peroxide in India. National Peroxide Limited continues to be the largest producer of Hydrogen Peroxide in the country with
a market share of 36%. In addition to being well known in the industry as a pioneer, its product commands a strong brand image. It has been in the forefront in the development of technology for manufacture of Hydrogen Peroxide, as well as new applications development. Due to these efforts, the domestic market has significantly developed over the years.
The Companyâs project to expand its capacity to 84 KTPA is at an advanced stage and the increased capacity is expected to be available by June 2011. Another competitorâs additional capacity of 28 KTPA is also expected to be available by June 2011. The total production capacity in the Country, during 2011-12 is estimated to increase to 202 KTPA on an annualized basis. The
domestic demand is expected to grow by 7% p.a. during 2011-12.This will result in the domestic demand being fully met from local producers


Rs. In crores
Particulars Mar-11 Mar-10 Mar-09 Mar-08 Mar-07
Sales Turnover 199.53 131.79 151.68 126.13 73.13
Other Income 3.25 0.6 1.03 0.9 1.08
Stock Adjustments 8.49 -2.16 1.49 0.91 -3.27
Total Income 211.27 130.23 154.2 127.94 70.94
Raw Materials 29.21 26.24 41.4 36.42 18.36
Excise Duty 19.28 9.7 16.73 16.92 9.28
Power & Fuel Cost 19.48 16.55 14.94 13.45 8.7
Other Manufacturing Expenses 6.3 8.54 6.46 4.34 4.27
Employee Cost 11.27 8.31 8.65 6.35 6.5
Selling and Administration Expenses 30.55 26.88 23.29 22.38 13.81
Miscellaneous Expenses 0.07 0.37 0.37 0.13 0.08
Less: Preoperative Expenditure Capitalised 0 0 0 0 4.12
Profit before Interest, Depreciation & Tax 95.11 33.64 42.36 27.95 14.06
Interest & Financial Charges 0.76 1.27 3 3.39 1.61
Profit before Depreciation & Tax 94.35 32.37 39.36 24.56 12.45
Depreciation 8.41 8.31 8.21 7.85 5.93
Profit Before Tax 85.94 24.06 31.15 16.71 6.52
Tax 28.02 7.86 10.5 5.93 2.18
Profit After Tax 57.92 16.2 20.65 10.78 4.34


















Particulars Mar-11 Mar-10 Mar-09 Mar-08
Debt-Equity Ratio 0.05 0.12 0.41 0.7
Long Term Debt-Equity Ratio 0 0.07 0.27 0.52
Current Ratio 0.97 0.78 0.7 0.62
Fixed Assets 1.15 0.75 0.86 0.73
Inventory 15.18 15.53 17.99 21.99
Debtors 8.97 8.14 10.19 9.31
Interest Cover Ratio 114.08 19.94 11.38 5.93
Operating Profit Margin(%) 47.67 25.53 27.93 22.16
Profit Before Interest And Tax Margin(%) 43.45 19.22 22.51 15.94
PBDTM (%) 47.29 24.56 25.95 19.47
Cash Profit Margin(%) 33.24 18.6 19.03 14.77
Adjusted Net Profit Margin(%) 29.03 12.29 13.61 8.55
Return On Capital Employed(%) 79.69 30.61 39.03 22.6
Return On Net Worth(%) 55.85 21.92 33.19 20.51
2

Hi, impressive set of nos. The net margin is very good. HDFC Sec had covered this stock in Sep 2010. See if you can open the link below.

The end use of Hydrogen Peroxide is bleaching and other cleansing functions. How much will this market grow, unable to get an idea.

http://www.valuenotes.com/uploads/article_pdf/hdfc_NationalPeroxide_28Sep10.pdf

3

Presently, hydrogen peroxide is mainly used by Textile and Paper industry. Hence, the growth of Hydrogen peroxide is directly linked to growth of these industries. There is a general consensus that Textile industry will go through a brief boom period during the next 3 years. Also recent acquisitions in Paper industry suggests that paper industry could in for some consolidation. Hence, there doesnt seem to be much risk as far as growth is considered. However, newer application of Hydrogen peroxide ( also known as Mr. Clean )in areas of effluent treatment could be the major growth driver in future.

This is the reason that the company is constantly adding capacities and has target to double the existing capacities over the next five years. Most importantly all these expansion will be funded through internal accruals and also there could be further expansion in margins due to

apportionment of fixed costs.

4

The company’s plant was shutdown for 50 days during Q1FY12 for expansion. Hence, The market is expecting muted results for the quarter and hence correction in market price. However, the AR of the company clearly states that it had stocked up enough finished goods to meet customers requirements during the shut down. Hence, the results may still surprise the market on the positive side which could provide trigger for immediate upsides.

Views invited.

5

http://moneylife.in/article/national-peroxide-good-chemistry/18627.html

National Peroxide: Good chemistry
August 03, 2011 05:00 PMnull
Moneylife Digital Team

The company is the countryas largest manufacturer of hydrogen peroxide, used in the paper and textiles industries, and has good growth prospects

National Peroxide Ltd (NPL) makes hydrogen peroxide, sodium perborate and peracetic acid. Established in 1954, NPL is one of the largest manufacturers of hydrogen peroxide in India. The company currently commands a market share of around 40% in the hydrogen peroxide market. The Mumbai-based company has its fully-integrated manufacturingplantfor hydrogen peroxide at Kalyan, on the outskirts of Mumbai. Hydrogen peroxide is used for bleaching,chemical synthesis, effluent treatment, sterilisation, etc, in paper & pulp industries, followed by cotton textiles. Besides, there is a growing demand for water-treatment applications. Hydrogen peroxide is an environment-friendly agent. NPLas competitors include Amines & Plasticizers, Asian Peroxide (unlisted), Gujarat Alkalies and Chemicals, Hindustan Organic Chemicals, Sree Rayalaseema Hi-Strength Hypo Ltd and Tata Chemicals.

The company has gradually increased the production capacity of hydrogen peroxide at its Kalyanplantfrom about 30,000 million tonnes per annum (mtpa) in March 2004 to around 65,000mtpa (50% concentrated) in March 2010. It has further started expanding the production capacity of itsplantto 84,000mtpa and is investing Rs46 crore for this through internal accruals. NPL has chalked out plans to expand capacity to 1,50,000mtpa over the next five years. The financial performance is set to improve further on the back of expanded capacities.

Until December 2009, NPL did not have long-term supply agreements for natural gasafeedstock for hydrogen peroxideaso the company waspurchasingnatural gas on a spot basis. In January 2010, NPL signed a long-term gas supply agreement with GAIL (India) which has ensured steady supply of feedstock at a predefined structure and brought down NPLas costs considerably.

For thefinancial yearended 31 March 2011, NPL reported a net profit of Rs58.17 crore against Rs16.38 crore in FY09-10. In the same period, its total income increased to Rs182.96 crore from Rs122.45 crore, while its net revenues grew to Rs181.63 crore from Rs121.90 crore. Compared to the net-worth of Rs128.73 crore in FY10-11, NPL has loan funds of just Rs8.85 crore which means the company has minimal dependence on external funds. In FY10-11, its earnings per share (EPS) stood at Rs101.23 compared to Rs28.52 in FY09-10. The company has recommended a dividend of Rs12 per equity share of Rs10 each (120%) for FY10-11.

NPLas net profit for the March 2011 quarter increased to Rs15.71 crore from Rs5.91 crore in the corresponding period last year. In the same period, its total income rose to Rs52.64 crore from Rs33.58 crore.

NPL has outperformed the benchmark Sensex since August 2010. Over the past five quarters, NPL has reported an average growth in revenues and operating profit of 42% and 153%, respectively. Its average operating margin is 46% and return on net worth is a superb 45%. Its market-cap to revenues is just 1.44, while its market-cap to operating profit is 2.62 times. Thestock isan attractive buy at the current market price, given its market dominance and growth prospects.

6

Hi Sandeep,

Yes, its a good co. I was a shareholder earlier…exited early :((

But I think the current margins are on the higher side (if you look at their margins historically) and may soften going forward.

Regards,

Ayush

7

I think its a good stock. But revenues and operating profits dipped in 2007 and 2010. Lets investigate the reason why?

Also, how does the company generate such high margins? What is its competitive advantage?

Is 2011 just a blip or a sustained superior performance? With so much capacity addition coming up - will demand grow accordingly or will capacity utilization dip?

With EPS of 99 in 2011 I’d like to see the dividend much higher than rs 12.

kind regards,

subbu

8

The dip in sales in 2010 was due to poor price realisation of Hydrogen Peroxide. The prices were down by 10% though volumes were higher by 21%. Yes, 2011 margins are on the higher side but historically the company has OPM% of around 25%. As far as dividend is concerned, I think the management is retaining most of the cash to meet expansion needs.

Also, one thing I like about the business is RM% to sales which historically is around 25%.

9

Hi, If i remember right then dip in 2007 was due to planned shutdown or some natural calamity.

Regards,

Ayush

10

While going through the report of HDFC given by Mr.Vinod MS,the concerns are there,which i am again atteching here with.

Concerns

Competition could lead to decrease in realizations of hydrogen peroxide and impact profitability

NPL faces competition from imports from Asia and domestic players like Gujarat Alkali, Asian Peroxide and Hind Org Chemicals. India

signed a Free Trade Agreement (FTA) with ASEAN countries on August 13, 2009 after 6 years of negotiation on sideline of meeting of

Economic Ministers of ASEAN. Indiaâs trade with ASEAN countries is mainly with Singapore, Malaysia and Thailand. As a result of the

FTA, the customs duty of imports from Thailand has been reduced from 7.5% to 5%. This is likely to put pressure on domestic prices.

Solvay is setting up a mega plant in Thailand for Hydrogen Peroxide from which a large quantity is likely to be available for their

domestic and export markets in 2012. Increase in capacity by players like Guj Alkali along with increase in supply overseas could result

in an oversupply in the domestic market leading to a fall in realizations in FY12.

**
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Don’t you think these are more valid concerns as we are approching 2012 ?

11

One way of looking this development can be that there seems to be huge unfulfilled demand for this product. Hence, everyone is getting in to major expansion. This could be a case of increasing the pie rather than one’s share. With 38% market share, National Peroxide is definetly placed better to exploit any new oppurtunities. Also, othar than Asian Peroxide, all other companies are also into other products which in a sense dilutes their overall focus on the product.

12

Hi Sandep,

As you mentioned the plant sutting for 50 days in Q-1 would have resulted in price correction. But not sure if the inventory took care of the Q-1 sales.

Did you have a look at the Q-1 results? Your thoughts after the results were announced invited

Rgds

Vinod

13

Hi Vinod,

Did National Peroxide Q1 results. But nothing to read into it, since the plant was closed for about 70 days for expansion. Whatever, sales has happened, is due to closing stock and 20 days operations. Cant read much into the margins due to lower absorption of fixed costs.

But the trial production has commenced in June 11 end. I dont think Q2 results will include sales from expanded production, though Q2 results would be comparable with past quarters. Hence, Q2 and more importantly Q3 results will give a clear picture about the earnings of the company. But if we can have high conviction about earnings for Q2 and Q3, current market price offers a great opportunity to get into the stock as it provides limited downside and high margin of safety.

Views invited

14

Hi,

I think one important point we are missing here is that the prices of Hydrogen Peroxide have almost tripled in the last two years - from Rs.20 to Rs.55 as of May 2011. And these are expected to move up in trend with the past - this is what might be keeping the margins up. And the product has almost unlimited applications - from water treatment to industrial use, from house hold detergents to aseptic packaging, from dental applications to laundry - which would ensure the demand stays high and keeps going higher.

Regards.

15

I have been tracking the stock for a while. My conclusion is that ultimately this is a commodity product and supply should catch up. Solvay has upcoming plants in Thailand and another one in Saudi.

16

hi there, does anyone understand why so much of volatility in yearly volumes sold? Its like every two bad/muted years followed by one bumper year.

Thanks
Rajat

17

AGM notes -

zero discharge plant, maintains cleanliness and hygiene

Process of making hydrogen peroxide - Natural gas >> hydrogen gas >> oxidized using some catalysts >> hydrogen peroxide

Textile has been flat, newspaper buoyant

solvay contribution was not much and they probably wanted to sell

GST has caused price hike in RM (12.5% to 18%)

Competitors - 20% imports, Gujarat alkali 38%

Trying for ADD on imports (put up a team to look after imports)

Prices of RM might come down coz of INR appreciation

Capcity ramp up plan by 30% in next couple of years

18

hdfc_NPL_04Jan18.pdf (789.5 KB)

19

Ground level checks suggest shortage of hydrogen peroxide. Prices of 50% grade very volatile and in the range of Rs65-100/kg after making a high of Rs150. I can’t find global demand supply dynamics, can’t even get why the shortage. As per my calculations, National Peroxide average realization was Rs32/kg and Editda around Rs14/kg
So looks like stronger results coming. However, I would like to know why the demand is so high. Just hearing higher exports happening from traders, but unsure how reliable it could be.

20

Hearing some domestic plants shut downs on environmental issues , but unsure which ones.

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