My Take On Paushak
- About Paushak
- MOAT
- Financials
- Valuation
- Suggestion
About Paushak
Incorporated in 1972, Paushak is managed by Mr. Chirayu Amin and his family members, promoters of Alembic Pharmaceuticals Ltd (rated ‘CRISIL AA+/Stable/CRISIL A1+’). Paushak manufactures phosgene-based specialty chemicals, used in the pharmaceuticals, agrochemicals, and performance-enhancement industries.
Phosgene’s market size is likely to be driven by its utilization in pharmaceutical, agrochemical, polycarbonates, and chemical industries. The demand for phosgene will be ever increasing and moreover, the demand will be fulfilled by existing players only as it is extremely difficult to set up plants for phosgene-based specialty chemical production
Paushak uses phosgene for 2 things - sell directly and use captively to create specialty chemicals. (According to the 2010 annual report)
MOAT: Phosgene is extremely poisonous and was used as a chemical weapon during World War I, where it was responsible for 85,000 deaths. It was a highly potent pulmonary irritant and quickly filled enemy trenches due to it being a heavy gas. Hence, the license to produce and handle phosgene is not given by the government to new entrants, making barriers to entry very high. License to increase capacity takes 4-5 years and Paushak has successfully increased its capacity from 1440 MT/Year to 4800 MT/year to 14400 MT/year in the last 15 years. The phosgene-based chemicals are essential and no other company can take the market share from Paushak due to extreme regulatory barriers, leading to an increase in demand met by Paushak only. Thus, making it a long-term value investment opportunity, at an appropriate valuation.
Financials
- Paushak has grown its sales from 30 Cr in 2011 to 150 Crores in 2022, leading to a 15.7% sales CAGR.
- The company has healthy margins with >30% EBITDA and ~25% PAT, >25% pre-tax ROCE
- 1 crore is needed to expand capacity by 80 MT/YEAR. The company completed a 120 Cr capex in 2022, thereby increasing the capacity from 4800 MT/year to 14400 MT/year. With the current capacity of 14400 MT/year, they have a maximum capacity to generate ~450 Crores of revenue, ~100 Crores of operating profit after tax, and ~85 Crores of net profit per year. The current increased capacity of 14400 MT/year may take ~7 years to reach this level of utilization.
Valuation
The current increased capacity of 14400 MT/year may take ~7 years to generate ~450 Crores of revenue, ~150 Crores of cash, and ~120 Crores of net profit per year. By this time I expect the company to get government approval for increasing their phosgene capacity even further, a trend which has been seen in the last 15 years when the company had 3 capacity expansions approved and successfully implemented (Paushak has successfully increased its capacity from 1440 MT/Year to 4800 MT/year to 14400 MT/year in the last 15 years)
Analyses suggest that ROIC is a major driver in the growth of valuation in the chemical sector across the globe (src: McKinsey)
The company has an ROIC of >40%, a very high ROIC vs an average ROIC of 15%. Generated a Net operating profit after tax of 36 Cr by employing ~40 crores of net working capital and ~40 crores of PPE
Having said all that the valuation seems very rich
- On the basis of EV/IC multiple: ~38x (last year’s numbers) vs the median multiple of ~2.5x for the companies in the Indian chemical sector.
- On basis of PE multiple: 85x vs the median multiple of ~20x for the companies in the Indian chemical sector.
- On the basis of a forward estimation: Even if we give the company a forward EV/IC of 19 (current median of top 10 valued chemical companies in India), after 7 years, the enterprise value will be ~4800 Cr (current EV is 3000 Cr), which is only a ~6.5% CAGR over 7 years.
Suggestion
Closely track the EV/IC multiple and price dip for Puashak. And start accumulating when EV/IC is below 12x.