Vikas Ecotech - Chemical Company

Stock Opportunities
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Vikas Ecotech is a chemicals company.

History
Earlier known as Vikas Globalone. It was an NBFC listd in BSE in mid-1990. The company started as agent to Reliance, SRF, Nirma, Arkema etc in North India. Company backward integrated into manufacturing in 2003.

Products

According to 14-15 Annual report main product of the company is

Thermoplastic Rubber Compounds which form 31% of turnover of company.

Thermoplastic Rubber (TPR) Compounds are formulated using Styrene-Butadiene-Styrene (SBS) or Styrene-Ethylene/Butylene-Styrene (SEBS) block co-polymers. Most of TRP formulations are 100% recyclable.
Some typical applications of TPR compounds are footwear products, gaskets, cable jacketing, toys, automotive applications, soft touch over-molding and general purpose molded goods. These compounds can be formulated to provide weather resistance, ozone resistance, low temperature flexibility as well as excellent resistance to many chemicals. They are light weight and can be colored to meet your
requirements.

Other products

Methyltin Mercaptide
Tin Tetrachloride
Epoxidised soya bean oil
EVA compounds
PET compounds
PVC compounds

Raw Material

Tin Alloy
2-Ethylhexyl Thiogycolate
Tinmate
PVC compound
TPR compound
Hydrogen Peroxide
RSO Refined Soyabean Oil
Styrene Butadiene Copolymer
Thermal Plastic Elastomer
Methyl Chloride (Gas)

Customers

SRF
Escorts

Cables - RR Kabel, KEI industries, Havells India
Shoes - Relaxo, Liberty
Plastic Furniture - Supreme Industries

Plant Locations

I. Jammu & Kashmir, Dist. - Samba
II. Rajasthan - Shahjahanpur, Dist. - Alwar
III. Uttrakhand, Dist. - Udham Singh Nagar
IV. Delhi, Bawana Industrial Complex
V. Gujarat - Dahej - Under construction

Subsidiary

As of 31-Mar-15 company does not have subsidiary.

Financial

Profit and Loss (Source- Screener.in)

Screen Shot 2016-05-31 at 4.28.34 PM.png969Ă—827 79.7 KB

Balance sheet (Source - Screener.in)

Screen Shot 2016-05-31 at 4.29.50 PM.png972Ă—574 51.6 KB

Recent Management Guidance

On a recent interview on CNBC here the MD of the company Mr. Vikas Garg said the following about the company.

I. Specialty chemical manufacturer and products are not manufactured in India.
II. Will grow at CAGR of 35-40% for next 3 years.
III. Maintain a margin of 22%.
IV. Margin expanded due to - Doubling of exports in Fy16, in-house R & D.
V. Manufacturing to trading ratio 80:20

Key Risk/Concerns

I. Management inflating guidance - In an interview to Inc500 in 2011, MD guided for 800cr revenue in next five years but revenue in 2016 is 312cr.
II. Low promoter holding - Promoter holding is less than 50% with Vikas himself holding only 23.xx%
III. Very high trade receivables - Trade receivables are high. As percentage of revenue close to 45% this year.
IV. Cash flow from Operation not matching Net profit over 10 years period - Summation of Cash flow from operation from 2005-15 is -27.5cr whereas same for net profit is 28.8cr
V. Company is working capital negative.
VI. Unexplained forex outflow - Forex inflow/ outflow of 76cr/51cr respectively. What are they importing?
VII. Plant in sensitive area - Company has a plant in Samba - J & K. Army camp in Samba was attached by terrorist in recent past.

Other points
I. Merrill Lynch Capital bought 1.9m shares at Rs. 20.25 in Feb-16.
II. Shares are trading today at lower circuit at Rs. 11.
III. Company is growing at scorching pace, revenue growth this year is 46%. Net profit grew at 571%

Interview of MD by Business India (360.1 KB)

Disclosure
Not Invested. Opinions Invited.

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Vikas has started work on setting up a manufacturing base in Dehej, Gujarat, with the company already being allotted eight acres of land there. “This will be twice the current capacity and help us cater to the markets of western and southern India. Proximity to the port will allow us to increase exports of products like mtm and epoxidised soya bean oil too”. The expansion is expected to go on stream in the next 12 months.

They’re already expanding outside J&K.
But fascinating choice of plant location in the first place. Promoter says they procure from Haldiram Ethnic Foods which is based out of Delhi NCR region. So why J&K? Could it be because of a tax holiday between Mar '10 to Mar '14? Looks like this is the scheme under which they availed the exemption.

A few quick observations:

  1. As per the AR they’ve manufacturing capabilities at Rajasthan, Uttrakhand and Delhi too. But this didn’t get mentioned anywhere?
  2. Promoter holding is less than 50% with Vikas himself holding only 23.xx%
  3. Forex inflow/ outflow of 76cr/51cr respectively. What are they importing?
  4. Risks that were not covered earlier: Commodity price and govt. regulation risk.

I’m still reading the AR and will contribute more later.

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During the year under review, expenses were incurred on import of technology, raw materials
and further expenses were incurred on foreign traveling of directors and other executives of the
Company.
Earnings : Rs. 76,20,23,719/-
Outgo : Rs. 51,72,36,931/- (include both foreign expenses and Import purchases)

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Total Operating cash flow since 2010 is far less than the total reported profit …it is concerning

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@Gaurav,

Any reason for share price falling over 40% in last few trading sessions. I couldn’t find any specific piece of news towards this. Today, it is up 10% making it very volatile.

I see good potential with Vikas (MD) expecting CAGR growth of 35% over next 3 years.

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@dkukreja I could not really understand what is happening in the company? Management guidance is too good to neglect it. I think we need to understand the following

I. Are these chemicals only manufactured by Vikas Ecotech in India? Is it true that company does not have any competitors in India?

II. If company does not have any competition, are these chemicals imported into India?

III. Does company has any real advantage (margin, cost) over the imports of these chemicals?

IV. If company is the only producers of these chemicals why trade receivable are so high?

V. Why is company growing at such a scorching pace? We know that management has a habit of inflating the guidance. So it is given that company may not grow at the guided rate of growth.

People with links in chemical and plastics industry will have total insight about the company, they can really help by talking to customers (Supreme, Relaxo) of the company.

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Please find attached the corporate report link.corporate_report(1).pdf (360.1 KB)

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http://www.bseindia.com/corporates/anndet_new.aspx?newsid=19942624-c6c8-4c5c-b701-d183b6c91599

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looks promising. bio-plastic is a new concept as far as india. Holding few quantity of share. watching how story shape up.

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hi,

is it good to invest in short term basis? i see some upside for this stock

Ramu

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dificult to say for short time. market is in corrective mode. it may go down to 12.5 to 13 in short time. you may wait.long time buy.

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Q1-Results
http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/1F06FC2F_BCE8_4D48_83C4_671FB87899BA_163127.pdf

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Vikas quarterly presentation Q1FY17.pdf (2.2 MB)

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In the press release you can access here. Vikas ecotech has mentioned that Dahej plant is the 3rd plant of the company.

Screenshot from 2016-08-09 17:45:04.png737Ă—185 83.2 KB

Whereas in the annual report of FY15, the company has mentioned four existing plants in

J & K
Rajasthan
Uttarakhand
Delhi

Screenshot from 2016-08-09 17:46:04.png1015Ă—740 54.8 KB

How are we supposed to understand this?

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Cash Flows of the company tells a different story, am i missing something here ? Company Profit are growing year on year but the same is not reflected in the “Cash from Operating Activity” why ?.

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@Gaurav,
I spoke to the management and they mentioned that they have only 2 plants in Jk and Rajasthan. The third one in Dahej should be operational soon. (From Oct 2k16) I do see the 2 additional plants mentioned in AR15 but don’t think these contribute to any substantial revenue to be accounted.

The main concern is the Working capital. Trade receivables sometimes take 3-4 months to materialize and this is the only drawback i gathered from the call to the Investor relations team.

All else looks too good to be true. :smile:. With the current plant installation revenues of 325cr from the manufacturing unit seems pretty conservative from the management. Overall topline should be 400 cr.

For FY 18, once the Dahej plant becomes fully operational, Topline estimates of 600 cr doesn’t seem outlandish. Besides the management has a dedicated team of marketing folks who are looking to expand into various horizons aggressively.

Also the Investor relationship manager mentioned that there is going to be continuous addition of plants on a yearly basis. The existing Dahej plant itself has provisions to add two more plants once the order book fills up.

Disclaimer: Initiated a tracking position. Hence opinion is unbiased.

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@anand_paxonet

Your post instill confidence to make further investigation into the company.

  1. I am surprised that management is saying that they only have 3 plants. In such case who printed the annual report for 2015. This is a pretty serious matter and a company with two plants missing…:confused:

  • Trade receivable have reached 45% of revenue, which is pretty high number and is already suggesting the management will very soon have to do some provisioning.

  • We should try and talk to some to their customers, suppliers and competitors.

  1. Also, we should try and visit one of the plants.

Disclosure: Not invested.

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Sure. Will need to investigate on these lines. Few more plus that run in favor of this company:

  1. Moderate compensation for Executives
  2. ESOP provided which means the employees have an incentive to work hard
  3. The quality of the products have been accepted by a variety of leaders as very good which gives them pricing advantage and also stay ahead of low cost Chinese competitors.
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Spoke to an Auditor on the subject of receivables. Usual credit for buyers anywhere between 2-4 months to repay the money for goods procured. Anything above 180 days is usually a write-off and needs to be shown so in the balance sheet.

If you look at the revenues for last year:
Q1 = 19% of Total Sales
Q2 = 23% of Total Sales
Q3 = 27% of Total Sales
Q4 = 31% of Total Sales

If we take that the paying cycle is approximately 4.5 months, then the payables must be close to (31% + 0.5*27%) ~ 45%. = 135 crores.

If you look into this problem, a majority of the receivables issue seems to arise out of the fact that the company is constantly growing Q over Q and hence the picture is gory.

Also i can’t figure out any mention of write-offs in AR15 which means that the amounts tend to get recovered. This needs to be closely monitored in this years AR though.

The only drawback of this extended payment cycle is need to go for short term borrowings to fund the working capital.

Otherwise i am continuing to get impressed by this business. :slight_smile:

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@anand_paxonet

You observations & calculation are matching with the present state of the company, which instill confidence.

I suggest we should not take this on face value and trust management just because they are saying it.
This management is sure to over-promise and under-deliver as they have done in the past.

I think we need to do the following before we should even think of taking the next step

I. Resolve missing plants conundrum.

II. Talk to suppliers and customers. The company has mentioned several large companies as customers Kei, Havells, Relaxo, Liberty, Supreme. We need to talk to them. I do not have any connection in the industry therefore we need help here.

III. Also there is unexplained forex inflow/outflow in AR15. I could not find any item they are importing

Screenshot from 2016-08-13 15:24:02.png992Ă—261 37.8 KB

IV. After all the above points are done, we should visit the plant.

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