Vishnu Chemicals - Is Growth sustainable?

Stock Opportunities Untested - but worth a good look
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Vishnu Chemicals is India’s leader in Chrome based chemicals industry. The company is the seller of following products:

Barium Carbonate, out of these, is a recent addition by acquisition (100% shareholding) of a company called Solvay Vishnu.

Before this, there major products have been Sodium Dichromate and Basic Chromium Sulphate.

These chromium compounds are majorly used in leather tanning industry, paints, pigments and as dye stuff, photographic films, Electroplating (chrome plated water taps, and other bathroom accessories), and as an oxidizing agent.

The leather industry in India should grow at the rate of 24% for the next 5 years. (Source: http://www.makeinindia.gov.in/sector/leather/)

Given this growth rate, and the distribution network of Vishnu, it can be a good opportunity.

Now, we deep dived into various factors of the company.

  1. Operating Efficiency

As seen in the above table, the net working capital of the company has increased by 144 Cr in the last 5 years. However, the OCF of last 5 years has been 146 Crs. Hence, they are able to meet the WC requirements by OCF. Although no cash is generated for investment purposes, there current utilization is only 47% and they do not need CAPEX investments till they double the sales.

As seen here, sales have been growing consistently and the OPM is also increasing. In the last 2 quarters of FY16, operating margin has improved to 18.9% than 16.3% last year. One of the reason, which we envisaged, was buying of Solvay, which provideed around 6000 MT of sulphur annually (major raw material). The other can be because of sales of Barium Carbonate (need to check).

The real operating leverage will be seen in PAT, because there is no further investment required. So, a greater chunk of operating profit will translate to PAT, giving higher growth rate for PAT than sales.

  1. Financial Health

The company’s total debt is around 177 Crs. Interest coverage ratio to operating profit lies at 2.30, and hence we do feel that company is not into any financial risk.

  1. Growth Drivers

The company has mentioned in the annual report that they plan to double their sales (from 2015 levels) by 2017. That is total sales of 1000Cr by end of FY17. The company has set up a subsidiary in hong kong, and is also targeting to enter China market.

Also, incremental receivables/sales ratio shows that company is trying hard to increase sales (Not a good sign). But, we believe that this is because they are trying to enter new markets where they are not present.

The second growth driver is the expected growth in the leather industry market, which is 25% as per Make in India website.

The third growth driver will com from the sale of Barium Carbonate chemical, whose major application is in the tiles industry, which is also poised for growth.

While we do not believe that the aggressive target is un-achievable, we believe that they can atleast reach this target by FY18 end. Given the operating leverage they have in hand, EPS can actually grow at double the sales growth.

Concerns:

  1. Incremental receivables ratio is increasing, however, this might not pave as entry to new market, hampering sales.

  2. There have been a petition by Vishnu Chemicals to put import duty on chrome based chemicals, which was rejected. What has been the rationale behind that? Is there a threat to Vishnu by overseas companies? The link to the petition is below:

http://dgsafeguards.gov.in/newversion/FINAL%20findings%20%20sodium%20dichromate%201.pdf

  1. Working Capital incremental has been tremendous in the last 2 years, if this continue, and WC loans are required to sustain growth, it can affect the EPS growth rate.

Disc: Not invested

Akash & Nikhil

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They have a poor credit rating. Though it improved from BB- to BB+. Still below investment grade

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I made a rough google search on the products it manufactures and found a lot of domestic manufacturers too.

Some of the links :
http://www.tradeindia.com/manufacturers/barium-carbonate.html
http://www.tradeindia.com/manufacturers/chromium-chloride.html

Not sure how much these exert pressure on margins or pricing flexibility but definitely I see high customer power in the business. Probably the quantity and scale at which most of these operate is pretty low or their reach is pretty regional.

But with the PE > 15 and commodity nature of business, I need some more info on how much % of local competition to predict if it can sustain the growth.

Disc: Not invested.

Nirav

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Hi Nirav -

We had the same queries and we wanted to understand the market share. Then we got across the petition filed by Vishnu, and it has major details around the market share.

http://dgsafeguards.gov.in/newversion/FINAL%20findings%20%20sodium%20dichromate%201.pdf

On page 3, it is mentioned that

“M/s Vishnu Chemicals is the lead producer of sodium di
chromate and holds major share in the Indian Market as the appellant accounts for
more than 75/85% of the total production in India”

So, I guess this answers the question. However, we are still not able to understand that why Vishnu has filed the petition after being the market leader?

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@goyal_nike

  1. Sodium dichromate:

Vishnu has been the traditional market leader in India.

The pdf document you have attached shows the final findings related to a request for imposition of safe guard duty on import of sodium dichromate which has been applied for by Vishnu Chemicals and supported by other domestic manufacturers of sodium dichromate, with an intent to apply protective additional duty on imports, in order to protect / restore market share.

However, the government after taking into account inputs from all interested parties, and studying all facts has concluded that there is no significant case for application of safeguard duty.

If you study the document, you will see consumers of sodium dichromate have repeatedly claimed that supply disruptions from Vishnu were the norm and and that Vishnu could not supply quality on par with suppliers from abroad. This claim is also supported by sharp increase in tonnage imports from abroad.

The lack of protective duty means margins will need to compress.
Also Vishnu will need to find efficiencies in production, improve quality, and ensure smooth supply to claw back lost market share.

  1. Barium Carbonate:

The nameplate capacity of this plant is 30,000 tons/annum realistically.

Although it is an extremely efficient plant, the major disadvantage for Vishnu is that the production process is different from other domestic producers who get sodium sulphide flakes as a by product.

Vishnu is currently aggressively trying to gain market share and prices of product have fallen from 40 Rs per Kg to 25 - 26 Rs. per Kg. Chinese imports which were earlier in abundance have slowed to a trickle.

Solvay exited the J.V. with Vishnu due to the following factors:

  • Lack of smooth availability of Baryte (primary raw material) from A.P.M.D.C. which meant the plant could not operate on a continuous basis. Also A.P.M.D.C. prioritised supply of good quality grade of Baryte to exporters, rather than supporting domestic value addition initiatives, which is frankly due to lack of national guidelines.

In the past few months, after bifurcation of AP / Telangana supply situation of baryte has stabilised, however the concern remains that there is one authority that controls the supply of primary raw material and any disruption at this organisation means a potential plant shut down.

  • Addressable Market is not very large:

The primary requirement for BaCO3 used to be with the television glass and the chloralkali market, followed by other sectors such as speciality glass, pyrotechnics and ceramics.

The Television Glass industry requirements went to zero after shut down of CRT television lines. (approx. 12,000 tons per annum product requirement in India went away in 2011)

The Chloralkali segment requirement has halved, as a result of two factors:

  • Some major chlor alkali users switched their production process to membrane process which eliminated the use of BaCO3 due to erratic supply of BaCO3 from local producers (courtesy APMDC baryte shortage)

  • Quality of salt received by the chlor alkali producers who still need BaCO3 - has improved thus reducing the need for BaCO3 in production.

The total market demand for BaCO3 in India is unlikely to exceed 15,000 - 18,000 tons in 2016 at max.

Inspite of aggressive pricing Vishnu is unlikely to kill their domestic BaCO3 competitors. As explained earlier these competitors get Sodium Sulphide flakes as by product which they supply to tannery, pharma and fine chem. producers with good realisation - therefore they can hold their own against Vishnu.

Exports for Vishnu are a remote possibility because Chinese producers dominate supply for BaCO3 around the world due to availability of abundant cheap and high quality baryte, and they have scale of economics with much higher capacity plants in operation.

I do not have overview on Basic Chromium Sulphate production or future plans of Vishnu, however wanted to update you w.r.t. sodium dichromate as well as BaCO3 where I have some overview of the market due to my current occupation.

It is true that a good investor known for in depth analysis has taken position into Vishnu Chemicals and therefore there is always a possibility there are future triggers or business plans that are not currently visible to us. Based on current inputs one needs to tread with caution.

Trust this input helps with your assessment.

Good luck for 2016.

Best regards,

Aniket.

Disc: Not invested.

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Hi @Value_Seeker

Thank You for your valuable inputs. It has helped us to look into the factors that we missed either because of lack of source or lack of understanding.

We did a re-assessment of the product portfolio of Vishnu. So, Vishnu has 2 major sales generators:

  1. Sodium Dichromate (32%)
  2. Basic Chromium Sulphate (52%)

Rest are from other products, including barium carbonate.

Coming to basic chromium sulphate, we believe that sales are not an issue in this segment as the leather industry are on the rise, and growth is still there for next 2-3 years (trends of leather industry sales) and make in india details. Still, we are trying to talk to vendors to check if there are any issues with this.

Now coming to the Sodium Dichromate, we studied the paper yet again, and found that quality issue is majorly for color, pigment and dye industry, which forms only 11% of the total sales of Sodium Dichromate. We acknowledge that this is an issue as it can affect 5% of total sales. The supply disruptions was also for the pigment industry. We also figured that imports have been increasing of the said product, and it is a challenge to grow sales in the given stream, unless there is demand outside India, which we need to check.

For the Barium Carbonate, we thank you very much for highlighting this. We weren’t aware and we felt that atleast 50% of this can be sold by Vishnu.

We are re-assessing these factors, and checking if it is worth buying and if yes, at what price. Our whole analysis was based on expected sales growth and maintaining OPM, as CAPEX is not required. However, sales growth are going to be bit laggard given the points highlighted here, and OPM as well in one of the revenue streams.

Thank You,
Akash and Nikhil

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Dear Akash and Nikhil,

Glad my inputs could assist you.

Ch. Krishna Murthy is an astute businessman with a good team.

It is entirely possible that other / new ideas / products are on the anvil.

If you get some insight about any new product areas or initiatives in the pipeline, it may make the story more interesting.

Good luck and Best regards,

Aniket.

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Dear Akash and Nikhil,

I could dig up a few more details w.r.t. Basic Chromium Sulphate. (BCS)

BCS has only one addressable application area - leather tanning.

There are 2 prominent leather tanning market zones - North (Delhi and Kanpur) and South.

Kanpur market has been shut down and in South of India, Pollution enforcement is strict and units have been shut down. Apparently there is a market recession. Local market demand has been slowing.

Basic Chrome production produces sludge which is hazardous. (chrome dissolves slowly in water making it poisonous) In both Hyderabad and Bhilai area where Vishnu Plants operate, I heard that sludge contamination has apparently finished drinking water sources, and water has to be sourced from other areas. Note that Sludge volume produced is significant with 2 to 3 tons of sludge produced per ton of BCS - disposal is problematic.

However, Vishnu’s plant in Vizag is state of art with a different process that produced 0.5 ton sludge per ton of BCS. This plant caters only partly to the domestic market, and they have exports to global market (not aware of the volume of exports). Keeping with Vishnu’s philosophy to try and grab / dominate market share, they are in a price war with Bayer and Russian competitors. The sludge created is all taken by the Ramky group so Vishnu does not face environmental challenges at Vizag currently.

To my mind, the risk of such an aggressive approach is that you dominate or you die. And while this game of grabbing market share while slashing margins continues one needs to watch out for total debt as well as execution efficiency / monitor actual global market share gains reliably.

Trust these inputs will help.

Best regards,

Aniket.

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Hi Aniket -

Thanks for keep sending your inputs. It really helps a lot.

We have decided to keep a check on sales for the next 2-3 quarters, and then invest, if the issues highlighted do not have an impact on sales.

Secondly, I read about the leather industry situation in India. The industry faces threat from the NGT/environmentalist, however, closing an industry isnt going to take place. It may be shifted/upgraded, but it is going to stay, as there is strong demand for leather products around the world. Secondly, this is also an important sector of Make in India initiative.

Also, we looked at few of the leaders in leather products, namely Mirza and Superhouse, both have been performing reasonably well, if not awesomely.

However, the environmentalist concerns might slow down the industry in the short term, and we would try to check the same in the next 2-3 quarters.

Thanks again for your valuable inputs. They make the analysis challenging, and fruitful. :smile:

Akash and Nikhil

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You are welcome.

As stated these are historical inputs, but one must never forget that very high quality investor has invested.

Check import and export data on both sodium dichromate and BCS on zauba.com.
You can see a surge of exports in past few days for Sodium Dichromate from Vizag - this is a new development and needs monitoring.

Keep an eye on debt and try and build a picture of domestic / international addressable market for both products, as well as market share increase / decrease of Vishnu.

All the best!

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Yes Aniket,

we are aware of that and have been tracking it, but to be sure lets wait to see sales of next 2-3 quarters, before making any decision.

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Given they being industry leader (as claimed by te company) shouldn’t the banks be offering loans to them at much lesser rate and their working capital cycle be much better with positive CFO?

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Hi Aman,

Not sure about the bank loans. However, working capital cycle has been affected in the last 2 years, in which the receivables have increased.

Our hypothesis is that the receivables have been increased to increase/maintain sales against competition. The reason for this is that the delta receivables by delta sales ratio has remain between 0.2 and 0.3 only. It can also be an indicator of losing the leadership position from imports, and company striving to find more markets abroad.

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Dear All,

Here are the updated result of my investigation:

Vishnu has started aggressively exporting Barium Carbonate to Europe and other countries.
However, Barium carbonate is a losing business for Vishnu. They can never make money in this and they are aware of it. A sort of miracle is required to make money due to SSI competition and unethical practices of SSI.

Vishnu is planning some other products in this unit to generate money. But for this they need investment to the tune of 30 crores which they do not have. Already many of their current projects remain unfinished for lack of funds. They divert working capital to project and project fund of one to other. The decisions keep changing and there are many unfinished activities. For example they started building corporate office at Hyderabad. Invested in furniture but does not have fund to complete the civil work. Working is totally unplanned and whimsical.

I do not have much insight into their chrome business, however, it is profitable and they have a low BE in chrome. Leather industries will remain active for years to come as there is no substitute yet.
However, if veg tanning is preferred then BCS may lose market. They are 2nd to Lanxess, who are no 1 and main global competitor.

Vishnu is dependent on imported raw material and this is their vulnerability. They have a wonderful plant at Vizag and also invested in some other products which are yet to be successful. For initial years the dichromate business too suffered with quality issues but they have overcome this now.

The market for dichromate is not large so they have a problem for capacity utilization too. The price of both their main products have dropped. They have a by-product sodium sulphate. It is difficult to sell it due to its contamination with Cr. They are holding over 100,000 ton of this in various warehouses for which they pay a monthly rent of 20 lakhs. Now they are putting up a plant to convert this to white. This plant is yet to be commissioned and they invested some 25 crores in it. Once it is commissioned further generation of Cr contaminated product will be overcome.

However, they still will have to dispose off the current stock which is virtually non moving. They are also planning to go in for soda free process for which again large investment is planned. All the technologies are obtained through grey route. They catch hold of retired employees or ex employees of MNCs and try out technology which does not have any guarantee.

Suppose the person dies or becomes incapable while you started investment, then there is no back up. It is risky proposition. There had been failures too. In one such project they spent over 10 crores and even now there is no success.

I am concluding my study here. It is a definite avoid for me.

Trust the inputs help.
All the best,

Aniket.

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Hi @Value_Seeker,

Hats off to your investigation. Going by all these, it becomes an avoid for us as well.

Just one thing - source of all this information? Is it something in AR which we missed to capture?

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Hello @Value_Seeker, could you please post the source for making following statements,
“However, Barium carbonate is a losing business for Vishnu. They can never make money in this and they are aware of it.”

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Akash and Nerolu,

For 8 years we were primary dealers for the Solvay-Vishnu J.V. (now completely owned by Vishnu) - which was selling speciality grade Barium Carbonate for the glass industry. I am personally very well aware of the BaCO3 market, and Indian Market challenges.

To answer your questions:

All Information posted is received courtesy personal and informed inputs.
All information posted is upto date and accurate.
The inputs are completely factual - and neither malicious nor misrepresenting any facts which have come to light.

Needless to state I am not personally invested, and the only desire to post such an update was the wish to caution any fellow investors who may be tempted to buy into the company due to the “optically attractive” sector and position taken by an investor known for the quality of picks.

This forum has given me a lot of insight and I try to ‘pay it forward’ where I can.

Best regards…

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Super Investigation @Value_Seeker
Appreciate it

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@Value_Seeker I appreciate your courtesy call of informing the value picker fraternity & you have right to your views.

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