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Saral Gyan Hidden Gem - Nov 2010


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Saral Gyan Hidden Gem - Nov 2010

  1. 1. EQUITY RESEARCH REPORT DE NORA INDIA LTD BSE CODE: 590031Industry: Electrodes & Welding Equipment CMP: Rs. 75.50 (07/11/2010)Market Cap: 419.4 (Million) Target Price: Rs. 155Date: November 07, 2010 Time Period: 18 – 24 months Saral Gyan Capital Services An Independent Equity Research Firm
  2. 2. HIDDEN GEMS – NOV 2010 TABLE OF CONTENTS.No Content Page No.1. Company Background 032. Recent Developments 083. Financial Performance 104. Charts & Graphs 125. Peer Group Comparison 146. Key Concerns 147. Saral Gyan Recommendation 158. Disclaimer 16 -2- SARAL GYAN CAPITAL SERVICES
  3. 3. HIDDEN GEMS – NOV 20101. Company BackgroundDe Nora India Limited is a Public Limited Company with 51% equity held by De Nora. TheCompany is a subsidiary of the De Nora and has brought to India the latesttechnologies with the complete support of De Noras technical expertise andmanagement. The company is headed by Mr S. C. Jain, Managing Director, who leads ateam of professionals with vast experience.De Nora India as part of De Nora is leader in the field of:  Electrochlorinators  Cathode & Anode for Chlor-Alkali Industry  Cathodic Protection Systems  ElectrowinningWith his factory in Goa with state-of-the-art facilities, De Nora India meets the demandsof the rapidly developing Chlor-alkali industry. This factory also provides access to theGoa port facilities for company’s future export commitments. This service is providedthrough a team of specialists, a centralized data bank and access to the vast technologyresources of De Nora. De Nora Indias strength lies in its technical expertise backed byits well trained team of specialists. Of course, there is the additional benefit of the directtechnical support of De Nora’s highly trained engineering staff, ready to discuss theneeds of any prospective client, to define the best optimized solution.In keeping with the philosophy of the De Nora, De Nora India Limited provides itsvaluable customers, not only a superior product, but also technical assistance, ininstallation and operation of their electrodes, for both, new and retrofitted cells ofdifferent technologies, through out their operating life. -3- SARAL GYAN CAPITAL SERVICES
  4. 4. HIDDEN GEMS – NOV 2010De Nora Product OverviewDe Nora provides products and services based on electrochemical technology throughtwo main product lines:  Chlor-Alkali which makes a full range of products and systems for chlorine and alkali, and sodium and potassium chlorate commodity chemical producers.  Oxygen & Specialties designs, develops and manufactures electrodes, anode coatings and systems for several electrochemical applications.De Nora can service a wide range of customer technical needs for all theelectrochemical processes with:  Anodes and cathodes for Chlor Alkali Industry (Amalgam/Diaphragm/IEM cells)  Anodes, Cathodes and GDE for Hydrochloric Acid Electrolysis  Anodes for Chlorate and Perchlorate production  Anodes for Surface Finishing  Anodes for Electronics  Anodes for Electrowinning and metal recovery  Anodes for Pool chlorination  Anodes for Industrial Electrochlorination  Anodes for Cathodic Protection systems  Anodes for Water TreatmentRange of DSA® Anodes applicationsDSA® Anodes are titanium anodes coated with a proprietary and patented Mixed MetalOxide (MMO) solution of Precious Metals such Iridium, Ruthenium, Platinum, Rhodium,Tantalum.Thanks to their specific characteristics and the changes in the coating formulation and inthe coating techniques, the use of DSA® Anodes supplied by De Nora can range from thelong established application in the Chlor-Alkali industry to the most recent utilization ina wide range of other uses in the Electro-galvanic industry, Copper foil, Printed WiringBoard, various water treatment processes, and ultimately Cathodic Protection againstcorrosion for the iron structures in soil, in concrete, sea water etc.The direct sea water Seaclor® electrochlorination systems are to-day marketed by asister company, Severn Trent De Nora, to which De Nora supplies the electrode packs onan exclusive basis. -4- SARAL GYAN CAPITAL SERVICES
  5. 5. HIDDEN GEMS – NOV 2010Energy saving and environment protectionDe Nora ’s main objective has always been the improvement of its proprietary coatingsto achieve the longest possible life in operation and the reduction on powerconsumption of the anodes. Today De Nora offers (through its Spare Parts & ServiceDivision) Zero Mercury Emission packages for the improvement of the cathodic area ofthe amalgam cells reducing the loss of Mercury to well below the limits imposed byauthorities.In the field of Surface Finishing De Nora offers GreenChrome™ a specifically customizedproduct for the decorative chrome plating processes that obtain excellent resultsallowing the conversion of carcinogen Cr6+ baths to environmentally and non poisonousCr3+ baths.ServicesUhde GmbH and Uhdenora S.P.A. manufacture IEM and HCl electrolysers for theirlicensees in De Nora Deutschland, one of the factories of De Nora that has beenequipped, since 1998, with Laser welding machines customized for the assembly of thelatest generation of anodic and cathodic “single element” with proprietary DSA®Anodes, activated cathodes and ELAT™, in cases of HCl specifically developed for thesecells.All the electrochlorination systems marketed by Severn Trent De Nora are equippedwith electrode packs coated and assembled either in Italy, in De Nora Elettrodi(Suzhou)and in De Nora Tech.Financial – Leasing opportunitiesIn the seventies, when the metallic anodes coated with Mixed Metal Oxides wereinitially commercialized, Permelec, now De Nora, started manufacturing the anodicstructures at its own cost offering them to its Customers on a Lease basis granting acontinuous electrodes efficiency by a scheduled maintenance and re-coating serviceunder its full responsibility and expense.Today, De Nora owns more than 80,000 anodic structures installed in amalgam plantsand almost 200,000 anodes installed in diaphragm technology plants: the world’s largestDSA® Anodes structures inventory.De Nora is always available to study and prepare a financing scheme based on a leasecontract, in particular when working with partners like Uhde and Uhdenora, also for theIEM technology even if for such a technology the anodes and cathodes are an integralpart of the Electrolyzer structures. -5- SARAL GYAN CAPITAL SERVICES
  6. 6. HIDDEN GEMS – NOV 2010Product Range - Chlor AlkaliDe Nora’s roots in the chlorine and chlorate industries run deep. From the creation ofthe earliest commercial diaphragm cells in the early 1900s, to the development of thevery first membrane cell and now the most competitive anode coatings available. Theintroduction of DSA® Anodes in mercury cells was justified primarily by the benefit ofpower savings and the elimination of some hazardous plant operations associated withthe use of graphite anodes, increased production, and product quality.De Nora efforts are aimed at radically improving the economics of the Chlor-Alkalibusiness studying components like Gas Diffusion Electrodes that are going to be thefeature of choice for the future generation of high CD IEM. Company offers recoatingtechniques for almost any IEM cell type. De Nora has developed cathode coatingssuitable for all technologies and reduce cell voltage. AMALGAM DIAPHRAGM MEMBRANE CHLORATEDe Nora provides:  DSA® Anodes, the most successful and economical electrode for the production of chlorine and caustic soda by MEMBRANE/AMALGAM/DIAPHRAGM technologies.  Anodes for different types of mercury cells under a lease or purchase program.  Services for the anode structures include repair work and renewal of the DSA® Anodes coating with the recoating of deactivated electrodes including the necessary mechanical repairs to the structures.  Technical Assistance to train and support customers in the installation, use and operation of cells and anodes.  Diaphragm that eliminate the need for asbestos, cell tops that last decade or more, and everyday spare parts to keep existing plants running like new. -6- SARAL GYAN CAPITAL SERVICES
  7. 7. HIDDEN GEMS – NOV 2010Product Range - Oxygen & SpecialitiesThe Oxygen & Specialties business evolved from De Noras goal to extend itselectrochemical technology beyond the chlor-alkali applications. DNOx suppliesinnovative DSA® Anodes and systems that provide our customers lower operating costs,improved performance and higher throughput.De Noras works closely with existing and potential customers to identify and respondtheir needs and opportunities. De Nora innovative technical capability comes from:  In-depth knowledge and understanding of insoluble anode processes.  World leadership in DSA® Anodes technology.  High performance, formulated mixed metal oxide anode catalyst coatings and titanium anode structure design.  A diversified and professional staff of in-house electrochemists, engineers and R&D scientists.  A full range of service and technical support available around the world. ELECTROWINNING EMEW ELECTRONICS ELECTROCHLORINATIONOxygen & Specialties is committed to excellence in various electrochemical process.Company focuses on technical expertise and DSA® Anodes product’s to provide theirclients with practical, workable solutions to your most difficult electrochemicalchallenges.  Surface Finishing  Electronics  Water treatment  Pool chlorination and SPA Disinfection  Industrial Electrochlorination  EMEW and Electrowinning  Cathodic Protection  Other Specialties -7- SARAL GYAN CAPITAL SERVICES
  8. 8. HIDDEN GEMS – NOV 20102. Recent Developmentsi) De Nora – A Distinguished presence at the KPCA show 2010 in Korea (Aug 2010)The KPCA show was an excellent opportunity for the company to look around the recenttrends of the electronic circuit industry and to show the latest PCB productiontechnologies.De Nora stands presence at the exhibition has been an ideal opportunity to createpossible business opportunities for De Nora and to allow its customers to be informedon the most advanced insoluble anode technology in copper plated micro viametallization as well as via filling in both vertical and horizontal plating processes.Company exhibition was successful at the KPCA 2010 show in Koreaii) Acquisition of full control of Permelec Electrode Ltd. and majority of ChlorineEngineers Corp. Ltd. (Sep 2010)Industrie De Nora S.p.A. (De Nora) has reached an agreement with Mitsui and Co., Ltd.(Mitsui), for the purchase of all the shares held by Mitsui in order to reach 100%ownership of PERMELEC ELECTRODE Ltd. (PEL), in Fujisawa-shi, Japan.PEL was founded by Mitsui and De Nora as a 50-50% Joint Venture in 1969 to serve theJapanese Chlor Alkali market.This acquisition is an important step for De Nora to improve its global manufacturingcapacity and will further strengthen the ongoing technical exchange between De Noraand PEL for the continuing development of high performing electrodes.The move shall ensure that the world Chlor Alkali Industry will benefit even more fromDe Nora’s well proven experience in cutting edge coating manufacturing facilities andelectrochemical technologies.In the framework of the final agreement reached with Mitsui in this transaction, DeNora has also secured the control of CHLORINE ENGINEERS Corp. Ltd. (CEC), in Tokyo,Japan, Mitsui’s subsidiary engaged in engineering and manufacturing of sodium chlorideelectrolysis plants.CEC has been expanding its activities since its foundation in 1973 and has licensed asignificant share of the worldwide chlorine production by ion exchange membraneprocess. -8- SARAL GYAN CAPITAL SERVICES
  9. 9. HIDDEN GEMS – NOV 2010De Nora and CEC will align a combined portfolio of products and solutions to improveplant performance and will offer to CEC Licensees, prompt and reliable assistance in themaintenance and servicing of their plants, deploying the resources of De Nora’sNetwork of Companies.The combination of the expertise and resources shall be very beneficial to CEC’s attemptto better serve its customer base and shall allow CEC customers to improve theoperation of their chlorine plants.With the acquisition De Nora is also enlarging its technology platform, since both PELand CEC are involved in the development and the commercialization of novelelectrochemical processes driven by the environmental pressure, especially in the fieldof Water Treatment and Clean Energy.The move reflects De Nora’s renewed commitment to further develop its business,remaining very focused on the electrochemical technologies – both in Chlor Alkali andEnvironmental applications and its goal, to not only be a reliable supplier oftechnologies but also a dynamic and innovative partner with a long term vision. -9- SARAL GYAN CAPITAL SERVICES
  10. 10. HIDDEN GEMS – NOV 20103. Financial PerformanceDe Nora India reports net profit of Rs 9.72 million in the September 2010 quarterDe Nora India reported net profit of Rs 9.72 million in the quarter ended September2010 as against net loss of Rs 10.2 million during the previous quarter ended September2009. Sales rose 55.72% to Rs 44.13 million in the quarter ended September 2010 asagainst Rs 28.34 million during the previous quarter ended September 2009.De Nora India net profit rises 105.17% in the June 2010 quarterNet profit of De Nora India rose 105.17% to Rs 11.9 million in the quarter ended June2010 as against Rs 5.82 million during the previous quarter ended June 2009. Sales rose56.08% to Rs 46.3 million in the quarter ended June 2010 as against Rs 29.6 millionduring the previous quarter ended June 2009. Last 6 Quarters Net Sales & Profit 60 52.05 50 46.3 44.13 40 31.83 29.58 28.34 Rs in Millions 30 20 11.9 9.72 9.18 10 5.82 0 -0.49 -10 -10.2 -20 1 2 3 4 5 6 Net Sales 31.83 28.34 52.05 29.58 46.3 44.13 Net Profit 5.82 -10.2 9.18 -0.49 11.9 9.72 Jun 09 Sep 09 Dec 09 Mar 09 Jun 10 Sep 10 - 10 - SARAL GYAN CAPITAL SERVICES
  11. 11. HIDDEN GEMS – NOV 2010 Current & Expected Earnings: Quarterly Ended Profit & Loss Account Particulars Dec Mar Jun Sep Dec Mar (Rs in Millions) 2009 2010 2010 2010 2010 E 2011 EAudited / UnAudited UA UA UA UA UA UANet Sales 52.05 29.58 46.3 44.13 64.63 43.87Total Expenditure 43.5 31.85 35.83 41.57 53.51 31.92PBIDT (Excl OI) 8.55 -2.27 10.47 2.56 11.12 11.95Other Income 2.42 4.57 4.43 2.6 3.67 4.93Operating Profit 10.98 2.31 14.9 5.16 14.79 16.88Interest 0 0.04 0.03 0.04 0.04 0.04Exceptional Items 0 0 0 0 0 0PBDT 10.98 2.27 14.87 5.12 14.75 16.84Depreciation 1.66 1.46 1.52 1.49 1.72 1.58Profit Before Tax 9.32 0.81 13.35 3.63 13.03 15.26Tax 0.15 1.31 1.45 -6.08 1.43 1.32Provisions & contingencies 0 0 0 0 0 0Profit After Tax 9.18 -0.49 11.9 9.72 11.60 13.94Extraordinary Items 0 0 0 0 0 0Prior Period Expenses 0 0 0 0 0 0Other Adjustments 0 0 0 0 0 0Net Profit 9.18 -0.49 11.9 9.72 11.60 13.94Equity Capital 55.55 55.55 55.55 55.55 55.55 55.55Face Value (IN RS) 10 10 10 10 10 10Reserves 0 0 0 0 0 0Calculated EPS 1.65 -0.09 2.14 1.75 2.09 2.51Calculated EPS –Annualized 6.61 -0.35 8.57 7 8.35 10.04No of Public Share Holdings 2458268 2458268 2458268 2458268 2458268 2458268% of Public Share Holdings 44.25 44.25 44.25 44.25 44.25 44.25 Expected Earnings for 3rd & 4th Qtr FY 2010-11: We expect De Nora Ltd will post robust growth in coming quarters with revival happening in chlor alkali industry. Moreover, company operations in water treatment industry is expected to do well as De Nora India supplies electro-chlorination equipments for purifying water for drinking and Industrial purpose. In financial front, company’s performance has improved significantly showing good growth in last two quarters. Company has registered sales growth of above 55% in last two quarters on YoY basis and is expected to sustain similar performance. - 11 - SARAL GYAN CAPITAL SERVICES
  12. 12. HIDDEN GEMS – NOV 20104. Charts & Graphsi) Share Price Moving Average:De Nora India Ltd is currently trading near to its 50 days and 200 days price movingaverage.ii) Comparative Graph: - 12 - SARAL GYAN CAPITAL SERVICES
  13. 13. HIDDEN GEMS – NOV 2010iii) Share holding Pattern:Promoters share holding is 55.74% without any change in terms of holding since lastmany quarters. We expect that parent company Gruppo De Nora (Italy) will significantlyincrease its operations in India considering business opportunities developing in thecountry. - 13 - SARAL GYAN CAPITAL SERVICES
  14. 14. HIDDEN GEMS – NOV 20105. Peer Group Comparison De Nora IFGL RasiPEER GROUP India Iykot Hitech Refactories Ador Welding Electrodes CMP 75.50 23.20 52.80 219.80 24.00 52 W H/L 101.10/60.50 34.90/20.10 73.40/33.60 241.10/133.30 29.80/15.15 Market Cap 419.4 141.15 1827.43 2988.94 114.24Results (in Mn) Sep-10 Sep-10 Jun-10 Sep-10 Jun-10 Sales 951.93 25.87 449.50 752.22 49.26 PAT 34.83 3.55 6.00 79.16 4.78 Equity 114.11 30.42 346.10 135.99 47.60 EPS 5.46 1.24 3.69 21.75 2.68 P/E 14.27 18.75 14.29 10.10 8.956. Key Concerns / Risks i) Company operates in business which is cyclical in nature showing up and downs in demand & supply. ii) Business dependency is directly related to performance of Chlor Alkali Industry. - 14 - SARAL GYAN CAPITAL SERVICES
  15. 15. HIDDEN GEMS – NOV 20107. Saral Gyan Recommendation De Nora India is into a niche segment and commands market share of 75%. Company uses advance technologies for coating of anode and cathode using in Chlor Alkali plants and corrosion systems used for preventing corrosion in saw pipes. De Nora products offering with latest membrane cell technology is opening new growth opportunities in the country. Further, company also supplies electro chlorination equipments for water purification. De Nora India Ltd is an MNC which is expected to trade at premium when compared to local players, but company is available at decent valuations with current P/E ratio of 14, giving an opportunity to investors to buy the stock at current market price. Company business seems to be complex which could be one of the reasons that stock has overlooked by Investors. As per our estimates, De Nora can deliver bottom line of 47.5 million for full financial year 2010 – 11, annualized EPS of Rs 8.55 with forward P/E ratio of 8.83 X for FY 2010-11, which makes stock of the company an attractive bet at current market price. Company has paid consistent dividend in past except the last financial year when company performance was poor due to slowdown in chlor alkali industry. Dividend of 70% was paid in 2006, 69% in 2007, 58% in 2008, 25% in 2009. De Nora India Ltd is expected to do well with revival in chlor alkali industry. On equity of Rs. 55.55 million the estimated annualized EPS works out to Rs. 8.55 and the Book Value per share is Rs. 47.14. At a CMP of Rs. 75.50, stock price to book value is 1.6. The scrip is trading at 8.83 X FY 2010-11 estimated earnings which make it an attractive considering the past track record and strong global presence of De Nora Group.Saral Gyan Team recommends “BUY” for De Nora India Ltd. at current market price of75.50 for a target of Rs. 155 over a period of 18-24 months. - 15 - SARAL GYAN CAPITAL SERVICES
  16. 16. HIDDEN GEMS – NOV 20108. DisclaimerImportant Notice: Saral Gyan Capital Services is an Independent Equity Research Company.Disclosure: The author of this article does not hold shares in the recommended company.© SARAL GYAN CAPITAL SERVICESThis document prepared by our research analysts does not constitute an offer or solicitation forthe purchase or sale of any financial instrument or as an official confirmation of any transaction.The information contained herein is from publicly available data or other sources believed to bereliable but we do not represent that it is accurate or complete and it should not be relied on assuch. Saral Gyan Capital Services ( or any of its affiliates shall not be in anyway responsible for any loss or damage that may arise to any person from any inadvertent errorin the information contained in this report. This document is provide for assistance only and isnot intended to be and must not alone be taken as the basis for an investment decision. - 16 - SARAL GYAN CAPITAL SERVICES