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Saral Gyan Hidden Gem - Sept 2015

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Hidden Gem - Sept 2015, Ultramarine & Pigments Ltd

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Saral Gyan Hidden Gem - Sept 2015

  1. 1. UNEXPLORED MULTIBAGGER SMALL CAP STOCKS EQUITY RESEARCH REPORT ULTRAMARINE & PIGMENTS LTD. BSE CODE: 506685 Industry: Specialty Chemicals CMP: Rs. 83.35 (11/10/2015) Market Cap: 243.38 (INR in Crore) Target Price: Rs. 150 Date: Oct 11, 2015 Time Period: 12 – 24 months Saral Gyan Capital Services An Independent Equity Research Firm www.saralgyan.in | www.saralgyan.com
  2. 2. HIDDEN GEMS – SEPTEMBER 2015 - 2 - SARAL GYAN CAPITAL SERVICES TABLE OF CONTENT S.No Content Page No. 1. Company Background 03 2. Recent Developments 06 3. Financial Performance 07 4. Peer Group Comparison 09 5. Key Concerns / Risks 09 6. Saral Gyan Recommendation 10 7. Disclaimer 12
  3. 3. HIDDEN GEMS – SEPTEMBER 2015 - 3 - SARAL GYAN CAPITAL SERVICES 1. Company Background Established in 1960, Ultramarine & Pigments has its manufacturing facilities at Ambattur, Madras and Ranipet in North Arcot, Tamilnadu. It is the largest manufacturer of ultramarine blue and synthetic detergents. The company also manufactures ultramarine colours, organic and inorganic pigments, metal powders, chemicals, raw materials for the paint industry, varnishes, enamels, oils and plastics. Company’s sales footprint has expanded from 2 countries to 50 countries and is still growing widely in emerging markets in Latin America and Africa. This is the only company in India to receive the ISO 9002 certification for both laundry and industrial grades of ultramarine blue. In 1987, the company diversified by setting up a unit to manufacture HDPE woven sacks. In 1995, the company purchased about 150 acres of land in Coimbatore, Tamilnadu, and set up four windmills which can generate one MW of electricity pa. The company also set up a new plant in Sep.'95, to manufacture synthetic detergent bars/cakes with an installed capacity of 15,000 mtpa. In 1995-96, the company issued bonus shares in the ratio 1:1. Later in year 2005, company again issued bonus shares in the ratio 3:5. In April 96, company started manufacturing alkyl benzene sulphonic acid with a capacity of 16,000 mtpa. During 1996-97, the company has set up a Linear Alkyl Benzene Sulphonic Acid plant with an installed capacity of 16,000 mtpa. In 1997-98, the company expanded the installed capacity of its Ultramarine Blue by 1,500 MT. The company has amalgamated with Sri Narasimha Plastic Industries Pvt. Ltd. in 1999-2000 which enabled the company to carry out the combined HDPE business more economically and advantageously. Also during the year, the ultramarine blue unit and detergent unit at Ranipet has been awarded ISO 9002 Certificate. Company also launched its IT Enabled Services Division at Chennai. The company diversified into the ITES segment and started Lapiz Digital Services in early 1993, which has been performing well in its sector. During 2000-2001, the company received ISO 14001 Certificate for Blue and Detergent Divisions at Ranipet during 2000-2001. The company has expanded the installed capacity of HDPE/PP Woven Fabric during the year 2003-04 by 180 MT and with this expansion, the total capacity has risen to 900 MT. Ultramarine & Pigments Ltd is equipped with an excellent infrastructural setup which includes most modern production equipment, process and Quality control instruments,
  4. 4. HIDDEN GEMS – SEPTEMBER 2015 - 4 - SARAL GYAN CAPITAL SERVICES continuously updated technical know-how, Quality management and assurance systems. The Quality assurance system ensures that every batch of products conforms to the grade specification in all aspects. Technically superior approach to analysis and measurements are constantly identified and implemented. Besides, the organization has implemented ISO 9001 Quality system management standard and ISO 14001 Environment system management standard. Company operates in 3 segments, Pigment division, Surfactants division and IT division. Pigment Division This division caters to the domestic & export markets. Unseasonal rain in South India affected the demand from the domestic market, causing a dip in sales. The European market remained flat this year, and did not show any revival. This division achieved a net revenue of Rs. 60.17 crores (4152 MT) as compared to Rs. 54.58 crores (4542 MT) in financial year 2013 -14. Due to a better product mix, realization per MT was improved by 21% resulting in a better profitability. Surfactants Division The Company has achieved a net revenue (including processing) of Rs. 79.10 crores during the financial year ended March 31, 2015 as against Rs. 65.41 crores in the previous year, showing an increase of 21%. This improvement in revenue and the margins is due to a sustained focus on broadening the customer base, with an emphasis on the organized sector and corporate customers. The increase in margins is also attributable to the improved supply of imported Alpha Olefin (a key raw material) in the first two quarters of the year. However in the latter part of the year, due to the volatility of crude prices, we faced erratic and inconsistent supply of raw material. IT Division In FY 2014-15, IT division of the company reported an income of Rs. 28.88 crores, an increase of 5% over last year. As per management, the profitability has improved considerably (15%) due to better margins and controls on overhead costs.
  5. 5. HIDDEN GEMS – SEPTEMBER 2015 - 5 - SARAL GYAN CAPITAL SERVICES Products & Services Pigment Division:  Ultramarine Blue  Ultramarine Violet  Bismuth Vanadate Yellow  Mixed Metal Oxides Surfactants:  Linear Alkyl Benzene Sulphonic Acid  Alpha Olefin Sulphonate  Sodium Lauryl Sulphate  Sodium Lauryl Ether Sulphate IT Division & Others:  IT Enabled Services  Dry Mixed Detergents  Wind Mill Generation Wind Mill Generation In FY 2014-15, the total revenue of the windmills was Rs. 216 lacs, an increase of 24% over the previous year. Company repaid the entire term loan availed from EXIM Bank, and as a result, faced lesser interest charges. This helped company to improve the profit from the Windmills significantly. In the coming years, company hope that the constraints and bottlenecks faced by Windmill operators will be reduced, as the Tamil Nadu State Grid capacity is augmented. This will help the company to avoid production loss during peak season.
  6. 6. HIDDEN GEMS – SEPTEMBER 2015 - 6 - SARAL GYAN CAPITAL SERVICES 2. Recent Development Plan to expand Surfactant business with initiation of Gujrat-Dahej Project Gujrat Industrial Development Corporation (GIDC) is in the process of establishing infrastructural facilities at the industrial site at Dahej, Gujarat. The Company has paid water contribution charges for the year, and is waiting for further progress, based on which the Company will initiate the necessary steps for setting up the project to expand its Surfactant Chemical business. Increasing Focus on IT Enabled Services In ITES division, company has a renewed focus on improving the operational efficiency, broadening of customer base and enhancing the revenues of the domestic division. ITES division reported an income of Rs. 28.88 crores in FY 2014-15, an increase of 5% over last year. The profitability has improved considerably (15%) due to better margins and controls on overhead costs. In FY2013-14 EBITDA margin of this segment was 20.4%, in FY2014-15 it was at 22.4%, increased by 200 basis points. With recent initiatives and developments, company is expected to deliver better top line and bottom line growth with increase in operating margins. Promoters consistently increasing their stake in the Company As per shareholding pattern submitted by the company for Sept’15, promoter’s shareholding in the company is 51.99%. Promoters have increased their holding by 1.38% in last one year and by 4.83% in last 3 years. YEAR FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 Sept'15 Promoters Holding 48.94% 47.16% 49.55% 50.61% 51.62% 51.99% % Increase (YoY) 0.0% -1.78% 2.39% 1.06% 1.01% 0.37% Promoters buying own company's share from the open market is a signal of highest commitment and confidence in the company's business. From above, it is evident that management of Ultramarine & Pigments Ltd has steadily made purchases via open market to increase their stake in the company. Promoters buying shares from open market adds comfort in terms of associated downside risk in stock price in case of market correction.
  7. 7. HIDDEN GEMS – SEPTEMBER 2015 - 7 - SARAL GYAN CAPITAL SERVICES 3. Financial Performance Ultramarine & Pigments standalone net profit rises 3.6% in the June 2015 quarter Net profit of Ultramarine & Pigments rose 3.6% to Rs 5.22 crore in the quarter ended March 2015 as against Rs 5.04 crore during the previous quarter ended March 2014. Sales rose 21.1% to Rs 50.8 crore in the quarter ended March 2015 as against Rs 41.96 crore during the previous quarter ended March 2014. Ultramarine & Pigments standalone net profit rises 25.17% in the March 2015 quarter Net profit of Ultramarine & Pigments rose 25.17% to Rs 3.68 crore in the quarter ended March 2015 as against Rs 2.94 crore during the previous quarter ended March 2014. Sales rose 4.06% to Rs 41.55 crore in the quarter ended March 2015 as against Rs 39.93 crore during the previous quarter ended March 2014. For the full year, net profit rose 30.23% to Rs 18.74 crore in the year ended March 2015 as against Rs 14.39 crore during the previous year ended March 2014. Sales rose 14.46% to Rs 171.66 crore in the year ended March 2015 as against Rs 149.98 crore during the previous year ended March 2014. 1 2 3 4 5 6 Net Sales 39.93 41.96 43.8 44.53 41.55 50.8 Net Profit 2.95 5.04 4.53 5.49 3.68 5.22 39.93 41.96 43.8 44.53 41.55 50.8 2.95 5.04 4.53 5.49 3.68 5.22 0 10 20 30 40 50 60 RsinCrores Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Last 6 Quarters Net Sales & Profit
  8. 8. HIDDEN GEMS – SEPTEMBER 2015 - 8 - SARAL GYAN CAPITAL SERVICES Current & Expected Earnings Quarterly Ended Profit & Loss Account In FY 14-15, the overall performance of the Company both in terms of revenue & profit before tax increased by 14% & 27% respectively. The total revenue was Rs. 172.21 crores & profit before tax was Rs. 27.51 crores. The profitability of all the major segments improved due to several steps initiated by the management. We believe company will continue to show improvement in operating margins from ITES division and its exports sales with increase in product offerings. Particulars (Rs in Crores) Sep 2014 Dec 2014 Mar 2015 Jun 2015 Sep 2015 E Dec 2015 E Audited / UnAudited UA UA UA UA UA UA Net Sales 43.8 44.53 41.55 50.8 51.37 54.21 Other Operating Income 0.16 0.13 0.15 0.12 0.18 0.16 Total Income - Operations 43.96 44.66 41.7 50.92 51.55 54.37 Raw Materials Consumed 21.18 17.52 15.42 24.66 24.14 26.42 Purchase of Traded Goods -- -- 0.01 -- -- -- Increase/Decrease in Stocks -3.06 1.59 2.58 1.45 0.08 1.80 Power & Fuel -- -- -- -- -- -- Employees Cost 7.99 7.56 8.14 8.07 8.56 8.19 Depreciation 0.82 0.81 0.75 0.73 0.74 0.72 Provisions And Contingencies -- -- -- -- -- -- Other Expenses 9.77 9.35 10.1 8.69 9.90 10.31 P/L Before Other Income 7.26 7.83 4.7 7.32 8.15 11.63 Other Income 0.36 0.46 0.47 0.63 0.44 0.53 P/L Before Int., E. Items & Tax 7.62 8.29 5.17 7.95 8.59 12.16 Interest 0.15 0.11 0.11 0.06 0.06 0.06 P/L Before E. Items & Tax 7.47 8.18 5.06 7.89 8.53 12.10 Exceptional Items -- -- -- -- -- -- P/L Before Tax 7.47 8.18 5.06 7.89 8.53 12.10 Tax 2.94 2.69 1.38 2.67 2.88 4.05 Net Profit/(Loss) 4.53 5.49 3.68 5.22 5.65 8.05 Equity Share Capital 5.84 5.84 5.84 5.84 5.84 5.84 Calculated EPS 1.55 1.88 1.26 1.79 1.93 2.76 Calculated EPS (Annualised) 6.2 7.52 5.04 7.16 7.74 11.03 No Of Public Shares Holding 1.42 1.42 1.41 1.41 1.40 NA Public Share Holding (%) 48.53 48.53 48.38 48.27 48.01 NA
  9. 9. HIDDEN GEMS – SEPTEMBER 2015 - 9 - SARAL GYAN CAPITAL SERVICES 4. Peer Group Comparison PEER GROUP ULTRAMARINE & PIGMENTS PODDAR PIGMENTS ASAHI SONGWON COLORS VIDHI DYE-STUFFS CMP 83.35 123.50 130.20 64.50 52 W H/L 91.25/60.00 158.00/105.05 178.95/105.15 66.40/8.40 Market Cap 243.38 131.03 159.78 322.15 Results (in Crores) Jun-15 Jun-15 Jun-15 Jun-15 Sales 50.80 75.31 57.86 59.05 PAT 5.22 3.77 5.04 3.80 Equity 5.84 10.61 12.27 5.00 EPS (TTM) 6.48 15.19 15.11 2.77 P/E 12.86 8.13 8.62 23.29 5. Key Concerns / Risks  The domestic market for pigments continued to pose challenges. There is shrinking demand for laundry and white washing applications, and there is a slowdown in the manufacturing sector.  As there was an erratic supply of Alpha Olefin due to fluctuations in crude pricing. This has had an adverse impact on the Surfactants division, and has limited company plans to expand its customer base.  Revenues in the detergents division are limited by the need for huge outlays on sales promotions and distribution for retail sale. While company has consolidated its retail operations for detergents and its retail pigments, overheads remain prohibitive and a limiting factor.
  10. 10. HIDDEN GEMS – SEPTEMBER 2015 - 10 - SARAL GYAN CAPITAL SERVICES 6. Saral Gyan Recommendation Ultramarine & Pigments has made a continuous effort to bring in more value added products in pigments division, and has developed products like violet, cobalt blue & yellow. This will help company in improving overall realization of Pigments division. The utilization of the sulphonation plant capacity will also improve due to committed off take of sulphonated products by leading corporates. In ITES division, company has a renewed focus on improving the operational efficiency, broadening of customer base and enhancing the revenues of the domestic division. We expect company will continue to achieve good revenue growth and profitability from its ITES division going forward. In FY 2014-15, exports earnings of the company have increased by 17% (Rs. 55.56 crores as against Rs. 47.29 crores) on account of better performance of both manufacturing & ITES divisions. The Company continues to focus on the export market. Management has been consistently successful in broadening the customer base and at offering custom grade material at faster pace. In order to improve realization, company has focused on offering finer grades of material. The emphasis on in-house R&D augurs well for export market. Company’s EBITDA and PAT margins are expected to improve considering better margins from IT segment and focus on exports with increase in product offerings. Key Financial Parameters Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Return on Equity (%) 20.40 17.55 14.16 16.50 19.50 ROCE (%) 19.41 17.19 14.15 16.50 19.65 Operating Profit Margin (%) 19.57 17.49 14.97 17.02 17.09 Net Profit Margin (%) 12.98 10.34 8.50 9.80 10.85 Debt to Equity (%) 0.1 0.12 0.07 0.02 0.0 Working Capital Days 110 108 120 144 163 Ultramarine & Pigments is a debt free company with reserves of Rs. 99 crores. Promoter’s shareholding is at 51.99% (as on Sept’15) without pledging any shares. FII shareholding in the company is nil and DII shareholding is negligible at 0.14%. Management has rewarded shareholders by paying regular dividend in the past. For FY 14-15, the company has paid dividend of 150% i.e Rs. 3 per share. At current share price of Rs. 83.35, this results in a dividend yield of 3.6%. YEAR Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 EPS 5.24 4.82 25.60 17.93 11.15 Dividend / Share (In Rs) 3.00 3.00 2.25 2.50 3.00
  11. 11. HIDDEN GEMS – SEPTEMBER 2015 - 11 - SARAL GYAN CAPITAL SERVICES Gujrat Industrial Development Corporation (GIDC) is in the process of establishing infrastructural facilities at the industrial site at Dahej, Gujarat. The Company has paid water contribution charges for the year, and is waiting for further progress, based on which the Company will initiate the necessary steps for setting up the project to expand its Surfactant Chemical business. During last 3 years, promoters have increased stake by 4.83% in the company. Considering reasonable valuations and good future prospects, we expect promoters will continue to buy the shares from open market to further increase their stake in the company. Moreover, management has been maintaining a healthy dividend payout of 56.3% and rewarded shareholders by issuing bonus shares in the ratio 3:5 in 2005 which is impressive. As per our estimates, Ultramarine & Pigments Ltd can deliver PAT of 26 crores for full financial year 2016, annualized EPS of Rs. 8.9 with forward P/E ratio of 9.4X for FY16. Valuation looks attractive for a debt free company with expected expansion in its profit margins. On equity of Rs. 5.84 crore, the estimated annualized EPS for FY 15-16 works out to Rs. 8.9 and the Book Value per share is Rs. 34.07. At current market price of Rs. 83.35, stock price to book value is 2.45. Considering company’s initiatives to increase its product offering with focus on higher revenues from exports, improvement in operating efficiency from IT division and company’s expansion plans to drive business growth, Saral Gyan team recommends “Buy” on Ultramarine & Pigments Ltd at current market price of Rs. 83.35 for target of Rs. 150 over a period of 12 to 24 months. Buying Strategy:  80% at current market price of 83.35  20% at price range of 70-75 (in case of correction in stock price in near term) Portfolio Allocation: 2-3% of your equity portfolio.
  12. 12. HIDDEN GEMS – SEPTEMBER 2015 - 12 - SARAL GYAN CAPITAL SERVICES 7. Disclaimer Important Notice: Saral Gyan Capital Services is an Independent Equity Research Company. © SARAL GYAN CAPITAL SERVICES DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST: a. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report b. Neither Saral Gyan, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company. c. Neither Saral Gyan, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company d. Neither Saral Gyan, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report. DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION: a. Neither Saral Gyan nor it's Associates have received any compensation from the subject company in the past twelve months. b. Neither Saral Gyan nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months. c. Neither Saral Gyan nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. d. Neither Saral Gyan nor it's Associates have received any compensation for products or services from the subject company. e. Neither Saral Gyan nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report. GENERAL DISCLOSURES: a. The Research Analyst has not served as an officer, director or employee of the subject company. b. Saral Gyan or the Research Analyst has not been engaged in market making activity for the subject company. Definitions of Terms Used: a. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service. b. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price. c. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service. d. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service. LEGAL DISCLAIMER: Nothing published herein or on www.saralgyan.in / www.saralgyan.com should be considered as personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. It should be noted that the information contained herein is from publicly available data or other sources believed to be reliable. Neither Saral Gyan, nor any person connected with it accepts any liability arising from the use of this document. This document is prepared for assistance only and is not intended to be and must not be taken as the basis for any investment decision. The investment discussed or views expressed may not be suitable for all investors. The user assumes the entire risk of any use made of this information. The recipients of Saral Gyan material should rely on their own investigations and take their own professional advice. Each recipient of Saral Gyan should make such investigations as it deems necessary to arrive at an independent evaluation of an investment referred to in this document (including the merits and risks involved), and should consult its own advisers to determine the merits and risks of such an investment. Price and value of the investments referred to in this material may go up or down.

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