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Hope you are doing great and enjoying the volatility in the stock market. Both global and Indian equity markets
have gone rouge.
A couple of frauds along with questionable earning reversion has made Indian markets all the more vulnerable.
I mean, yes, in the short run these events may put pressure on our stocks; but in the long run, the fundamentals of
a company take over the overall market performance.
In fact, this kind of volatility helps us in recommending more stocks with better Margin of Safety.
Our goal is to get in early and then 'ride sidecar' with the super investors of India. And if we get an opportunity to
recommend stocks below their buy price, we have a better margin of safety.
The super investor we are talking about today is a person who generally doesn't interact to media. He just quietly
picks stocks that he thinks will be multi-baggers of tomorrow.
One of the things that impresses us most about him is, despite his success, you'll see almost zero coverage of him
in the financial media. Why? When the Economic Times asked him for an interview, he said:
"I am a private person. Bull markets create heroes and bear markets create zeroes. So I'd rather stay anonymous."
Super Investor #Ashish Kacholia of Lucky Securities has a long list of successful stock picks.
His stake in Ashiana Housing is a good example. He first bought a piece of the pie in March 2013 and continues to
hold 1.26% of the company.
In a little more than four years, this investment has compounded annually at more than 40% CAGR for an absolute
return of 324%. Phenomenal returns by any standard.
Kacholia has also had success with stocks like DFM foods, eClerx Ltd, Kei Industries, and Shaily Engineering.
"I have felt the company should always perform on a quarter-to-quarter basis, but I learnt to my great expense that
life doesn't work in a linear manner. I have sold-off some of my best stocks because they didn't deliver for a quarter or
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two and this again is a part of the education that I have had." - Ashish Kacholia
We like his philosophy of seeking out strong businesses and competent managements and remaining patient until
his theory is proven right.
Our Smart Money tool recently flagged a company in which Kacholia has bought a stock in last two quarters. And
the stock has corrected in the recent volatility, which has made it more attractive from Margin of Safety point of
view.
"Failure doesn't mean the game is over, it means try again with experience" - Len Schlesinger
Every successful person who has achieved some things in life has been destroyed at least once. They've had at
least one knock-out moment that crushed them completely.
Bodal Chemicals Ltd (BCL) had such a critical moment during FY12-13. The company had incurred heavy capex in
its earlier years, which led to a liquidity crunch.
To add to that, the demand was sluggish and input costs were high. Foreign exchange fluctuation loss and high
interest cost further compounded the problem.
As a result, the company posted losses in those two fiscals. Finally, BCL left without an option, entered into
Corporate Debt Restructuring (CDR).
For any company under CDR, it is a daunting task to operate a business on a shoe-string budget.
In Dire Straits...
However, the great thing about failure is that it provides you with a second chance. BCL learned from its failures
and took on cost-cutting measures, as well as improved efficiency and productivity.
More importantly, due to stricter environmental norms and increased costs substantially eroding the low-cost
advantage of Chinese dye manufacturers, BCL discovered its sweet spot. This presented a huge opportunity for
this large integrated player.
This trend is likely to continue for companies such as BCL in the coming years as well.
With this tailwind, BCL rose like a phoenix from the ashes. The company repaid all of its CDR debt by July 2014.
Since then, there's been no looking back.
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Making a Strong Comeback...
Currently, BCL is one of the largest integrated dyestuff companies in India. Due to its presence across the value
chain, it is the preferred supplier with global MNCs. BCL commands a market share of 25% in dye intermediates
and 10% in dyestuff.
Apart from a shift in production from China to India, another key trigger is a shift from the unorganized to
organized segment.
The unorganized sector share stands around 50% of total dyestuff production. Stringent effluent treatment laws
have resulted in higher operating costs for small-scale players. They've found it increasingly tough to survive. With
GST in place, the pace of shifting toward the larger organized sector will accelerate further.
Considering these factors, as well as the healthy balance sheet, we reckon BCL is firmly placed. And, the recent
correction in the stock price further makes it attractive.
BCL commenced its operations by setting up a small Vinyl Sulphone Plant at Vatva - Ahmedabad (Gujarat) with
capacity of 200 T.P.A. which has now expanded to more than 16000 T.P.A.
BCL is the largest manufacturer of dye Intermediates (DI) in India and the only player with effluent disposal
permission of 1mn litres per day. Besides, being the largest DI manufacturer in the country, it is also amongst the
leading dyestuff manufacturer in the domestic market.
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Environmental Focus - A Key to Sustainable Growth
The company has capacity of manufacturing up to about 25 varieties of Dye Intermediates and up to about 150
variants of Dyestuff which are principally used as raw materials in Textiles, Leather, Paper & other Dyestuff
consuming industries.
The company derives ~35% of its revenues from exports to over 50 countries.
BCL has a unique and integrated product line covering forward and backward integration to dye intermediates. It
contributes about 20% of India's capacity and about 5% of the world's capacity for dye Intermediates.
BCL's Journey
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Company Introduction
BCL is one of the most integrated dyestuff companies in India today from bulk chemicals and dye intermediates to
dyestuff, with bulk chemicals and dye intermediates being produced in-house for captive use as well as for direct
sales.
The company has the capacity of manufacturing up to about 25 varieties of dye Intermediates and up to about
150 variants of dyestuff which are principally used as raw materials in textiles, leather, paper & other dyestuff
consuming industries. Out of the total production, about 30% is exported to over 50 countries across the world.
One of the key aspects that separate BCL from its competitors is its integrated business model. The company has
a unique and integrated product line covering forward and backward integration to dye intermediates.
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The integrated business model has the following benefits:
Allows BCL to produce at competitive prices, thereby capturing a larger market share.
Due to its presence across the value chain, the company is the preferred supplier with global MNCs such as BASF,
Huntsman, Colorantes Industriales and Stahl.
BCL commands a market share of 25% in dye intermediates and 10% in dyestuff in the Indian market and 6%
market share in dye intermediates and 3% in dyestuff globally.
Indian dye industry is highly fragmented and characterized by a large number of small players in the unorganized
sector.
The unorganized sector share is around 50% of total dyestuff production. Stringent effluent treatment laws have
resulted in higher operating costs for small-scale players. They've found it increasingly tough to survive.
With GST in place, the pace of shift towards the larger organized sector will further accelerate and the organized
player like BCL is firmly placed to benefit from this shift.
Revenue Profile
The company receives revenue from dye Intermediates (~60% of the revenue), dyestuff (~24% of the revenue),
Basic chemicals (~10% of the revenue) and others contribute the remaining.
# Basic Chemicals
Basic chemicals include a range of chemicals which are used as raw materials for Dye Intermediates and
Dyestuff. Some of the key products in the segment that BCL produces include Sulphuric Acid, Oleum, Sulphur
Trioxide and Chlorosulphonic Acid.
Over 45% of the production of this segment is consumed in house. With this backward integration, BCL is
considerably protected from raw material price volatility.
# Dye Intermediates
Dyes are intensely coloured organic compounds or mixtures used for imparting colour to the substrates ranging
from cloth, paper, leather to plastics in a permanent fashion. The basic importance of dye lies in its product and
resistant to washing.
A dye intermediate is the main raw material used for the manufacturing dyestuff. The manufacturing chain of dyes
can be traced back to petroleum based products.
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Naphtha and natural gas are used for the production of benzene and toluene, which are subsequently used for
manufacturing nitro-aromatics.
The nitro-aromatics are then used for manufacturing the compounds called dye intermediates. Examples of major
dye intermediates are Vinyl Sulphone, Gamma Acid, H Acid, CPC Blue, J Acid, a-Naphthyl Amine, etc.
BCL started its operations initially with one product i.e. Vinyl Sulphone Ester (Acetanilide Base); with gradual
advancement in production capacities. Currently, BCL is producing more than 25 variants of Dye Intermediates
with Vinyl Suphone (Acetanilide Base) as the core product.
Some of the key products in the segment include Vinyl Sulphone Ester, H Acid, F C Acid, DASA, Gama Acid and 6
Nitro. Over 40% of the production of this segment is consumed in-house.
# Dyestuff
Dyestuff is a final product in dye manufacturing value chain. It is used in several industries such as like textiles,
leather, paper, and plastics.
Dyestuffs have been classified in different categories based on the criteria like the colour, origin (natural or
synthetic), chemical structure or constitution, applications and method of application.
Application-based classification is the most useful and widely accepted classification system by dye
manufacturing industries.
The textile industry accounts for the largest consumption of dyestuffs in India (~80% of the total production).
In contrast, 40-50% of dyes produced in the developed countries find application in the paint industry, 30-40% in
other industries and less than 10% of the aggregate is used in the textile sector.
However, due to the growth in export and very high export potential of the dyestuff, the dependence of this sector
on the textile sector is slowly being diluted.
Further, the domestic demands of dyes are increasing due to the growth of industrial paint industries, printing
industries, plastic and tannery industries, which are also consumers of dyestuff.
Bodal Chemicals produces about 150 variants of Dyestuff products in this segment. Some of the key products in
the segment include Acid Black 210, Reactive Black BL/GR, Reactive Black B, Reactive Black 5 and Acid Black 194.
Out of the total production, about 30% is exported to over 50 countries across the world.
Capacity Expansion + New Products = Strong Topline Growth and Margin Expansion
BCL is executing capacity expansion plan across multiple processes/products. This will help the company to cater
to growing demand from end-user industries.
Similarly, BCL is trying to fill the space vacated by reduced supplies from China. The following capex is lined up
which will help BCL to post good growth in coming years.
Dyestuff capacity Expansion BCL had earlier guided to 24,000 MT dyestuff capacity expansion in 3-4 years with the first
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by 12,000 MTPA plus Ice plant phase of 8,000 MT by end of FY18. The company has now raised the expansion plan for the
first phase to 12,000 MT on the back of product demand.
With the new capacity, BCL will increase high value dyes such as Acid brown, Acid red,
Direct yellow, Direct red, Reactive blue, Reactive orange, Reactive printing dyes, and Red
yellow
Multiple Effect Evaporator MEEP treats high load wastewater. Benefits include, requirement of low steam and power,
Plant (MEEP) re-use of condensed water and integrated Zero Discharge System.
Cogeneration Power Plant and Upgrading existing major utility facilities. With a Cogeneration Power Plant, BCL to achieve
Utility section upgrade substantial saving in energy cost. The project will generate power along with steam. It will
also enable uninterrupted production.
Thionyl Chloride Plant (TC) TC sits between Sulphuric Acid and Vinyl Sulphone. BCL will build a TC plant at unit VII.
BCL will benefit from scale, low inventory, quality supply and no transportation cost.
Certain parts of TC will be used in-house and balance TC will be sold to pharma, agro and
chemical industries in the vicinity.
Vinyl Sulphone Plant at SPS By producing both H Acid and Vinyl Sulphone, SPS will utilize effluents of the two plants
Processors (BCL's acquisition, into each other's production respectively. This will generate additional revenue and reduce
acquired in Mar 2017) cost of managing effluents.
Land Acquisition for specialty Exploring opportunities in new specialty chemicals and looking to acquire land in Dahej
chemical complex
Total capex estimates for next 18 months is around Rs 3.5 billion, which includes above capex as well as
maintenance capex and working capital requirement of ~Rs 500 million.
Another interesting aspect is BCL diversifying into high margin products such as specialty chemical and liquid
dyestuff. BCL making small bets which are expected to diversify revenue streams.
Liquid dyestuff - BCL has recently commissioned a 10,800 tonne liquid dyestuff facility. The liquid
dyestuff is mainly used in the paper industry. The company incurred a capex of Rs 140 million for the
same. At optimum capacity, this segment has a revenue potential of Rs 1 billion with a consequent RoCE
in excess of 100%.
This is a high margin business (EBITDA margin of 20-21%). BCL is primarily targeting export markets for
this product profile. BCL is currently exporting this product to Australia and South Africa. Given the
significant demand in European countries, the company is targeting this region in the near term.
Acquisition of SPS Processors - BCL acquired 70% stake in SPS Processors which is engaged in
manufacturing of dye intermediates. SPS Processors' manufacturing plant, located at Kosi (Uttar
Pradesh), is a zero-discharge unit fully compliant with environmental regulations.
SPS has all necessary permissions in place to manufacture vinyl sulphone (another dye intermediate) as
well as the dyestuff. This acquisition will help BCL to expand its presence in the domestic market. SPS'
locational advantage in the north at crossroads of four states, strengthens BCL's competitive position.
Joint Venture with Trion Chemicals (TCPL) - BCL made an investment of Rs 150 million in TCPL for a
42% stake. The objective of this acquisition for BCL is to expand and diversify in the business of
specialty chemicals apart from dyes & dye intermediates.
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TCPL is engaged in the production of a compound which is a disinfectant, algaecide and bactericide
mainly for swimming pools. It is also used as a bleaching agent in the textile industry. TCPL is mainly
targeting the US market and has already acquired EPA license in the US for environment protection. At
optimum capacity utilisation levels, it is expected to generate an annual turnover of Rs. 2.25-2.50 billion.
Linear Alkyl Benzene Sulphonic Acid (LABSA) Project - BCL, through its wholly-owned subsidiary
Bodal Agrotech Limited (BAL), has started a new plant for the manufacture of LABSA. It is an anionic
surfactant widely used in all ranges of domestic detergents powder, cake and dish wash cleaners. The
total annual capacity for this plant is 18,000 MTPA. At an optimum capacity utilisation level, BAL is
expected to generate an annual turnover of Rs 1 billion.
With this, China overtook the US to become the world's largest chemical market in 2010. Foreign direct
investments by chemical multinationals boomed as China became more integrated into the world economy and
chemicals became a major Chinese export.
During this period, the chemical companies in China built huge capacities but ignored effluent(waste) treatment.
Chinese companies continued to deposit industrial waste in their rivers at the cost of economic growth.
Something had to give.
In 2015, the Chinese government woke up to the real dangers of water scarcity across the country. Rivers were
drying up. According to the 2015 State of Environment Report by the Chinese ministry, 28% of its river water was
marked as "unfit for human contact".
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The Chinese government sprang into action. It proposed to shut down or shift its 1000 odd companies to a 'green
belt'. Also, effluent treatment, i.e. the treatment of liquid waste or sewage, was a pre-requisite requirement to
receive export incentives. Investments had to be made to set up new effluent treatment plants. This meant lower
capacity utilization levels and higher gestation periods.
Their low labor cost card was also not playing out as expected. From 2011 to 2016, the average hourly rates have
increased by 64% to US $3.60. This is five times that of India. The booming Chinese economy also led to increase
in pay for employees.
Indian dye manufacturers used to face strong competition from Chinese dye companies. However, in a recent
move to control pollution, the Chinese government has cracked down on some companies, which has led to the
shutdown of a major dye manufacturer in China, which was contributing nearly 30% of global dye production.
Hubei Chuyuan Group was one of the largest chemical companies in China, having a presence in dyestuffs,
dyestuffs intermediate, fertilizers, pesticides and pharmaceuticals. The company also has the world's largest
production unit for H-acid, K-acid and Para base.
The company, which had a 30% market share in the sector, was recently shut down by the government on
environmental concerns. In June 2016, the local environmental watchdog in central China's Hubei Province
heavily fined Hubei Chuyuan Group and one of its subsidiary companies, more than 27 million yuan (about 4
million US dollars) for discharging excessive pollutants and setting up private discharge channels. The fine
was the largest ever handed down by Hubei environmental authorities.
Now, effluent treatment mechanism is a pre-requisite to carry on business and to receive export incentive. This
has substantially increased the manufacturing cost for Chinese firms and eradicated the low-cost advantage.
Environmental compliance cost in terms of setting up effluent treatment plant (CETP) constitutes a huge cost
(about 20% of capital outlay). This means that the cost arbitrage Chinese manufacturers were enjoying due to
non-compliance would be lost. Additionally, China manufacturers no longer enjoy a huge export incentive like they
did in the early 2000s. Similarly, labour cost arbitrage is also lost.
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With frequent plant shutdowns in China, global customers are looking at diversifying their procurement base and
increasingly targeting India as the next alternate source, thereby benefiting Indian dye intermediates and dye stuff
industry at large.
There has been a phenomenal change in the structural dynamics in the dyestuff industry. Going forward, new
capacities are unlikely to be added in China due to the stringent environmental norms. With this, integrated players
like BCL are strongly positioned to capitalize on this opportunity.
The promoters hold 55% (post the recent QIP) stake in BCL.
Suresh J Patel is the Chairman and Managing Director of BCL. He founded the company in 1989 as a young, first
generation entrepreneur.
He has been associated with BCL over nearly three decades. He is a Chemistry graduate with hands on experience
in the Chemical Industry. He has more than 22 years of experience in the production and marketing of Dye
Intermediates. He currently holds around 28.4% in the company.
Bhavin S. Patel is the Executive Director of Bodal Chemicals. He has been with Bodal for the last 14 years. He
currently heads the Dyestuff Division. He also leads the Liquid Dyestuff initiatives. He holds a Bachelor's Degree in
Science. He holds around 8% in the company. Further, Mr. Ankit S. Patel holds around 5.4% in the company.
Rest is held by the Patel Family. The company has recently completed its QIP (Qualified Institutional Placement)
and has diluted some stake.
Even though we don't like promoters diluting their stake in their company, but with a bad history of debt and
focusing on growth opportunities, dilution makes sense. (However, we will penalize the company in the Smart
Money Score and valuations).
In fact, Ashish Kacholia has entered the company in September 2017 and ICICI Pru and Reliance MF have
participated in the recent QIP.
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Smart Money Invested
1. Smart Money Invested - One of the important catalysts we look for in a stock is the smart money. Based on the
holding (higher the better) and our comfort with super investor we assign a rating on a scale of 10.
We also like to see either the super investor or the promoters of the company increase their stake in the
company.
In the case of BCL, smart money has entered the stock in the last two quarters. Ashish Kacholia has got around
1% in the company in the last two quarters. In fact, with the recent QIP, funds like ICICI Pru and Reliance MF has
entered the stock.
The owners of the company also hold a sizable stake in the company. Patel family holds around 55% in the
company. However, the promoters have diluted some stake in the company. The reason for the dilution has been
the expansion.
The company is going into expansion and don't want to leverage the balance sheet over and above 0.5 times (as
it has learned hard way by going into CDR).
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Sureshbhai Jayantibhai Patel 32 31.8 31.8 31.8 28
We believe smart money is adequately invested in the company. However, since, promoters have diluted their
stake, we penalize the company by 3 points and hence, we assign a rating of 7 to the company.
2. Business quality - BCL is the largest manufacturer of dye Intermediates (DI) in India and the only player with
effluent disposal permission of 1mn litres per day. Besides, being the largest DI manufacturer in the country, it is
also amongst the leading dyestuff manufacturer in the domestic market.
BCL has a unique and integrated product line covering forward and backward integration to dye intermediates. It
contributes about 20% of India's capacity and about 5% of the world's capacity for dye Intermediates.
Even though it is purely into the commodity business, but it has over the years de-risked its business by
backward integration. In fact, the disruption in the Chinese chemical industry and Indian un-organised industry
bodes well for the company.
In fact, what we like about the company is it has learned from its own lessons. The company did a massive
mistake of over-leveraging its balance sheet and went into CDR. However, it has come out of the CDR with flying
colours and now has a lean balance sheet.
Business Quality
Total 2
Topline & Bottomline CAGR 10 years > 10% Last 10 year Average Next 4 Year Average Score (out of
3)
Total 2.25
Debt to Equity Last 10 year Average Next 4 Year Average Score (out of
2)
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Opeating Cash Flows Last 10 year Average Next 4 Year Average Score (out of
2)
In the last ten years, its sales have grown at a CAGR of 17% and net profits by 28%. The growth in the operating
profits has been even better and grew at a CAGR of 30%.
As discussed, it has repaid its high debt and now aims to keep debt below 0.5 times. Even with the turbulence (3
years of making loss), the company on an average in the last 10 years returned ROEs and ROCEs of 21% and
20% respectively.
Even though we believe that company has got some non-commodity characters in financial numbers, we
penalize the company for being in the commodity business & high debt in the past and assign a rating of 7.25
on business quality.
3. Competitive advantage - One of the important factors super investors look for is sustainable competitive
advantages aka economic moats. They love to invest in companies focusing on widening of moats.
As discussed, BCL is one of the few companies with an integrated business model. Which helps it to stand itself
apart from otherwise commoditized industry.
Allows BCL to produce at competitive prices, thereby capturing a larger market share.
Due to its presence across the value chain, the company is the preferred supplier with global MNCs such as
BASF, Huntsman, Colorantes Industriales and Stahl.
BCL commands a market share of 25% in dye intermediates and 10% in dyestuff in the Indian market and 6%
market share in dye intermediates and 3% in dyestuff globally.
Apart from the integrated business model, what also set Bodal apart is the capital-intensive nature of the
business.
This keeps new entrants out of the business to an extent and over the years helps in sector consolidation. (with
more than 50% of market share with un-organized players - these players don't survive in bad times because of
the debt-laden balance sheets)
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Even though company has a differentiated model with quite a few competitive advantages over the competitors,
the industry is fragmented and hence we penalize it and assign a rating of 7.
4. Soul in the Game - The idiom of soul in the game stands for the owner operated companies i.e. companies
where owners and operators of the business are same. We believe higher stake and active involvement in the
business puts the incentives perfectly aligned.
So, we look out for companies owned and operated by good managers.
As indicated above, BCL is owned and managed by the patel family. The family holds around 55% in the
company. Please note this is post the dilution.
We love management that learns from their own mistakes. As discussed above, Bodal went to debt restructuring
and made losses. The management identified one of their biggest mistake i.e. over-leveraging their balance
sheet.
It now takes utmost care of not over leveraging its balance sheet and grow with internal accruals. We really like
management mistake learning attitude.
Also, we have gone through the auditor's report and Related Party Transactions; even though the company has
entered in some related party transactions, we do not find any material transactions which may raise questions
on the management integrity.
We believe, the management has put its soul in the business. This is a kind of pattern our Super Investors look
out for. However, given the fact that the management diluted some stake we penalize the company and assign a
rating of 8 on this parameter.
5. Capital allocation - One of the patterns our super investors and we seek for is the efficient capital allocation by
the management. The best way to evaluate this could be to look at both the sources and the application of the
funds by the management over a period.
Sources of Funds
By sources of funds we mean the money raised by the company to grow its business. Typically, there are three
big sources i.e. Equity Dilution, Raising Debt and Internal Accruals (cash generated by the business).
We love the companies with capabilities of funding their growth using cash generated by the business itself.
Further, if these companies are present in the industries with big market opportunity, sky is the limit for them.
In case of BCL, in the period FY12-17, of the total funds raised by the company, over 50% of the total funds were
generated by the business.
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Sources of Funds over FY12-17
Application of Funds
After sourcing the capital, the next and most important aspect is the allocation of the raised money. We believe
generating cash from the business is not enough, it is very important for the company to deploy the same in
profitable ventures.
In the case of BCL, around 39% has gone towards loan re-payment and 19% has gone towards new capex.
We believe, the management has burned its hand and now understand how important it is to keep a light
balance sheet and deploy capital in a more smarter manner. Even though we assign full marks for sourcing, we
deduct two points for application as, more than 50% of the money went for debt and interest payment. We, thus,
assign a rating of 8 for capital allocation.
6. Earnings quality - One of the key challenges while evaluating small and mid-cap companies is the quality of their
earnings.
The growth in the sales and profits should translate into cash flows for the company. There should be a good
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comparison between the accounting and cash profits to understand the quality of the earnings.
One crucial tool to check the earnings quality is the proper analysis of the Cash Flow Statements (which many
people miss to look at).
Over the years, we have found a similar pattern in companies that were fraudulent or bankrupt or both in India
and abroad. The usual culprit in both the cases involved money stuck in their working capital which meant
accounting profits weren't converted into cash profits.
We have devised a simple way to inspect earnings quality of any company. We begin with cash flow from
operations. Divide it in two parts i.e. Gross Cash Flow from Operations (GCFO) and Net Cash Flow from
Operations (NCFO). The difference being the 'changes in working capital'.
As a thumb rule, for a manufacturing company NCFO as a percentage of GCFO should not be significantly below
sixty percent. This simply means ideally not more than forty percent of the money should be stuck in working
capital.
We applied the same rule on BCL and over FY12-17 this number on an average stood at 102% which well above
the sixty percent rule.
We also compare the net cash flow from operations with operating profits because theoretically they should be
close to each other. For BCL both accounting and cash operating profits were close.
The company has got a very comfortable cash conversion cycle with 66 days (5-year average).
7. Scalability of the business - Identifying a good business is one thing, identifying a good business with potential
to grow at decent rates for years to come is another. One crucial factor for a business is the size of the market it
caters to.
In 2015, the Chinese government woke up to the real dangers of water scarcity across the country. Rivers were
drying up. According to the 2015 State of Environment Report by the Chinese ministry, 28% of its river water was
marked as "unfit for human contact".
The Chinese government sprang into action. It proposed to shut down or shift its 1000 odd companies to a
'green belt'. Also, effluent treatment, i.e. the treatment of liquid waste or sewage, was a pre-requisite requirement
to receive export incentives.
Investments had to be made to set up new effluent treatment plants. This meant lower capacity utilization
levels and higher gestation periods.
Their low labor cost card was also not playing out as expected. From 2011 to 2016, the average hourly rates
have increased by 64% to US $3.60. This is five times that of India. The booming Chinese economy also led to
increase in pay for employees.
Indian dye manufacturers used to face strong competition from Chinese dye companies. However, in a recent
move to control pollution, the Chinese government has cracked down on some companies, which has led to the
shutdown of a major dye manufacturer in China, which was contributing nearly 30% of global dye production.
17
Now, effluent treatment mechanism is a pre-requisite to carry on business and to receive export incentive. This
has substantially increased the manufacturing cost for Chinese firms and eradicated the low-cost advantage.
Environmental compliance cost in terms of setting up effluent treatment plant (CETP) constitutes a huge cost
(about 20% of capital outlay). This means that the cost arbitrage Chinese manufacturers were enjoying due to
non-compliance would be lost. Additionally, China manufacturers no longer enjoy a huge export incentive like
they did in the early 2000s. Similarly, labour cost arbitrage is also lost.
With frequent plant shutdowns in China, global customers are looking at diversifying their procurement base
and increasingly targeting India as the next alternate source, thereby benefiting Indian dye intermediates and
dye stuff industry at large.
There has been a phenomenal change in the structural dynamics in the dyestuff industry. Going forward, new
capacities are unlikely to be added in China due to the stringent environmental norms. With this, integrated
players like BCL are strongly positioned to capitalize on this opportunity.
Bodal's sales and profits have grown at a CAGR of 17% and 28% respectively in the last ten years. We expect the
company to deliver revenue and profit CAGR of 12% and 11% respectively over FY17-21.
Thus, given all these factors, we assign a rating 8 based on scalability of business parameter.
8. Market leadership - Dye Intermediates and Dyestuff industry by nature is fragmented with more than 50% of
market share with unorganized players.
BCL commands a market share of 25% in dye intermediates and 10% in dyestuff in the Indian market and 6%
market share in dye intermediates and 3% in dyestuff globally.
Indian dye industry is highly fragmented and characterized by many small players in the unorganized sector.
The unorganized sector share is around 50% of total dyestuff production. Stringent effluent treatment laws have
resulted in higher operating costs for small-scale players.
18
They've found it increasingly tough to survive. With GST in place, the pace of shift towards the larger organized
sector will further accelerate and the organized player like BCL is firmly placed to benefit from this shift/
So, even though the company has got all the right ingredients to be the market leader but given the fragmented
nature of the industry it operates we assign a rating of 8 on market leadership.
Considering the above analysis, the total ranking assigned to the company is 60.25 (out of 80). On a weighted
basis, it stands at 7.5. This indicates that fundamentals of the business are strong.
Working capital as a percentage of total operating capital employed is around 43%. BCL is doing the next
round of capex through QIP (QIP of ~Rs 2.25 billion raised in October 2017) and internal accruals. QIP
will lead to equity dilution for existing shareholders. Further, the execution of any un-envisaged large
sized debt funded capital expenditure could lead to increase in interest outgo and a decline in
profitability.
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Slowdown in End-User Industries
Any slowdown in domestic and world economies can impact the growth of BCL's end-user industries
such as textiles, leather, paper, detergent and water treatment. This could impact growth.
Face value 2
The below permutations and combinations based on earnings growth and
FY17 dividend/share (Rs) 0.8
P/E multiples gives a fair idea about the potential upside for the stock.
Dividend yield (%) 0.6% However, in addition to this we have derived a target price on basis of our
Stock Classification Small cap numbers.
Free Float 45.07%
Premium Search
Expected Target Price (FY21) Under Different Assumptions of Earnings Growth and P/E Multiples
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17 269 293 315 350 388
BCL is one of the most integrated dyestuff companies in India today from bulk chemicals and dye intermediates to
dyestuff, with bulk chemicals and dye intermediates being produced in-house for captive use as well as for direct
sales. The company has also diversified into specialty chemicals.
Due to its presence across the value chain, it is the preferred supplier with global MNCs. BCL commands a market
share of 25% in dye intermediates and 10% in dyestuff.
Stricter environmental norms and increased costs have substantially eroded the low-cost advantage of Chinese
dye manufacturers. This presented a huge opportunity for large integrated players like BCL. The company is trying
the space vacated by reduced supplies from China.
Not to mention, BCL is executing capacity expansion plan across multiple processes/products. With the Dyestuff
expansion, ramp-up at SPS and Trion Chemicals, we expect BCL to maintain sustained growth for the next three
years.
Despite capital intensiveness of the industry, BCL managed to keep its debt-equity ratio in check with its debt-
equity ratio hovering below 0.5 in FY17. With this, BCL has a stable financial profile. However, considering the
commodity nature of the industry, we assign a multiple of 12 times from FY21 perspective.
As such, we have arrived at a target price of Rs 190 for the company (from FY21 perspective). This implies a CAGR
of ~22% (excluding dividend yield of ~0.6%) and a point to point upside of 52%.
According to us, in a scenario of ideal allocation of funds, predominantly mid and small-cap stocks could be
considered to comprise of not more than 30-40% of your total equity portfolio. Further, we believe a single small
cap stock should not form more than 2-3% of the total portfolio. Please note that this allocation will vary from
person to person. For something that works best for you, we recommend you talk to your investment advisor.
Financials At A Glance
Operating profit margin (%) 16.5% 18.3% 17.3% 18.0% 18.3% 18.4%
Net profit margin (%) 9.4% 10.4% 9.3% 9.2% 9.5% 9.9%
Balance Sheet
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EPS (Rs.) 8 12 9 11 13 16
Book Value per share (Rs.) 19.2 29.4 55.9 65.2 76.0 89.5
Debtors 67 68 70 70 70 70
Inventory 36 39 40 40 40 40
Creditors 42 46 45 45 45 45
Fixed Assets turnover (x) 4.7 5.8 3.7 2.8 2.6 2.8
Growth Ratios
Net Sales growth (%) -13% 36% -6% 20% 17% 20%
Valuation Ratios
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Ratios FY16 FY17 FY18E FY19E FY20E FY21E
Price to book value (x) 1.7 1.2 1.3 1.1 0.9 0.8
Performance Review
This is as per the closing prices for the stocks as on 19th March 2018.
The stock of SP Apparels is trading below the price at which we had originally recommended the stock. Our
maximum Buy price for the stock is Rs 460. Thus, we maintain BUY view on the stock of SP Apparels.
Our view on the stock of TCPL Packaging Ltd remains a HOLD considering the steep run-up in its prices post our
recommendation. Please note the maximum Buy price for the company is Rs 600.
The stock of Ador Fontech Ltd has also gained since our recommendation. The maximum Buy price for the
company is Rs 100. Given that the current price is above the maximum Buy price, our view on the stock of Ador
Fontech remains HOLD.
Mayur Uniquoters has also gained considerably since we recommended the stock. The maximum Buy price for
this stock is Rs 400. Since the current price is above our maximum Buy price, our view on the stock of Mayur
Uniquoters remains a HOLD.
TVS Srichakra Ltd has corrected a bit in last one month and now trades below our maximum buy price. The
maximum Buy price for this stock is Rs 3,250. Thus, we change our view on the stock of TVS Srichakra Ltd from
HOLD to BUY.
Honda Siel Power Products Ltd has also corrected in last month and now trades below our maximum buy price.
The maximum Buy price for this stock is Rs 1,400. Since the current price is below our maximum Buy price, we
change our view from HOLD to BUY.
Jagran Prakashan Ltd has fallen since we recommended the stock. Thus, the current price is still below our
maximum Buy Price of Rs 185. Hence, we maintain our BUY view on the stock of Jagran Prakashan Ltd.
Ashiana Housing Ltd has fallen since we recommended it. The maximum Buy price for this stock is Rs 200. Hence,
we maintain our BUY view on the stock of Ashiana Housing Ltd.
Newgen Software Technologies Ltd has not moved much since we recommended the stock last month. The
maximum Buy price for this stock is Rs 260. Hence, we maintain our BUY view on the stock of Newgen Software
Technologies Ltd.
Summary of Open Positions for Smart Money Secrets as on 19th March 2018
SP Apparels Ltd 3-Jun-17 Buy 424 766 333 -21% Buy 130%
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TCPL Packaging 23-Jun-17 Buy 515 1,100 610 19% Hold 80%
Ltd
Ador Fontech Ltd 27-Jul-17 Buy 95 169 112 17% Hold 51%
Mayur Uniquoters 21-Aug-17 Buy 345 673 487 41% Hold 38%
Ltd
TVS Srichakra Ltd 25-Sep-17 Buy 3,127 4,934 3,189 2% Buy 55%
Honda Siel Power 26-Oct-17 Buy 1,314 2,387 1,395 6% Buy 71%
Products Ltd
Jagran Prakashan 22-Dec-17 Buy 171 312 164 -4% Buy 90%
Ltd
Ashiana Housing 27-Jan-18 Buy 187 328 158 -16% Buy 108%
Ltd
Newgen Software 26-Feb-18 Buy 239 416 230 -4% Buy 81%
Technologies Ltd
Ashiana Housing
Honda Siel
TVS Srichakra
According to us, large cap/ blue chip stocks should comprise at least 60% of one's
total equity portfolio. However, a single large cap/ blue-chip should not form more
than 5-6% of the total portfolio.. This allocation will of course vary from person to person. For something that works best for you,
we recommend you talk to your investment advisor.
24
These are some of the Most Frequently Asked Questions on Smart Money Secrets. Please view the others here.
If the stock price runs up post the recommendation and trades at levels higher than the
buy price, should one still buy the stock?
Please note that small and midcap stocks, in general, have low market capitalisation and liquidity. There is always
the possibility that these stocks may shoot up in price in no time, even at the time of our recommendation.
Therefore, we would like to recommend to our subscribers not to chase prices and not to consider buying a stock
once it goes beyond our recommended maximum buy price. There will be enough recommendations in a year so
that the pain of missing out on a few recommendations is eased considerably.
Do note that we give maximum buy price range for every stock we recommend in Smart Money Secrets.
Can there be an overlap or contrary views on the stocks recommended under this service
and that of the other Equitymaster services?
We believe that earning good returns from stocks is all about following a well-defined process.
In line with this, each of our product teams, be it the Smart Money Secrets team or Hidden Treasure or The India
Letter, has its own unique screen and checklist for selecting and recommending stocks. In rare cases, where there
is a compelling proposition to recommend a stock in more than one service simultaneously, could there be an
overlap in stocks.
For example, the Smart Money team has unique smart money screener for any stock to pass i.e. 1) Greater than 1%
shareholding of Super Investors; 2) Bulk & Block Deals; and 3) Increasing Promoter Shareholding. On the other
hand, same stock could be recommended under another service irrespective of the smart money screener. In fact,
any service may have recommend a stock and now smart money has entered the stock, it becomes a candidate
for Smart Money Team.
Thus, there could be recommendations that overlap with those in our other services. This aspect also leaves the
stage open for sometimes contradictory recommendations.
Assuming we initially gave a Buy on a stock with no subsequent recommendations on the same stock.
In that case the calculation is fairly simple. The returns shown in this case is simply the change in stock
price from the date of recommendation till the date on which the position was closed.
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Now let us take a case where we initiated with a Buy (1st position) and subsequently came with another
recommendation (2nd position) on the same stock. Let us assume that the subsequent
recommendation was also a buy. In such cases, the return calculation depends on whether the 1st
position is closed or not. If the first position is closed before we reiterate buy then the return on the first
position will be calculated as shown previously. However, if 1st position was not closed before we
reiterated buy, then the return calculation is from the earlier buy recommendation till the date on which
the position was closed. Basically where we have reiterated view on a stock we try to show cumulative
returns. The same logic applies with Hold recommendations as well.
Now let us look at Sell recommendations. There can be two situations here.
If there is no recommendation subsequent to the Sell recommendation we show maximum drop in stock
price from date of sell recommendation till date.
If the Sell recommendation is followed up by another recommendation, we show maximum drop in stock
price between the two recommendation dates.
Basically we have tried to cover all hypothetical instances in this note that may help you better understand the
return calculations and closed positions of our recommendations. If you have any query pertaining to it please do
write in to us for further clarifications.
Buy recommendation: This means that the subscribers could consider buying the concerned stock at
current market price keeping in mind the tenure and objective of the recommendation service.
Hold recommendation: This means that the subscribers could consider holding on to the shares of the
company until further update and not buy more of the stock at current market price.
Buy at lower price: This means that the subscribers 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.
Sell recommendation: This means that the subscribers could consider selling the stock at current
market price keeping in mind the objective of the recommendation service.
To enhance your experience of using StockSelect and to ensure that this journey is smooth for you we have compiled a list of
Frequently Asked Questions.
INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint
venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research
Analysts) Regulations, 2014 with registration number INH000000537.
BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment
opportunities across asset classes.
DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.
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a. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
b. Except for TVS Srichakra, Equitymaster has no financial interest in any other Subject Company forming a part of this report.
c. Equitymaster's investment in the subject company is as per the guidelines prescribed by the Board of Directors of the Company. The investment is however made
solely for building track record of its services.
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a. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
b. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
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brokerage services from the subject company in the past twelve months.
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GENERAL DISCLOSURES:
a. The Research Analyst has not served as an officer, director or employee of the subject company.
b. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
a. Buy recommendation: This means that the subscriber 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 subscriber 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 subscriber 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 subscriber could consider selling the stock at current market price keeping in mind the objective of the
recommendation service.
Feedback:
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.
Is the Short Term Pain a Worry for Bodal Newgen Software Technologies Ltd.
Chemicals? (Smart Money Secrets)
(The India Letter Special Report) Feb 26, 2018
27
offtake by the textile industry on the back of GST Jagran Prakashan Limited
disruption. (Smart Money Secrets)
Dec 22, 2017
The India Letter recommendation for the month of Honda Siel Power Products: Still Awaiting a
October 2017 Rural Recovery
(Quarterly Results Update - Detailed)
Dec 11, 2017
More Views on News Recommended Reading
Good monsoons and a strong product portfolio are
expected to improve Honda Siel's growth prospects
in the coming quarters.
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The performance data quoted represents past performance and does not guarantee future results.
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