Bodal Chemicals: Incisive Fundamental Analysis

BODAL CHEMICALS

This analysis combines FY 2017-18 figures with commentary and figures from the March 2017 AR because the latest AR is still not published.

1. BUSINESS

Bodal Chemicals is engaged in the manufacture of:

Vinyl Sulphone Ester: A raw material for the dyestuff industry. Bodal makes more than 25 dye intermediates using this chemical as the base. The best part is that it exports even to China (among other countries, including EU nations).

Sulphur and Bulk Chemicals: Including LAB, sulphuric acid, Oleum. This is a very competitive market.

Trichloroisocyanuric acid (Trion): Used in sanitizing pools and spas, preventing animal diseases, fruit & vegetable preservation, wastewater treatment, as an algicide for recycled water in industry and air conditioning, etc. This is a new venture and the product holds a lot of promise. This is a JV with Raj Chemicals which is headquartered in Hong Kong and operates 3 plants in Gujarat.

Bodal had 42% stake in Trion which it has increased in June 2018 to 59%.

30% of the revenues are from exports, rest are from the domestic market.

As China is scaling down its chemical capacities, the product profile looks good at least for the medium term.

2. CAPACITY UTIIZATION (as on 31-3-17)

Dyes intermediates – 77%

Dyestuff – 74%

Sulphur and bulk chemicals – 99%

Trion – Production still not commenced as on 31-3-17.

This tells us that:

Capacities are running at full steam and therefore, any upside in revenue is dependent on Dye Intermediate and Dyestuff production increasing capacity., and on Trion sales.

Now, the revenues for the year ended March 2017 were about 1200 crores.

60% of turnover is from dye intermediates = 720 crores

25% of turnover is from dyestuff = 300 crores

The rest is from Sulphur and Bulk Chemicals, which cannot increase because it is already operating at 99% in a competitive market.

Therefore, if the capacities increase to 100% for dye intermediates and dyestuff, we can expect the following increase in turnover:

Dye intermediate 720 crores at 77% implies 935 crores at 100% = 215 crore increase

Dyestuff 300 crores at 74% implies 405 crores at 100% = 105 crore increase

Therefore, Bodal’s revenue can grow by 320 crores after it starts operating at 100% capacity + Trion sales.

This was the situation as on 31-3-17

For the year ended 31-3-18, Bodal’s standalone sales fell by about 5%.

This implies that either the capacities have fallen as Trion sales have kicked in. Or, that Trion sales have not yet kicked in. We have to wait for the AR to figure out which segment did badly.

Bodal also had acquired SPS Processors, a dye intermediate manufacturer based in Uttar Pradesh for 4 crores. In its AR of 2016-17, it was mentioned that this unit along with its expansion would be operational in the first half of 2017-18. Well, if the unit was made operational, the results are not seen in sales of 2017-18 as per TTM data.

ALSO: Considering Bodal exports 30% of its production, and that the Rupee fell during the year, the sales should have increased.

3. CAPITAL EXPENDITURE 

In the year ended 31-3-17, the company spent about 31 crores on upgrading its effluent treatment plant to conform to global standards.

The expectation was that the exports would be happy about this development and place more orders with the company. But this expectation has not been met in the current year.

4. SUBSIDIARIES AND ASSOCIATES

Trion’s capital is 14.5 crores. Its turnover is 52 lakhs and its loss before writing back deferred taxes is 27 crores. Unsure about when this company’s revenues will pick up.

SPS Processors’ turnover of 81 crores on a small capital of 1.6 crores looks very good, but the profit before taxation of 46 lakhs looks too too tiny. To figure out whether this is wrong or right, one must dig deep into the subsidiary’s accounts.

5. SALARIES

The total of salaries drawn by the top 10 employees is Rs 2.78 crore per year.

Plus, Suresh Patel, the MD, draws Rs 1.08 crores in a year. Bhavin and Ankit Patel, who are related to him, draw 1.45 crores p.a., jointly.

The company employs 1,294 people across all its facilities.

The total salaries and wages bill works out to 41 crores.

The net profit after taxes works out to 128.6 crores.

Though the average salary bill (41 crores/1284) looks good, the net profits:salaries (128.6:41) seems a little low at 3.13. A very efficient company typically ensures that each employee’s efforts contribute 5-10 times to the net profit.

6. LOANS

For the year ended 31-3-17 the company paid up secured loans of RS 50 crores by taking unsecured loans and deposits of the same amount. Net debt at the end of the year stood almost unchanged at 142 crores.

7. RESERVES

Total reserves are Rs 337.5 crores as at 31-3-17, and of these about 52 crores are unearned (share premium/capital reserves). Still, Rs 285 crores of reserves looks very good considering the equity capital is just 21 crores.

However, we must check how these reserves have been utilized before passing judgment.

Typically, efficient managements invest their reserves or keep the money aside for future expansion.

In the case of Bodal Chemicals, the following investments look like they may be locked in for a long period of time:

Non current investments – 14.5 crores in subsidiary and associate

Goodwill – 10 crore

Loans and advances to related party – 52.45 crores (first the company acquires and then grants a loan)

Capital advances – 13.67 crores

Debtors exceeding 6 months Rs 10.97 crores (though the management says that the debtors are good, we can only pass judgment if they pay up).

This works out to 102 crores. Therefore of 285 crores free reserves, 102 crores may get locked in for a long period.

That leaves us with 183 crores worth of free reserves.

Of this, 31 crores has been spent on effluent plant and another 9 crore is capital work in progress, leaving us with 143 crores.

It would be reasonable to expect that a good part of this 142 crores is held in a bank or as listed investment.

However, that is not the case: Just 6 crores are kept in the bank and the rest are represented by an increase in debtors and inventory and a few other items that keep the working cycle moving along.

8. INTEREST

The company has obtained loans of about Rs 142 crores (see above). A large chunk are from directors and group entities.

It would be reasonable to expect that the company should pay about 11% interest on loans, which works out to Rs 15 crores.

However, the company has provided for Rs 6.6 crores, and the auditor has not qualified the accounts, which means the accounting is correct.

I’m not saying this is right or wrong – just pointing it out.

9. CASH FLOW STATEMENT

Though the company has witnessed a healthy inflow of cash at 121 crores, it has invested 110 crores of this into fixed assets including capital work in progress (50 crores) and investment/loans in/to subsidiaries (60 crores).

Also, in the item below (Contingent Liabilities), you will observe that the company has made capital commitments to the tune of Rs 29.8 crores which have not been accounted for. If the company backs out of these, there could be trouble. If it goes ahead and fulfills, there will be a gestation period before the new assets turn in profits.

10. CONTINGENT LIABILITIES

About 6.2 crores of demands from Income Tax and Excise are not provided for.

The company also has entered into capital commitments of about 29.8 crores net of advances, that are not provided for – however, this non provision is a usual trade practice.

11. DEBTORS TO SALES

The sales are 1272 crores and the debtors are 225 crores. That’s 18%, or in layman terms – the company allows a generous credit period of 55 days.

Though it is high, the times are such because the economy sucks, and therefore I wouldn’t fault the company over this.

12. DEFERRED TAX LIABILITY

The company has provided for deferred tax liability of Rs 19 crore being the difference between book and tax depreciation. Typically, companies knock off such liabilities by posting losses and reversing the provision.

Unsure if Bodal will do this, but as an investor you must be ready for sudden hiccups.

13. H-ACID

I’m adding this based on some feedback received that H-Acid prices will move up quickly to Rs 1,000/kg. These are currently at about Rs 500/kg.

In 2016, Bodal’s CMP was Rs 40 when the price of H-Acid, a dye intermediate, started flaring up because China closed its facilities.

In 2016 itself, it shot up to Rs 1,000 per kg and the fortunes of Bodal Chemicals changed. Bodal’s CMP moved from 40 to 160.

Today, the price of H-Acid is 600/kg. Many experts reckon it will move to Rs 1,000/kg.

This will benefit Bodal if and when it happens.

CONCLUSION: IS BODAL CHEMICALS A GOOD INVESTMENT?

First – The dye intermediates and dye stuff division were chugging along at about 75% capacity levels in 2016-17. As the turnover is more or less the same in 2017-18, it will be safe to assume that these divisions are performing at the same levels.

Therefore, if and when the prices of H-Accid zoom, and demand kicks in and capacities jump to 100% we can at best see an increase of Rs 310-500 crores in the topline, which will translate to about Rs 34-60 crores in the bottomline at 11% post tax margin, adding Rs anywhere between 3.0-6.0 to the current EPS of Rs 11.

But when will this happen? That is the big question.

The stock at 110 is languishing at a PE of 10, so if the PE is maintained, and if all the events stated above happen it will appreciate about 50-70 bucks. In the long run that is a modest appreciation.

Second – Companies typically try and knock off their deferred tax liabilities by reporting losses. If Bodal resorts to this it will result in a price drop.

Third – Trion, in which Bodal has a 59% share, makes an in-demand product, but has yet to report solid profits to make Bodal’s investment pay off. When will it report decent profits is a question out in the open.

Fourth – SPS Processors, in which Bodal has a 70% share, reports good revenues but a very flat bottomline. On top of this, Bodal has granted it a loan to increase capacities. So, this may take some time to play out.

Fifth – IMO, Bodal should stop acquisitions and focus on growing profits and shareholder wealth. But the company has made capital commitments of about 29.8 crores, so it looks like that the game may drag on. The stock was quoting 160 in 2016 and has hit about 190 high and is now at 110, and that is not saying much.

Sixth – During the year 2017-18, ICICI Prudential Fund and its entities have picked up 6.14% share in the company, which is a good sign, but for the long term. You can read this announcement for details.

To sum up, I would wait out on this one and watch quarterly numbers. If things start popping big time for at least 2 quarters, then it can be considered as a long term pick. Else, it’s a wait and watch.