Recovering from the post-Covid supply chain disruptions during the June 2020 quarter, several Indian chemicals companies posted healthy revenue and profit numbers for the nine-month period ended December 2020. Though, at the sector level, revenue from operations and operating profit for nine months ended December 2020, declined 7.7 per cent and 4 per cent, respectively, year-on-year. This includes a diverse set of Indian chemicals companies with a market cap of ₹100 crore or more.
In tandem with their financial performance, stocks of many chemicals companies have surged anywhere between 17 per cent and 468 per cent since March 23, 2020 lows, shooting up their valuations .
The closure of many plants in China due to stricter environmental and safety norms over the past few years, and the focus on diversification away from China for sourcing of chemicals, have opened growth opportunities for the Indian chemicals sector. A greater emphasis on hygiene-based products is expected to be yet another growth driver. Also, India is a net importer of chemicals and this provides domestic companies ample scope for import substitution.
Using the Capitaline database, we shortlisted chemicals companies that have maintained an average EBITDA (earnings before interest, taxes and depreciation) margin and net profit margin of at least 15 per cent and 10 per cent, respectively, over the last five-year period (FY16 to FY20) and for the nine-month period ended December 2020. These companies have also grown their revenue from operations and operating profit (EBIT), each at over 10 per cent (CAGR) during FY15 to FY20. The short-listed companies also fared well during the nine month-period until December 2020.
No surprise then, that their stock valuations have moved up sharply. The stocks of these companies are trading at price-to-earnings multiples (trailing 12-month) of 26 to 30 times. The valuations are, however, still lower than those of many peers that have lagged, both on profit margins and growth compared to these companies.
Advanced Enzyme Technologies (Advanced Enzyme), a ₹3,820-crore market cap company, is engaged in research and development, manufacturing, and marketing of enzyme products in India and abroad. It caters to three segments — human healthcare and nutrition (three-fourths of company revenue), animal nutrition and industrial processing. Exports account for 57 per cent of the company’s revenue.
Advanced Enzyme has the highest margins in the Indian chemicals industry. Revenue and profit growth too have been impressive. No debt and positive free cash flows are othier positives. The company showed up in one of our earlier screeners too. At a trailing twelve-month price to earnings multiple (TTM PE) of 26 times, the stock trades above its three-year average P/E multiple of almost 20 times.
Valiant Organics is focussed on manufacturing and marketing of different types of chlorophenol with applications in agro-chemical, pharmaceutical, rubber, and dyes and pigment industries. The Gujarat-based Valiant Organics reported an average EBITDA and net profit margin of 28 per cent and 17 per cent, respectively, for the last five-year period.The company has grown its revenue 63 per cent (CAGR) to ₹ 675 crore and operating profit 74 per cent (CAGR) to ₹171 crore between FY15 and FY20. This was largely on account of Valiant Organic’s acquisition of Amarjyot Chemical, a specialty chemicals company with three manufacturing plants in Gujarat, in 2019.
While fluctuating prices of chlorine gas and phenol, the major raw materials, along with customer concentration pose risk, there are positives too. Valiant Organics is expanding its manufacturing capacity and is also further backward integrating. Despite this, as of September 2020, the company had a debt-to-equity ratio of under 0.4 times. The stock trades at TTM PE of around 28 times.
Navin Fluorine International derives 65 per cent of its revenue from its high value business comprising specialty chemicals for life science and crop science segments, and CRAMS (contract, research and manufacturing services) opportunities. The other 35 per cent comes from its inorganic fluorides and refrigerants business. Domestic sales account for 55 per cent of the revenue.
While the company is exposed to fluctuations in prices of fluorspar, a key raw material, its diversified sourcing of raw material, and a 25 per cent joint venture formed for the beneficiation of fluorspar ores supplied from the Gujarat Mineral Development Corporation mines, provide some degree of raw material security. Upcoming capacity expansions too should benefit the company. A new multi-purpose plant being set up at a cost of ₹195 crore is expected to be commissioned in FY22. The company’s cGMP (Good Manufacturing Practices) certified CRAMS facility too is expected to reach its peak turnover in the next one-two years.
The stock trades at a TTM P/E multiple of 27.7 times, above its three-average multiple of 25.7 times. The company’s strong financial performance is reflected in its high margins, and strong revenue and operating profit growth (see table).
Alkyl Amines Chemicals, another well-performing company trades at a much higher P/E multiple. On the other hand, Balaji Amines, which trades at multiples comparable to those of the short-listed companies, missed one of the short-listing criteria by a notch.