A deep value fertiliser and chemical business
A deep value fertiliser and chemical business
"Strong fertiliser and chemical business: Unbeatable PE ratio of 4.5x, near-zero debt, book value twice its price, and an incredible track record of consistent sales and profit growth"
Amidst the evolving landscape of India's fertilizer and chemical industry, one company stands out as a prominent player, supplying essential compounds as raw materials to various high-value sectors. With a diverse product portfolio covering both fertilizer and industrial segments, this leading producer plays a vital role in fueling the operations and growth of numerous industries that rely on its high-quality inputs.
What sets this company apart is not only its broad product range but also the margin of safety it offers to investors. With a strong financial foundation and robust risk management, the company provides a sense of security even in volatile market conditions. This margin of safety acts as a shield, safeguarding investors' capital and reducing downside risks.
Annual Revenue > Market Cap:
One amazing aspect that highlights the financial strength and robustness of this producer is its annual revenue surpassing its market capitalization. With annual revenue that exceeds 1.7 times its market cap, the company showcases its ability to generate significant earnings and solidify its position in the market.
A Balanced Revenue Stream:
With 70% of its revenue generated from the fertilizer business and the remaining 30% from the industrial chemical segment, this company maintains a well-balanced revenue stream. In the fertilizer sector, they produce critical compounds such as Urea, Ammonium Sulphate, and Di-Ammonium Phosphate, contributing to agricultural productivity and sustainable farming practices.
Simultaneously, their industrial chemical business offers products like Melamine, Cyclohexanone, and HX Sulphate Crystal, which find applications across a wide range of industries.
This strategic distribution allows the company to adapt to market fluctuations by tweaking its product mix accordingly. The ability to counter cyclicality ensures a stable and resilient revenue stream, attracting the attention of savvy investors.
Unique Distinction: Sole Manufacturer of Essential Chemicals:
What sets this leading producer apart is its position as the sole manufacturer of four distinct chemical substances: Melamine, Cyclohexanone, HX Sulphate Crystal, and MEK Oxime. These chemicals play vital roles in various industries, serving as crucial ingredients and intermediates that enable the production of a diverse array of products. From enhancing the quality of materials to driving innovation, these chemicals are indispensable components in their respective domains.
The company's diversified revenue streams reduce reliance on any single sector, mitigating risks associated with sector-specific fluctuations. Secondly, as an integral part of the supply chain, the company enjoys strong business relationships and a high barrier to entry for potential competitors. This fortifies its market position and provides a foundation for long-term growth.
A Vision of Vertical Integration:
This exceptional company is not content with its current status. It has set its sights on vertical integration, striving to produce high-throughput raw materials in-house. By taking control of its supply chain, the company aims to enhance operational efficiency and seize opportunities for growth. This strategic move places the company at a significant advantage, ensuring a reliable source of raw materials and consolidating its position in the market.
Consistent Compounder:
In the past five years, this company has proven itself as a consistent compounder, delivering impressive returns across its sales, capital expenditures, and profit after tax. Such a track record establishes a strong foundation for future growth and instills confidence in investors seeking long-term stability and profitability.
Steady-State Margins and Attractive Valuation:
The company's steady-state margins of 14% are commendable, particularly in an industry heavily influenced by government subsidies. These margins indicate the company's adeptness in navigating challenges and maintaining profitability. Moreover, with a low price-to-earnings (PE) ratio of 4.5, this company presents a compelling investment opportunity. Its conservative valuation makes it an attractive prospect for seasoned investors seeking undervalued assets.
Strategic Investments:
A key factor contributing to the company's investment value lies in its diverse portfolio of strategic investments. Notably, investments in another state chemical company, a state-owned green gas company, a PSU Industrial Power company, and another joint sector fertilizer and chemical enterprise collectively account for around 65% of the company's market capitalization. This diversified approach showcases the company's astute decision-making and further solidifies its investment appeal.
Financial Stability and Energy Efficiency:
With negligible borrowings and a strong balance sheet, this company is well-positioned to weather economic downturns and navigate potential challenges. Additionally, it has embraced energy-efficient operations, setting itself apart from its peers. By constructing a 154 MW windmill, the company has effectively addressed energy consumption concerns, showcasing its commitment to sustainability and aligning with future regulatory changes.
New State PSU Policy:
This state’s PSUs have gained attention due to new rules on dividends, bonus shares, and buybacks. The new framework mandates PSUs to declare dividends equivalent to 30% of post-tax profit or 5% of net worth, whichever is higher. PSUs with a net worth of ₹2,000 crore and cash/bank balance of ₹1,000 crore are required to exercise the buyback option.
These PSUs have low equity capital and large shareholders' funds, making them eligible for issuing bonus shares. With steady growth and minimal debt, dividend payments and yields are expected to remain healthy. However, balancing investor payouts with capital expenditure plans is a challenge for some companies. This company does have significant planned capex for expansion and new projects.
Addressing Risks:
While there are risks associated with government subsidy fluctuations and proposed restructuring programs, the company remains viable and supported by the government. Its cautious approach to expansion and dividend payouts, coupled with a substantial 500% dividend declaration, indicates confidence in its financial position and ability to adapt to changing circumstances. Furthermore, proactive measures are being taken to protect margins and mitigate the impact of reduced subsidies and potential funding constraints.
Conclusion:
In the realm of fertilizer/chemical businesses, this company stands strong, offering a unique proposition to investors. What sets it apart is not only its status as the sole producer of sought-after chemical substances in India but also the rock-solid foundation it provides for investors.
Underpinning this foundation are strong financial indicators that exemplify the company's stability. Its sales outpace its market capitalization, reflecting a solid revenue base. Moreover, with consistent compounded profit growth, attractive price-to-sales and price-to-earnings ratios, and a steady 5% growth in the netblock, the company showcases its financial prowess.
Furthermore, the company's significant investments, which constitute 65% of its market capitalization, coupled with negligible borrowings, highlight its prudent financial management and low-risk profile. This robustness acts as a safeguard, instilling confidence in investors, particularly during times of market uncertainty.
In conclusion, armed with impressive financial performance and a steadfast foundation, this company presents an enticing investment opportunity. Investors can place their trust in its sturdy financial indicators, positioning themselves for potential returns and long-term growth while enjoying a reassuring margin of safety.
We want to emphasize that this communication should not be misconstrued as a recommendation, as we are not SEBI RIAs. It is crucial for readers to conduct their own due diligence and exercise caution.
Therefore, we urge all readers to approach this opportunity with prudence and carefully consider the potential risks involved. While the prospects appear promising, it is essential to maintain a cautious approach and stay informed of the inherent dynamics of the industry.
Happy to chat and discuss this in detail
About Us -
Govind Shorewala - Entrepreneur (Mining, Textiles) & Investor (Private & Public Markets) → Reachout at: govind.shorewala@gmail.com
Aaroah Mittal - Early Stage VC → Reach out at: aaroah.m@people-group.com