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INVESTMENT RATIONALE
Demand for hydrogen peroxide on a growth trajectory
The demand for hydrogen peroxide is set to grow across the world on account of environmental concerns. Hydrogen peroxide is widely used as a bleaching chemical finding extensive application in the textile and paper industry. Chlorine, another chemical is equally used in the bleaching industry. However, usage of chlorine leads to depletion of the ozone layer and is therefore, hazardous to the environment. The usage of hydrogen peroxide is not engulfed with any such issue and is very much safe with regard to the issues related to the environment.
The usage of hydrogen peroxide has gained importance over the recent years as a substitute for hypochlorite and other bleaching agents. This chemical acts by creating active oxygen. Hydrogen peroxide needs higher temperatures and high pH levels to oxidise.
Hydrogen reacts very willingly with many chemical substances but creates no harmful by-products. Hence, it can be considered harmless with respect to the environment unlike many other chemicals.
Hydrogen peroxide prices have almost doubled over the last one year
Hydrogen peroxide prices have been constant at Rs.35 per kg over the last two months. Off late, the prices have improved to Rs.43 per kg levels. There is a 100% y-o-y increase in hydrogen peroxide prices at Rs.41.9 per kg during the quarter compared to Rs.21.9 per kg during the corresponding quarter last year. We expect the company to be a key beneficiary of the upturn in hydrogen peroxide prices.
Leadership status, expansion plans to improve performance further
National Peroxide is the market-leader with 38% share of the domestic market. Considering the improvement in demand for its product, the company has commenced the expansion process of its facilities from 68,000 tonnes to 84,000 tonnes in this quarter itself. As a result, the company has undertaken maintenance shut down for a period of about six weeks commencing from April 11, 2011. The company plans to expand the capacity further to 1,50,000 tonnes over the next five years. The capacity expansion expected to be around Rs.50 crore would be entirely funded through internal accruals only.
The increase in capacity should not only lead to a surge in volumes but also in margins on the back of apportionment of fixed costs. During FY’11, the company has clocked an EBITDA margin of +50%. We expect high margins to sustain going forward as well on the back of buoyancy in hydrogen peroxide prices, capacity expansion plans and reduction in cost-structure.
Increase in promoter holding
The promoter holding in the company has increased from 66% to 70.09% over the last 15 months. This increase in holding by the promoter group re-instates the confidence of the promoters in the business model of the company.
Strong growth in the end-user industry
The prospect of Hydrogen Peroxide is dependent on performance of the textile and paper industry since it finds significant application as a bleaching agent in both these sectors. Both, paper and texile, are doing extremely well and are on track with their expansion plans. The acquisition of AP Paper Mills by International Paper and that of Subburaj Papers by Seshasayee Paper Mills clearly states that the paper industry is on the verge of consolidation.
The client list of the company in the textile sector and the Paper sector have been mentioned below:
BILT
Andhra Pradesh Paper Mills
West Coast Paper Mills
Some of the prominent names in the textile sector who source Hydrogen Peroxide from the company are:
Bombay Dyeing Arvind Mills
Risks & Concerns
Volatility in the price of hydrogen peroxide
Volaitility in the price of hydrogen peroxide is a significant risk to our earnings estimate. However, on account of environmental issues associated with the usage of its nearest competing product, chlorine, the demand is expected to be robust.
COMPANY BACKGROUND
Incorporated in the year 1956, National Peroxide Limited is a Wadia group company . The company is the largest single location hydrogen peroxide manufacturer in the country. NPL derived close to 92% of its revenues from the sale of hydrogen peroxide during FY’10 and is the leader with 38% market-share.
VALUATION AND RECOMMENDATION
We expect NPL to post an EPS of Rs.114.8 in FY’12E on the back of expansion in capacity and robust trend in the price of Hydrogen Peroxide. The performance in Q1FY’12 is expected to be muted on account of the shutdown undertaken by the company to expand the capacity. We remain upbeat about the future prospects of the company on the back of robust demand for hydrogen peroxide from the end-user industries. We value the core business at 6x FY’12E earnings of Rs.115 per share to arrive at a figure of Rs.690. The value of the investment in group companies stands at Rs.22 per share (after assigning a
40% holding company discount). Investors looking out for strong and steady business model, having high return ratios can expect a price of Rs.712 over the next 6 to 9 months providing an appreciation of 27% from the present levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INVESTMENT RATIONALE
Demand for hydrogen peroxide on a growth trajectory
The demand for hydrogen peroxide is set to grow across the world on account of environmental concerns. Hydrogen peroxide is widely used as a bleaching chemical finding extensive application in the textile and paper industry. Chlorine, another chemical is equally used in the bleaching industry. However, usage of chlorine leads to depletion of the ozone layer and is therefore, hazardous to the environment. The usage of hydrogen peroxide is not engulfed with any such issue and is very much safe with regard to the issues related to the environment.
The usage of hydrogen peroxide has gained importance over the recent years as a substitute for hypochlorite and other bleaching agents. This chemical acts by creating active oxygen. Hydrogen peroxide needs higher temperatures and high pH levels to oxidise.
Hydrogen reacts very willingly with many chemical substances but creates no harmful by-products. Hence, it can be considered harmless with respect to the environment unlike many other chemicals.
Hydrogen peroxide prices have almost doubled over the last one year
Hydrogen peroxide prices have been constant at Rs.35 per kg over the last two months. Off late, the prices have improved to Rs.43 per kg levels. There is a 100% y-o-y increase in hydrogen peroxide prices at Rs.41.9 per kg during the quarter compared to Rs.21.9 per kg during the corresponding quarter last year. We expect the company to be a key beneficiary of the upturn in hydrogen peroxide prices.
Leadership status, expansion plans to improve performance further
National Peroxide is the market-leader with 38% share of the domestic market. Considering the improvement in demand for its product, the company has commenced the expansion process of its facilities from 68,000 tonnes to 84,000 tonnes in this quarter itself. As a result, the company has undertaken maintenance shut down for a period of about six weeks commencing from April 11, 2011. The company plans to expand the capacity further to 1,50,000 tonnes over the next five years. The capacity expansion expected to be around Rs.50 crore would be entirely funded through internal accruals only.
The increase in capacity should not only lead to a surge in volumes but also in margins on the back of apportionment of fixed costs. During FY’11, the company has clocked an EBITDA margin of +50%. We expect high margins to sustain going forward as well on the back of buoyancy in hydrogen peroxide prices, capacity expansion plans and reduction in cost-structure.
Increase in promoter holding
The promoter holding in the company has increased from 66% to 70.09% over the last 15 months. This increase in holding by the promoter group re-instates the confidence of the promoters in the business model of the company.
Strong growth in the end-user industry
The prospect of Hydrogen Peroxide is dependent on performance of the textile and paper industry since it finds significant application as a bleaching agent in both these sectors. Both, paper and texile, are doing extremely well and are on track with their expansion plans. The acquisition of AP Paper Mills by International Paper and that of Subburaj Papers by Seshasayee Paper Mills clearly states that the paper industry is on the verge of consolidation.
The client list of the company in the textile sector and the Paper sector have been mentioned below:
BILT
Andhra Pradesh Paper Mills
West Coast Paper Mills
Some of the prominent names in the textile sector who source Hydrogen Peroxide from the company are:
Bombay Dyeing Arvind Mills
Risks & Concerns
Volatility in the price of hydrogen peroxide
Volaitility in the price of hydrogen peroxide is a significant risk to our earnings estimate. However, on account of environmental issues associated with the usage of its nearest competing product, chlorine, the demand is expected to be robust.
COMPANY BACKGROUND
Incorporated in the year 1956, National Peroxide Limited is a Wadia group company . The company is the largest single location hydrogen peroxide manufacturer in the country. NPL derived close to 92% of its revenues from the sale of hydrogen peroxide during FY’10 and is the leader with 38% market-share.
VALUATION AND RECOMMENDATION
We expect NPL to post an EPS of Rs.114.8 in FY’12E on the back of expansion in capacity and robust trend in the price of Hydrogen Peroxide. The performance in Q1FY’12 is expected to be muted on account of the shutdown undertaken by the company to expand the capacity. We remain upbeat about the future prospects of the company on the back of robust demand for hydrogen peroxide from the end-user industries. We value the core business at 6x FY’12E earnings of Rs.115 per share to arrive at a figure of Rs.690. The value of the investment in group companies stands at Rs.22 per share (after assigning a
40% holding company discount). Investors looking out for strong and steady business model, having high return ratios can expect a price of Rs.712 over the next 6 to 9 months providing an appreciation of 27% from the present levels.
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