Clariant’s array of products, catering to diverse industries, hedges it from a slowdown in any user segment.
Investor interest in Indian chemical companies has been low. This is because the listed chemical industry landscape in India is strewn with hundreds of small and micro-cap companies whose sorry financial performance tends to make the investor look askance at the few good picks in this sector; Clariant Chemicals, for instance.
The company’s revenues are expected to grow at a healthy rate, despite the ongoing slowdown in Indian industry. Its diversified portfolio of products ensures that weakness in any one user industry does not impact its topline.
High input costs have been taking a toll on the company’s profitability. But the planned restructuring and the steep correction in the stock price since the beginning of this calendar make it an apt juncture to accumulate the stock with a long-term perspective.
Clariant Chemicals, a subsidiary of Clariant AG of Switzerland, manufactures dyes, specialty chemicals, pigments and colours. The stock is down 30 per cent since December 2012 following the company’s announcement that it plans to hive off its textile chemicals, paper specialties and emulsions business for Rs 209.15 crore.
The sale was part of a restructuring plan of the parent, Clariant AG, to focus on its core businesses and exit the non-essential segments that were weighing on the profitability of the group.
The management stated that the businesses that were sold accounted for 35 per cent of Clariant Chemicals’ turnover in India.
The sale has come into effect after June 2013. The drop in stock price since the announcement has discounted the loss in revenue after the sale.
The company has an array of products and supplies to various industries, thus protecting it from the impact of slowdown in any one user industry. Besides catering to the colouring needs of varied user industries, such as automobiles and consumer products, Clariant supplies additives and specialty chemicals (performance enhancing materials). Clariant Chemicals’ operations in the specialty chemicals segment holds good growth prospects. This is a research-driven business that makes chemicals that helps improve the end-product.
The specialty chemicals of Clariant help enhance personal care products, such as shampoos and moisturising creams and act as additives for concrete and mortar used in construction. Besides, the offerings include biocides used in wet wipes, cleaning material for household and industrial use, and ingredients for pharmaceutical and agro-chemicals.
According to a study by the CII, a third of the $1-trillion global specialty chemicals industry could shift to India by 2020. The domestic specialty chemical industry is projected to grow between 13 and 16 per cent up to 2020, as the increasing disposable income of Indians makes them upgrade to superior quality products.
WEATHERING SLOWDOWN
While the business is expected to deliver over the long term, the current economic slowdown and decline in discretionary spending may impede growth in near future. That said, the chemical industry appears to be weathering the slowdown relatively better this calendar.
The chemical and chemical products index within the IIP grew at 7.6 per cent in June 2013 over June 2012 and the growth in the first quarter was a respectable 8.5 per cent over the same quarter in the previous year.
The company managed sales growth of 12 per cent in the year ended December 2012 but the net profit declined 22 per cent.
Also, Clariant grew its turnover 14 per cent in the first six months of 2013. But higher operating expenses due to increase in cost of raw materials, power and higher employee cost resulted in operating profit margin declining 5 percentage points to 14 per cent.
The easing of chemical prices should provide respite to the company’s profitability . Inflation in chemical and chemical products index has halved in the April to July 2013 period over the same period a year ago.
Clariant is a zero-debt company, well positioned to tide out the current regime of tight liquidity and high interest rates. It is also a net foreign exchange earner, thus protected from the vagaries of an errant rupee. The liberal dividend payouts (see accompanying chart) would also serve as a hedge.
At the current price of Rs 486, the stock price trades at a price-to-earnings multiple of 13. This is at a significant discount to its peers, such as BASF that trade at a PE multiple of 20 times. But if the sale of its businesses is taken into account, the PE multiple for FY13 would be on par with BASF.
Considering the growth prospects of the company and an expected improvement in profitability from current levels, we expect profits to grow at a healthy pace over the next two years. This should provide room for price appreciation.
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