Dear Members,

We have released 26th Jan’17: Poddar Pigments Ltd (BSE Code – 524570) – Alpha/Alpha Plus stock for Jan’17. For details and other updates, please log into the website at the following link – http://katalystwealth.com/index.php/my-account/

Detailed pdf report on the company can be accessed at the following link – Poddar Pigments (NSE Code – PODDARMENT) – Jan17 Katalyst Wealth Alpha Report

Note: For any queries, mail us at info@katalystwealth.com

Date: 26th Jan’17

CMP – 226.05 (BSE); 227.95 (NSE)

Rating – Positive – 3% weightage; this is not an investment advice (refer rating interpretation), the rating is only for indicative purpose and please take your own decision regarding the same.

Introduction

Promoted by Mr. S. S. Poddar, Poddar Pigments (PPL) is an ISO 9001:2008 QMS certified company and manufactures colour and additive masterbatches for the dope dying of the man-made fibres (MMF), various plastic applications and engineering plastics and compounds.

As per the company, it has the unique distinction of being the first company in India to manufacture Masterbatches for the dope-dyeing of Polypropylene, Nylon & Polyester Multifilament Yarn/ Fibres.

We like the company on several fronts including its consistency in performance over the years, the way it has managed its balance sheet with minimal debt, strong tailwinds for the masterbatch sector, high promoter holding and reasonable valuations.

One concern that we have right now is that company seems to be operating near full capacity, however what is good is that the business is not very fixed capital intensive and therefore expanding capacity shouldn’t be an issue.

Business

As mentioned above, Poddar Pigments manufactures colour and additive masterbatches for man-made fibres, plastic applications and engineering plastics and compounds.

The company has its manufacturing facility at Jaipur and it has the capacity to manufacture 14,000 tonnes of specialty masterbatches per annum. It started with the capacity of 1200 MTPA in 1991.

The company supplies masterbatches for the following segments:

Man-made fibres – In the man-made fibres segment the company supplies masterbatches for Polyester, Polypropylene and Polyamide.

The company provides wide range of masterbatches which are used in textile processes and their applications include textile, home furnishing, automotive, upholstery, luggage, lamination fabrics etc.

Plastics and Packaging – Apart from the White, Black and Colour masterbatches PPL also manufactures various high purity additive masterbatches available in LDPE, PP & PET base polymers for various plastics applications viz. PE, PP & PET films, Injection & Blow moulding, PP Spun Bonded Non-woven fabrics, PET Bottles, Cables, Irrigation pipes, plumbing pipes, etc

Engineering Compounds – The Company also offers product range under MASTERPLUS Engineering Plastic Compounds. These masterbatches are used in various products ranging from electrical switches and other electrical components, Home Appliances, Automotives, and Telecommunication devices, etc.

What is a masterbatch? Masterbatch is basically a solid or liquid additive used for colouring (colour masterbatch) or imparting other properties to plastics (additive masterbatch) and man-made fibres. Colouring masterbatch gives colour/shade (red, orange, green, etc) to the end product while additive masterbatch is used to impart properties such as strength, effect/feel (metal or pearlescent), bio-degradable, UV stabiliser, antioxidant, etc.

Industry outlook – According to a recently released TechSci Research report, “India Masterbatch Market Forecast & Opportunities, 2020”, the masterbatch market in India is projected to surpass US$ 1.1 billion by 2020.

As per the report, increase in number of plastic processing facilities in India coupled with growing demand from end use sectors is forecast to propel growth in the country’s masterbatch market over the next five years. Moreover, increasing demand for colourful and innovative solutions from packaging industry and growing preference of plastic and polymers for manufacturing light weight vehicles in automotive industry are forecast to boost demand for masterbatch in India through 2020.

As far as man-made fibres are concerned, with the rising cost of natural and blended textiles, demand for synthetic textiles is bound to increase. Retail consultancy Technopak estimates the total textile and apparel market (domestic and export) to grow at 9% CAGR to reach US$ 223 billion by the fiscal ending March 2021 (FY 2021) from US$ 89 billion in FY 2011. While the global per capita consumption of MMF is around 12 kg per annum, it is merely 3.5 kg in India, providing significant scope for the increase in domestic consumption.

Moreover, market players are investing in R&D for introducing technologically advanced masterbatch products and to increase product quality and operational and energy efficiency of existing products. All these factors are anticipated to augment the demand for masterbatch, thereby boosting the masterbatch market in India.

Promoters/Management

Poddar Pigments is an owner operated business with Mr. S. S. Poddar at the helm of the affairs of the company as the promoter and the Managing Director.

He is ably supported by Mr. R. K. Sureka who is the CEO of the company. Mr. Sureka has been working with the company for more than 19 years now.

In small cap companies, we believe it’s important as an investor that the promoters hold reasonably high stake and in the case of Poddar Pigments the promoters own more than 60% stake in the company.

Overall we find the promoters to be conservative and they have managed the operations very efficiently. Since FY 11 they have been continuously paying dividend and have also managed to reduce debt.

We have also not come across any major red flags in terms of related party transactions.

Operating Performance

As mentioned above, Poddar Pigments has been one of the very consistent performers over the last several years.

Barring last 2 years, the company has consistently reported ~20% growth in sales on year on year basis. Further, there’s been improvement not just in terms of sales, but also in terms of operating efficiency with the EBITDA margins of the company improving from 3-4% to current levels of 7-8%.

What we like most about the performance is the way the company has managed its balance sheet as it never leveraged it excessively while still managing decent growth and return ratios. In fact, at the end of Sep’16 the company is debt free with net cash surplus.

On the margins front, we believe there’s scope for company to further expand its margins as its gross margins are currently lower by 500-600 basis points in comparison to Plastiblends India Ltd.

On the growth front, the last two years saw lower growth in sales on account of firstly slowdown in exports market and secondly lower raw material prices which impacted value growth. We believe, going forward growth rates may improve with the improvement in demand in both domestic and exports market and also the fact that commodity prices seem to have bottomed out and have started increasing.

As far as return ratios are concerned, the company has consistently been recording ROE and ROCE in excess of 15%.

Valuations

At around current price of 227 the market capitalization of the company is Rs 240 crores and the enterprise value is ~ Rs 230 crores. The enterprise value is lower than market cap as the company is cash rich with surplus of around 10-12 crores as of 30th Sep’16.

For the trailing twelve months the stock has recorded PAT of Rs 20.69 crores and EBIT of Rs 25.88 crores. The stock is therefore trading at 11.60 times trailing twelve months earnings and EV/EBIT multiple of 8.88.

We believe the current valuations on absolute basis are reasonable; further we believe the element of cyclicality in the business has been very low with operating margins being consistently maintained in the range of 7-8% and steady increase in sales. As mentioned above, going forward we expect improvement in sales on the back of both increase in commodity prices and overall improvement in demand.

In the masterbatches segment, Plastiblends is another major listed company and currently quoting at 18 times trailing twelve months earnings.

Risks and Concerns

Slowdown in end user industries can impact the demand for masterbatches and thereby the growth of Poddar Pigments.

Besides domestic sales, Poddar Pigments also derives around 30% of its sales from exports and thereby currency fluctuations can impact the profitability of the company.

Till now company has shown good resilience in terms of maintenance of margins, however masterbatches is a very competitive segment and increased competitive intensity can impact company’s ability to pass on price hikes in raw material costs.

 

Disclosure: I don’t have any investment in Poddar Pigments and have not traded in the stock in the last 30 days.

Best Regards,

Ekansh Mittal
Research Analyst
http://www.katalystwealth.com/
Ph.: +91-727-5050062, Mob: +91-9818866676
Email: info@katalystwealth.com

  

Rating Interpretation

Positive – Expected Absolute return of over 20%
Neutral – Expected Absolute return in the range of +/- 20%
Negative – Expected Absolute return of over -20%
% weightage – allocation in the subject stock with respect to equity investments

 

 Research Analyst Details

Name: Ekansh Mittal     Email Id: ekansh@katalystwealth.com    Ph: +91 727 5050062

Analyst ownership of the stock: No 

Details of Associates: Not Applicable

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Ekansh Mittal or its associates including its relatives/analyst do not hold beneficial ownership of more than 1% in the company covered by Analyst as of the last day of the month preceding the publication of the research report. Ekansh Mittal or its associates/analyst has not received any compensation from the company/third party covered by Analyst ever. Ekansh Mittal/Mittal Consulting/analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market-making activity of the company covered by Analyst.

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