Hello Sir,

Hope you are doing well.

We have released our new stock recommendation for our Premium Members and would like to share with you details on the same.

It’s a polymer technology products company and we believe it will benefit immensely from the ongoing shift towards green energy in the Indian and the global market.

Some key positive and differentiating factors about the company:

Leader in India in several products – Though we look at small and mid-cap companies, we still prefer the ones which are the leaders in their respective segments. This company has the distinction of launching several products for the very first time in India and is either the leader or in top-3 in almost all its product segments in India and in some products globally.

Premium products – In the company’s product basket, the share of the premium products has doubled from 11% in FY 15 to 22% in FY 22. This is likely to further increase to 30% + in next 3 years.

Premium products have the twin advantages of higher operating margins (~600-800 bps) and lower working capital cycle in comparison to regular products. Thus, with higher contribution, company’s profitability and return ratios are like to improve from current levels.

Green Energy – On account of rising prices of crude oil and in general as well, Governments across the world are pushing towards green energy in the form of higher share of usage of natural gas, renewable energy, electric vehicles, etc.

The stock recommended by us has launched a few products related to the above which are witnessing strong demand both in India and from the international markets and the company is planning to double the capacity in the next 12-15 months.

Some basic numbers:

  • Market cap - < than 5,000 crore
  • Operating profit growth – ~12% CAGR from FY 12-FY19
  • PBT growth – ~13% CAGR for the same period
  • Debt to Equity ratio – Reduced from 1+ to less than 0.5
  • Average Cash flows from operations – Rs 95 crore for FY 12–FY 16; Rs 116 crore for FY 17–FY 21
  • Valuations – Around 10 times normalized post-tax earnings

That’s the past; how does the future look like – The management is targeting around 12% CAGR in sales over the next 3 years; however, on the back of rising share of Premium products and lower debt, we expect the operating margins to expand by around 200 bps and the PAT might double.

What about the promoters – We like companies wherein promoters have skin in the game and here the promoters hold more than 50% stake in the company.

They have reduced the pledge on their holding substantially and intend to bring it down to zero.

Over the last 10 years, they have diluted equity once and despite the increase in the scale of the operations the debt equity ratio of the company has reduced from 1+ to less than 0.5.

What about the valuations – For one of the leading companies in its space that has expanded sales and profits at a steady pace (barring FY 20 and FY 21) and has continuously launched new products, we believe the valuations are quite reasonable at around 10 times normalized post-tax earnings.

The company has also been quite consistent in terms of dividend pay-out at around 10-15% of the profits.

Overall, looking at positive growth outlook, good track record and reasonable valuations, we have recommended the stock to our members.

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Best Regards,

Ekansh Mittal
Research Analyst
Web: https://www.katalystwealth.com/