Management Speak: Shree Pushkar Chemicals & Fertilizers (Unrated) - Dye-ing to grow

Shree Pushkar Chemicals and Fertilisers (SPCFL) is a manufacturer of dyes and dye intermediates and probably the only company in India to have deployed zero waste integration in an industry beset with pollution emission challenges. With China shutting several large units on non-compliance of pollution control norms, there has been a gradual shift in business to India, which has benefited organised dye players like SPCFL, as per management. In a bid to capitalise on the opportunity, the company undertook capacity expansion at its dye intermediates unit and is also moving up the value chain by adding capacities in dyestuff. Moreover, SPCFL expects recent price hikes in dyes and dye intermediates to significantly improve realisations.  Capacity addition, expected price hike and zero waste integration make the management sanguine on the company’s near-term growth prospects. SPCFL has guided 20%+ per annum revenue growth and 16-17% EBITDA margin improvement in FY19E. The stock currently trades at 15x FY18 EPS and 9.7x EV/EBITDA; we do not have a rating on the stock.

Zero waste integration - a key differentiator: Chemical companies in India have been facing increased scrutiny from regulatory authorities over waste management since last 2-3 years. SPCFL is the only company in India to have come up with zero waste integration that involves converting effluents from dyestuff intermediates into by products as raw material for manufacturing dyes and dyestuffs/fertilizers, etc. Zero waste integration (backward and forward) has not only improved cost efficiencies during the production process, but has also reduced dependency on raw materials from external sources. SPCFL indicated the process has enabled EBITDA margin expansion of 380bps from 12.9% in FY13 to 16.7% to FY17 (Margins in FY18 decline to 15.4% owing to capex)

Capex to meet pent up demand: Plant shut downs in China have led to unprecedented rise in dye/dye intermediate demand globally, causing their prices to spike. To capitalise on the shortfall, SPCFL increased its dye intermediate capacity (H. Acid by 750tpa to 3150tpa; Vinyl Sulphone by 1,000tpa to 3,750tpa). The company has also moved up the value chain by adding 6000mt of capacity in reactive dyes (3000tpa in FY16 and 3000tpa in FY17). SPCFL plans to incur capex of Rs1.75bn over next 2-3 years to augment its dye intermediate and dye stuff capacities and to venture into sulphur chemistry and pigments. SPCFL has guided 20%+ revenue growth and 16-17% EBITDA margin in FY19E on higher utilisation and price increases.