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In this post we look at Atul Limited, integrated chemical company in India having a market capitalization of Rs 11,350 Cr.
The Company
Atul was founded on September 05, 1947 by Mr Kasturi Lalbhai and was the first private sector company of independent India to be inaugurated by the first prime minster of the country, Mr Jawaharlal Nehru. The company has been on the forefront of manufacturing various products for the first time in India. For instance it was the first company to start manufacturing of dyes in the 1952-71 period, in another case it started manufacturing para Cresol in 1972-92 period. Para Cresol is used in the fragrance, personal care and pharmaceuticals industries and is Atul’s key product currently. The company has a 42% market share in this product.
The company serves 27 industries, some of industries where the company’s products are used is shown below
Source: Atul AR, FY19
Atul manufactures 900 products and 450 formulations from basic chemicals, it serves about 6,000 customers in 92 countries and owns 114 brands. The company has 4 production facilities in India (Ankleshwar, Atul, Panoli and Tarapur).
Brands of the company include Lapox, Polygrip – acquired in 2010 and Lacare – recently launched. The company has strong network of about 2,250 retailers and distributors in India and its products are available at more than 38,000 retail outlets in India.
Business Segments
The company reports its revenues under two segments, there are 9 businesses that fall into these segments
- Life science chemicals
- Performance and other chemicals
Let us briefly look into each of these segments below
Firstly, the split of revenues between the life sciences and performance chemicals. The chart shows the split in revenues for both these segments for FY18 and FY19
Total sales stood at Rs 4084 Cr versus Rs 3217 Cr, registering growth of 27%. The life science segment contributed 31% of sales as compared to 69% for the performance and other segment.
Life Sciences Chemicals
The life sciences segment consists of crop protection (retail and bulk), pharmaceuticals and intermediates and aromatics I. Below is the revenue split between the two for FY18 and FY19
Crop protection revenues grew by 16% to Rs 754 Cr in FY19 versus Rs 651 Cr in FY18. The crop protection business contributed 59% of the total life sciences segment. Exports stood at Rs 491 Cr, contributing to 65% of the total crop protection revenues. Exports grew by 17% over previous year. India revenues stood at Rs 263 Cr, these can be broken into
- Bulk sales – Rs 171 Cr (registering growth of 36% over previous year)
- Brand sales – Rs 92 Cr (registered de growth of 13% over previous year)
Company sells various fungicides, herbicides and insecticides. Key protection chemicals that the company manufacturers are 2,4-D and downstream products, sulfonylurea and indoxacarb. It has a worldwide share of 16% in the 2,4-D downstream products and 7% in indoxacarb. There are 20 products and 40 formulations in this segment.
The company has 50+ brands of crop care products and caters to 2 million farmers through network of +2500 distributors. Growing population resulting in demand for food grain will drive the demand for this segment. The global crop protection market is $ 56.5 billion and the Indian market size is $ 2.5 billion.
Going forward the company aims to expand capacities for existing products, expand geographical reach. The company has higher dependence on the herbicides segment and it aims to develop products in the other groups to negate this. It is also dependent on China for its raw materials and it plans to backward integrate and source supplies from local vendors.
Pharmaceuticals, intermediates and aromatics – I recorded revenues of Rs 526 Cr during the year, an increase of 43%. Volume growth stood at 24%. Exports constituted 44% and domestic 56% of the total sales of this category. Exports grew by 56% and domestic market by 34%.
The company caters to various therapeutic categories like anti depressant, anti diabetic, anti infective, anti retroviral and cardiovascular and has 72 products. It is amongst the world’s largest manufacturers of Dapsone, an API. Atul Bioscience Limited (ABL) is a 100% subsidiary and manufacturers range of API intermediates. ABL recorded revenues of Rs 104 Cr in FY19 an increase of 37% over previous year.
Performance and Other Chemicals
The performance and chemicals segment consists of aromatics II, bulk chemicals and intermediates, colors and polymers (retail and performance materials). Below is the revenue split amongst the various sub categories for FY19 and FY18
Segment recorded revenues of Rs 2804 Cr in the year. Polymers constituted 37% of the segment revenues, this was followed by the aromatics, colors and bulk chemicals and intermediates constituting 25%, 20% and 18% of the segment revenues. Bulk chemicals and intermediates and aromatics clocked growth rates of 42% and 32% respectively, while the colors and polymers segment grew by 22% and 21%.
The aromatics II category recorded revenues of Rs 711 Cr, exports constituted 68% or Rs 486 of these and rest came from the domestic market – Rs 225 Cr. The export market grew by 25%, whereas the growth in the domestic market was 50% over previous year.
The aromatics II category serves customers mainly belonging to the fragrance and personal care industries. While the whole aromatics basket includes broader range of industries – chemical additive, pharmaceutical, polymer, personal care, flavours and fragrance, paper and textile to name a few.
Para Cresol, para Anisic Aldehyde, para Anisyl Alcohol and para Cresidine are some of the key products in this segment. In p Cresol the company commands market share of 42%, while in p Anisic Aldehyde and p Anisyl Alcohol the market share stands at 75% and 95% respectively. The number of customers that the company serves in the Aromatics I&II category is 367 offering range of 38 products.
Below is the industry size of the additives, fragrance and personal care segments
Source: Atul Presentation, May 2019
Bulk chemicals and intermediates category recorded revenues of Rs 498 Cr. The products in this category are consumed by customers in the personal care, pharmaceutical, tyre, dyestuff, paper, construction and chemical industries. The company serves 197 customers with 24 products. Resorcinol, Resorcinol Formaldehyde Resins and Caustic Soda are some of the key products in this category.
Colors recorded revenues of Rs 548 Cr, 52% of the revenues were from the domestic market, while exports contributed 48%. Growth in both the domestic and export market was 21% over the previous year.
The company has a product range of 587 products and serves 298 customers. category are used by Some of the industries that use these products are in the textile, paint and coatings, paper, food and printing ink industries. Pigment Red 168, Sulphur Black 1 and Vat Green 1 are some of the key products.
Atul has a JV company – Rudolf Atul Chemicals which was set up in 2011-12. This entity provides a complete range of textile chemicals in the domestic market, the company generated revenues of 83 Cr, an increase of 14% over previous year.
The opportunity size for this category under various sub products is shown below
Source: Atul Presentation, May 2019
China is the leading manufacturer of dyes followed by India, however one needs to note that the treatment costs of manufacturing dyes and pigments is high given that the process generates significant pollutants.
The polymers business generated revenues of Rs 1,048 Cr in FY19. Revenues from India stood at Rs 711 Cr, forming 68% of total sales. Domestic revenues can be further broken down into bulk and retail sales. The bulk segment generated Rs 593 Cr while the retail segment Rs 118 Cr. Exports stood at Rs 337 Cr, constituting 32% of the total polymer revenues.
Some of the industries which use polymers are – automobiles, adhesives, aerospace, construction, electrical and electronics, footwear, paint and coatings, and wind energy. Products include epoxy resins, curing agents, sulfones and rubber and polyurethane based adhesives.
Atul has a significant domestic market share in the epoxy resins and curing agents space, while it enjoys significant worldwide market share in the sulfones business. The global market for epoxy resins and curing agents is estimated to be $ 7.3 billion and is growing at 2%, while the Indian market is $ 285 million and growing at a faster at 6%. The global market for sulfones is $ 367 million an growing at 5%.
The company has products under the Lapox, Polygrip and Lacare brands. The number of products that the company has is 101 and 310 formulations serving 615 customers.
The company has another small segment – Floras which serves the food and nutrition segment. This segment recorded revenues of Rs 28 Cr in FY19. Atul produces tissue culture date palms and banana plants. It also produces processed dates and other products using dates under the Date Delight brand.
Financials
The below table shows the financial highlights of the company for a 14 year period (FY06-19). We will look at some of the important metrics.
Compounded sales growth has been in double digits in the all the periods we have looked at (3Y,5Y,10Y and Since FY06). The 3YR CAGR has been the highest, with sales growing by 17% in this period.
The operating earnings or EBIT in 3 periods (5Y,10Y and since FY06) has shown higher growth than sales, the 3YR EBIT growth is in line with the sales growth registered by the company in this period. How have the operating profits grown faster than the sales growth? Some the reasons are
- Change in the product mix – company selling products which are niche and have better realizations in the market or getting better realizations for current basket of products due to demand – supply issues
- Controlling costs below the gross profit line, examples include employee benefit expenses and other expenses
- Operating leverage – as the volumes that the company sells increases and the company’s fixed costs stay constant profits directly flow through the bottom line. Basically costs are spread over larger volumes. We has covered the concept of operating leverage in our funda series earlier, it can be found here.
We will have to deep dive into the financials to check which of these factors have lead to faster growth in the operating profits.
Operating margins for FY19 were 17%, this is in stark contrast to the margins of 6% that the company had in FY06. The average operating margins in the FY06-19 period was 11%. We need to ascertain if these margins are sustainable over will the margins revert to the average.
While sales have gone up 4.7X in the FY06-19 period, operating profits or EBIT is up 13.3X.
Net profits or PAT have grown faster than the topline growth in the 5 and 10Y periods. The company is a zero debt company currently and lower interest costs have helped in grow profits at a faster clip. Interest costs in FY19 were Rs 4 Cr as compared to peak interest costs of Rs 43 Cr in FY12. PAT margins in FY19 were 11%, the average PAT margins were 7%. Profits have gone up 5.10X in the 14 year period.
We now look at what is the quantum of business assets that the company has required to achieve this profitability and how have these investments or assets been funded.
Total capital employed (fixed assets + other assets) stood at Rs 2,650 Cr at the end of FY19, these were Rs 622 Cr in FY06. The company has made investments of Rs 2028 Cr (2,650-622) in the FY06-19 period. Majority – Rs 1313 Cr or 65% of these investments have been made in other assets. Working capital will be the major component of other assets and these investments have been made in towards working capital. The net block has changed by Rs 715 Cr, these should not be taken as the investments in fixed assets as gross assets are adjusted with accumulated depreciation to arrive at the net block.
How have these investments been funded? It is primarily through equity. The change in equity during the period has been Rs 2,377 Cr and the company has no debt in FY19 as compared to Rs 349 Cr in FY06. In addition the equity share capital has remained the same Rs 30 Cr, indicating that their has been no dilution.
What has the company made on these investments? look at the change in EBIT. EBIT has changed by Rs 607 Cr and on investments of Rs 2028 Cr the company has made 30%. These are the kind of qualities we should look at while identifying investments – no/low debt, CAPEX funded by internal accruals and earning higher returns over the cost of capital.
Finally looking at ROCE and ROE, the ROCE and ROE for FY19 stood at 25% and 16% respectively. The average ROCE and ROE were 17% and 14%. The drivers for return on capital is the operating margins and the asset turnover. One look at the table above and one can see the improvement in both margins and asset turnovers. Asset turnover is arrived at as Sales/Total assets. Both of these factors have helped in the higher return on capital.
Leverage plays a role in generating the ROE. We had written about the ROE in our funda series, it was a two part series and can be found here and here. Leverage has had no role to play in the ROE of 16% that the company has generated in FY19 as the company was debt free at the end of the financial year. However on the flip side, ROE may be compressed in case the company has no debt and is generating cash from the business and investing the surplus cash (after adjusting for investments in business assets) in financial instruments. Financial instruments earn less than what the business earns and that brings down the ROE. Atul had financial investments of Rs 736 Cr at the end of FY19.
The other important part of the business is the working capital. Inventories and receivables were 34% of the total assets in FY19 and trade payables constituted 11% of the equity and liability section. The business is working capital heavy and it is very important to manage this efficiently. How has the company fared on this front?
The cash conversion cycle (CCC) is Inventory days + Receivable days – Payable days. The CCC for Atul has been constant since FY10, it stood at 61 days at the end of FY19. On closer look at the above table one can see that the receivable days have been constant, the company collects money from its customers once every 2 months. Inventory and payable days have both decreased in the same period.
The China Factor
Indian chemical companies have done in the recent past in terms of sales, profitability and share holder returns. One of the primary reasons for the same has been the developments that are taking place in China. What has actually happened in China and how will things pan out?
China has imposed stricter implementation of environmental norms, as a result of this there have been shortages and steep increase in prices of certain chemicals. The vacuum created due to this has been filled up by Indian companies. One needs to understand the developments taking place in China and how long this is going to last.
There are certain structural developments that are taking place in China, which will impact the chemical markets. Some of these developments are
- Shifting of chemical production to dedicated chemical parks (currently 50% will move to 90%)
- Relocating of existing plants – smaller by 2020 and larger by 2025
- Restricting the number of chemical parks
- Companies in the new chemical parks will have be strictly controlled – this will result in the rise of compliance cost for these companies
- The move to chemical parks is also targeted towards reducing overcapacity in the market
- Major blast in Jiangsu province in March,2019 has lead to severe restrictions
For instance by the end of 2020, the number of chemical producers in Jiangsu province is expected to decrease to 2,000 and then to 1,000 by 2022. Shandong province on the other hand intends to halve the number of chemical parks in the province to less than 100.
Increase in compliance costs and labour costs will create a more level playing field for companies operating out of China. However one needs to understand that capacities will be back once this consolidation is over, hence it is very important to understand which companies will enjoy long term advantages even after things have settled down in China.
Source: Atul Presentation, May 2019
Final Thoughts
Chemical companies in India are at an interesting juncture. Production of chemicals is moving to Asia – – mainly China and India. With the developments taking place in China, customers would want to diversify and not totally rely on their procurement from China. It is Indian companies that will benefit from this. It is for us as investors to deep dive and identify which companies will benefit and have long run way once the dust settles in China.
Note: Not a recommendation. This is just a quick analysis of a stock that seems to be showing strong price movements in the short term. Don’t just buy or sell based on this analysis – consult with a financial advisor before taking action. All market investments involve risk of losing money. Authors at Capitalmind may have positions in securities mentioned in the article.
Disclosure: The authors at Capitalmind may have positions in the stocks mentioned, please assume our bias exists. This is not a recommendation to buy or sell securities. This is purely information about the company mentioned.
