ICMA - Indian Chemical Manufacturers Association

The Numbers And Their Implications

How is the current financial health of the companies - this can be answered by looking at the snapshot table. Some points strongly come across

	Companies have strong reserves and shares have healthy book value. Excepting Pidilite and the troubled Schenectady Herdillia, all other companies have share prices lower than their book values. That is a good portent when outlook improves and profitability rises. Investors can dig and delve for bonus candidates.

	Right now, operating margins are slim with the exception of companies with brands like Pidilite and (to a small extent) Schenectady Beck. The latter has however seen sliding margins. This could be attributed to the non-materialisation of demand from power equipment suppliers in the wake of the grand power generation targets going for a toss.

	All companies have high amount of debt in the balance sheet, servicing of which effectively eats into the operating profit.

	Asset turnover too is quite low, which means that depreciation is a huge charge and volumes are not quite commensurate. That too hits profitability and as a reason the net margin in most cases is quite thin. Only exception here is Jubilant. Its vast product range and active presence in different segments of the industry means that it can squeeze a strong turnover out of its gross block and even on thin operating margins it can play the volume game to get a good bottomline.

	On the EVA front, the main value creators are Pidilite and Jubilant, as the table shows. The industry sample as a whole is a healthy value creator, even Schenectady Herdillia scores well on that yardstick. It is the abnormally high capital costs (interest and depreciation) which have killed profits for the company. That is a problem which can hopefully be remedied under the new management going forward. The only source of worry is Schenectady Beck, which has not done too well in 2001-02 and in fact has been a marginal value destroyer.

Among the companies, Jubilant as the volume play and Pidilite as the value play clearly come across as attractive. Pidilite's quarterly report too is quite encouraging. For the second quarter ended September 2002, on the back of a 15% rise in turnover (Rs.1437 million), the operating profit (Rs.307 million) went up by 25%. This was mainly due to a decline in the major raw material costs, and the company simultaneously leveraging its brand equity to maintain selling prices. Consumer and bazaar products, aimed at the retail segments, were the real growth driver. This category grew at 19% and increased its share in turnover to over 70%. Combined with control on interest outgo, the overall result was a 22% increase in the net profit (Rs.155 million).

Jubilant has a subsidiary, Jubilant Biosys, through which it has made a foray into bioinformatics, a promising segment. The company has publicly displayed its commitment to research as a growth tool. It claims to have the largest R&D budget in the speciality chemicals sector. Also, one of its plants near Pune has been awarded the ISO 14001 certification.

On the heels of its rebranding exercise (it was earlier Vam Organics) Jubilant has also gone in for acquisition for Max India's bulk drugs facility in Mysore. It plans to improve focus on institutional customers and exports, and give a conscious thrust to its R&D activities, focusing on breadth of offerings and cost-effectiveness. It aims to expand reach and distribution infrastructure.

In contrast to Jubilant's institutional thrust, Pidilite's customer focus remains predominantly retail. It recently received an international award for its latest Fevicol commercial, an indication of effectively targeting its market. We have already seen how it has built up brand equity in some target segments and is targeting others. Exports were stagnant in 2001-02, but this year aggressive steps are being taken and the company is expecting 20-25% growth in exports. Among other growth steps, Pidilite is looking at acquisitions (brands like Steelgrip or even businesses), and is even considering the overseas market in its sweep. Acquisitions are not a new thing for the company- it had acquired the Ranipal whitening brand from IDI around three years back. The target size for acquisition is around Rs.500 million.

Ciba Speciality Chemicals has launched a new range of reactive dyes for carpets. It is aiming for a new level of properties in the dyes that would prolong the carpet life and extend dye usage to heavy-duty bathroom textiles. It also plans to enter into the VAT dyes market. The company is targeting to change its position from the supplier of specialised whitening agents for fabric care to a fast moving consumer goods producer, with retail offerings. Technology and marketing support will not be a constraint, as the increased stake of the parent company testifies.

Schenectady Beck India is also going retail, with a new range of its famous BeckSeal epoxy putties. The company is quite buoyant on the electrical generation market and sees a strong fill-up for insulating material in the wake of addition in power generation capacity and subsequent demand for electrical equipment. Its group company, Schenectady Herdillia, has now decided to broaden its operations and get focused on value-added downstream products like perfumery products and drug intermediates for vitamin-E. There are active plans to put up a Rs.7,500 million global scale phenol unit, with foreign collaboration, with backward integration into cumene as support.

This indicates that all companies discussed above are seeing growth at their respective levels and are taking measures to ride the wave. For the investor, the sector is a mixed bag. As we have seen, an increase in prices and improvement in outlook makes this sector a prime candidate for bonus announcements. But for that the debt-equity ratio has to come down, which in all cases is substantially high, especially in Jubilant and Schenectady Herdillia. Pidilite, with a bag of brands, a strong presence in its target market, healthy balance sheet and focused growth plan, comes across as a good investment argument. So does Jubilant, with its high asset turnover, value-addition thrust and research initiatives. Pidilite has an added advantage in that it, like all brand-intensive companies, stands to gain by soft prices. Hence, having Pidilite in one's portfolio makes it a perfect hedge against the main price uncertainty that undermines the P/E ratios in the trough of the cycle.

The slight dip in Schenectady Beck India's operating margins, and the uncertain outlook on the power sector, makes one wary of investing right away. More so since the acquisition of Steelgrip by a strong player like Pidilite will only accentuate the pressure on margins. But on the whole, for the investor, there are more pluses than minuses in this sector. It is just a matter of anticipating the movement in prices and timing the investment.

Keyword

The above keyword is a

Manufacturer
Product