Stock Story : Dharamsi Morarji Chemicals Co Ltd

Today we are here to discuss on a small chemical company by the name of “The Dharamsi Morarji Chemical Company Limited” (DMCC, henceforth).

Vital Stats

As on Date 23.04.2016.

Source: 

Market Cap.: 137.66 Cr.
Current Price: 65.75
Book Value: 14.53
Stock P/E: 8.85
Dividend Yield:0%
Face Value: 10.00
52 Week High/Low: 99 / 15.80
Days Receivables Outstanding : 201.32
Debt to equity: 1.18
WCap to Sales: 0.29%

Price to Book ratio: 4.46

Sales growth 5Years: 15%
Profit growth 5Years: loss to Profit
OPM last year: 14%
NPM last year: 12% (not paying taxes due to earlier losses)
Return on equity: 27.41%
Return on capital employed: 16.91%

Promoter shareholding: 48.73%

About

Source:   (Emphasis mine)

The Dharamsi Morarji Chemical Company Limited (DMCC), established in 1919, was the first producer of Sulphuric Acid and Phosphate fertilizers in India. Over the years, the brand of the Company (“Ship”) came to be recognized as the quality standard for Single Superphosphate (SSP).

Until recently, DMCC was known primarily as a fertilizer producer, with over 75% of revenue from SSP. As a strategy, DMCC structured itself to Specialty Chemicals. With focused Research and Development efforts, processes for downstream sulphur-based chemicals were commercialized. Simultaneously, the Marketing team engaged with customers in India and overseas to meet their requirements.

Through a painful restructuring process, DMCC exited the manufacturing of fertilizers almost entirely. What is visible now is a culmination of efforts by the entire team: sustainable performance with zero dependence on Government policy, net foreign exchange earnings, and sales to over 25 countries in 5 continents. 

Core Technology

• Sulfonation & Sulfation
• Chlorosulfonation
• Friedel Craft Reaction
• Esterification
• Methylation
• Ethylation

The Story – In a Nutshell

One of the oldest fertilizer companies in India, was mostly into fertilizer making. Given the vagaries of the govt. subsidiary dependent fertilizer business was forced to Corporate Debt Restructuring. Company took a long and painful step and has finally come out of the loss making and working capital straining Fertilizer business. Have sold some old plants and assets related to that. Now focusing strongly on growth opportunities in specialty chemicals catering to export markets.

Because of CDR in 2006-07, company has huge accumulated losses. Have redeemed strategic investments it received during troubled times. Banks have converted substantial equity and still have 8.8L preference shares and preference dividend to be redeemed from the company. There will be no free cash flows for some time.

Company is carrying forward substantial losses and also Deferred Tax Assets, so no taxes to be paid for some time. The turnaround and price action around that has happened as stock price moved 8x (almost 10x considering the 52W peak). Henceforth, company’s focused progress into specialty chemicals and deleveraging of liabilities will determine the price going ahead.

Recent News and Price Surge

Last 1 year: 3X

Last 3 years: 8X

No Recent News. Check for latest news

Last 5 Years:

What happened in Fiscal FY2014 ?

Sales (net of excise duty) grew from 85.6 Cr to 101.3 Cr majorly brought about by Specialty Chemicals which grew from 45Cr to 63 Cr or by 40%. Exports grew from 32 Cr (FY13) to 47 Cr(FY14).

In short company’s sales were boosted by exports of specialty chemicals from 2 products commercialized from own R&D earlier, which were accepted by clients. Also cutting down on SSP fertilizers with strained working capital helped. Company has significant carry forward losses and not paying tax.

Observations (AR FY2014):

1)      The Company’s fertilizer business viz. Single Superphosphate (SSP) could not be continued on its own inter-alia, due to strained liquidity and shortage of Working Capital. The turnover of Commodity Chemicals during the current Financial Year ended 31st March, 2014 was marginally higher at Rs 30.03 crores as compared to the turnover of Rs. 29.73 crores during the previous Financial Year.

2)      The turnover of Specialty Chemicals during the current Financial Year ended 31st March, 2014 was Rs. 63.17 crores as compared to Rs.44.78 crores in the previous year. The Export turnover of the Company during the current Financial Year ended 31st March, 2014 was Rs. 46.66 crores compared to Rs.31.70 crores for the previous Financial Year. Your Company continues to make efforts to develop new markets and customers.

3)      The SSP Fertiliser Industry continues under the stresses and strains of the huge working capital requirement arising mainly out of the delays in receipt of the subsidy amounts from the Central Government and other related procedural issues

4)      While the bulk chemicals are an intrinsic part of our operations and are essential for the growth of the specialty chemical segment, the profitability of the bulk/commodity chemical is limited due to continuing competition and logistical restrictions. Therefore in case of bulk/commodity chemicals, our focus is on cost reduction, effi cient sourcing, overall supply chain optimization and developing value added/ pure grades of bulk/ commodity chemicals which would have a niche domestic market.

5)      In the specialty chemicals business, your Company has commercialized two products which had been developed earlier by the Company’s in house Research and Development team. (Note : Spend on R&D is miniscule 0.10% of sales)

6)      The Company expects to increase the capacity utilization of its Chemical Plants at Roha, by carrying out some internal financial and business restructuring and improving the availability of working capital finances. Your Company is setting up flexible manufacturing facilities termed “Multipurpose Plants” which can be utilized for several different products, the transition between products being rapid, the new products can be commercialized at short notice.

Observations (AR FY2015):

1)      The Corporate Debt Restructuring undertaken by the Company a few years ago is reaching its logical conclusion and the accumulated losses of the Company have reduced over the last 3 years. 

2)      The turnover of Commodity Chemicals during the current Financial Year ended 31st March, 2015 was higher at Rs. 39.88 crores as compared to the turnover of Rs. 30.03 crores during the previous Financial Year.

3)      The turnover of Specialty Chemicals during the current Financial Year ended 31st March, 2015 was Rs.74.46 crores as compared to Rs. 63.17 crores in the previous year. The Export turnover of the Company during the current Financial Year ended 31st March, 2015 was Rs. 51.76 crores as compared to Rs. 46.66 crores for the previous Financial Year.

4)      The Company’s fertilizer business viz. Single Superphosphate (SSP) could not be continued on its own due to various economic considerations, and hence there is no turnover of SSP fertilizers during the current fi nancial year ended 31st March, 2015.

5)      The Management of your Company has also decided to lay emphasis on improving technical expertise in Sulphur and Ethanol chemistry. Efforts are being made to have long term alliance with key customers to develop tailor made processes/products to meet their specifications and expectations.

6)      Your Company has already set up flexible manufacturing facilities termed as “ Multi-purpose plant ” which can be utilised for manufacture of various Specialty Chemicals which are the future growth areas. Your management is therefore contemplating further investment in this segment.

7)      The Company has also set up a Solar Plant in Roha with an initial capacity of 500 KW which will gradually be increased over a period of time. The solar energy is expected to partially replace expensive grid power with cheaper green energy and reduce marginally the Company’s energy cost.

8)      R&D Expenses incresed from 10L(FY2014) to 1.01Cr(FY15, 0.85% of sales)

9)      Principal Business:

• Production of Benzene Sulfonyl Chloride (31% of turnover)
• Sulphuric Acid (24% of turnover)

 10)   Preference Shares outstanding : 8.80L

a.       600000, 8% Redeemable Cumulative non- convertible Preference Shares of Rs.100/- each aggregating to Rs.600 Lacs were to be redeemed in 5 Equal yearly installment of Rs.120 Lacs each commencing from Financial Year 2008-09.

b.      The Preference Share-holders have agreed for further extention of time for the redemption of the said Preference shares any time upto 31 st March, 2018.

c.       The cumulative dividend on these Preference Shares aggregating to Rs.576 Lacs (Previous year Rs.528 Lacs) is to be paid as and when declared by the Company

a.       280000, 2.5% Redeemable Cumulative non- convertible Preference Shares of Rs.100/- each aggregating to Rs.280 Lacs are redeemable in 16 Equal yearly installment of Rs.17.5 Lacs each commencing from 1st April 2012.

b.      further extention of time for the redemption of the said Preference shares any time upto 31 st March, 2022.

c.       The cumulative dividend on these Preference Shares aggregating to Rs. 50.81 Lacs (Previous year Rs. 43.81 Lacs) is to be paid as and when declared by the Company.

11)   Consequently, there is virtual certainty of realization of “Deferred Tax asset” mainly resulting from unabsorbed depreciation and carried forward losses. Accordingly, the recognized “Deferred Tax Asset” of Rs. 2654.15 Lacs as at 31.03.2009, without any addition, is being carried forward.

Notes

Work in progress. To be revisited after few quarters. More clarity awaited from 2016 Annual Report.

Food for thought

Consider the consolidated financials for last 10 years.