Reap the Benefits of Diversification

REAP THE BENEFITS OF DIVERSIFICATION WITH DCM SHRIRAM 

DCM Shriram Ltd. is a conglomerate operating in three business verticals namely – agri-rural business, chlor-vinyl business and value-added business. Collectively, the group notched up a turnover of Rs 7,063 crore. The agri-input businesses include farm solutions, bio-seed and fertilisers. The farm solutions provide hybrid seeds, pesticides, bulk fertilisers, micronutrients, etc. The chlor-vinyl business is associated with caustic soda, chlorine and assorted chemicals like hydrochloric acid, stable bleaching powder, compressed hydrogen and sodium hypochlorite. It also includes plastics business which manufactures PVC resins and calcium carbide with captive production of acetylene, chlorine and coal-based power. 

A major part of its value-added business includes Fenesta building systems, which manufactures un-plasticized PVC systems for doors and windows, offering design, fabrication and installation solutions to customers. Additionally, the company also deals in cement, PVC compounding and operates a Hariyali Kisaan Bazaar. DCM Shriram is one of the most cost-efficient producers of products and services in all its businesses and has consistently strived to attain operational efficiency. 

Financial Performance

The consolidated quarterly financials stood as follows. The total revenue from operations stood at Rs 1,700.08 crore in Q2FY19 versus Rs 1,604.70 crore in Q2FY18, registering an increase of 5.94 per cent. EBITDA stood at Rs 296.26 crore in Q2FY19 in comparison to Rs 290.14 crore in Q2FY18, posting a growth of 2.10 per cent. However, profit after tax stood reduced to Rs 167.72 crore in Q2FY19 versus Rs 171.95 crore in Q2FY18, registering a decline of 2.46 per cent. Moreover, the finance costs stood at Rs 41.11 crore in Q2FY19 versus Rs 19.91 crore in Q2FY18, posting a whopping increase of 106.47 per cent. 

On a QoQ basis, the total revenue from operations stood at Rs 1,700.08 crore in Q2FY18 versus Rs 2,067.90 crore in Q1FY19, thereby decreasing 17.78 per cent. EBITDA stood at Rs 296.26 crore in Q2FY19 in comparison to Rs 337.46 crore in Q1FY19, posting a drop of 12.20 per cent. Profit after tax stood at Rs 167.72 crore in Q2FY19 versus Rs 217.84 in Q1FY19, marking a decline of 23 per cent. For the quarter ended September 2018, the company declared an interim dividend of 200 per cent. 

The consolidated annual financials reported a 19.21 per cent surge in total income from operations to Rs 6,900.45 crore in FY18 from Rs 5,788.46 crore in FY17. Revenue from operations rose to Rs 7,006.56 crore in FY18 from Rs 6,117.19 crore in FY17, posting an increase of 14.53 per cent. EBITDA increased to Rs 1,034.93 crore in FY18 from Rs 771.09 crore in FY17, posting a growth of 34.21 per cent. The profit after tax rose to Rs 669.56 crore in FY18 from Rs 551.68 crore in FY17, showcasing a growth of 21.36 per cent. Furthermore, the company’s net worth increased to Rs 2,987.0 crore in FY18 from Rs 2,529.8 crore in FY17, posting a growth of 18.07 per cent. Its earnings per share improved to Rs 41.2 in FY18 versus Rs 34.0 in FY17, reporting a rise of 21.17 per cent. The return on net worth rose to 24.3 per cent in FY18 versus 23.9 per cent in FY17. Similarly, EBITDA to net sales stood at 15.8 per cent in FY18 versus 14.1 per cent in FY17, while PAT to net sales stood at 9.7 per cent in FY18 versus 9.5 per cent in FY17. 

The company declared an interim dividend of 200 per cent, i.e. Rs 4 per equity share of face value Rs 2 each for the FY2017-2018. As of March 31, 2018, the company reported net debt of Rs 653 crore vis-à-vis Rs 928 crore as on March 31, 2017. Consequently, the net debt-toequity stood at 0.22x in FY18 versus 0.37x in FY17. Furthermore, the company completed the share buyback programme on October 23, 2018, whereby it bought 64.74 lakh shares, representing 3.99 per cent of the capital. This transaction cost Rs 249.999 crore plus incidentals. 

Growth drivers 

The improvements in power efficiencies and economies of scale have strengthened the chlor-vinyl business. The planned capacity expansion has been commissioned, resulting in full capacity utilisation. FY17-18 witnessed sizeable growth in both turnover and profits owing to favourable pricing and higher volumes. Despite the challenges faced by the sugar business, the company achieved the highest ever sugar production and added a new distillery to its facilities. The company has contracted around 40,000 tonnes of sugar exports till date and is preparing to undertake shipments of an impressive 92,000 tonnes quota assigned to it by AprilMay, 2019. Its bullish outlook on the sugar business is evident from its Rs 660 crore capacity expansion plan, particularly for additional crushing and power generation, which is expected to go on-stream in the next 18 months. To top it off, the company shared its target to produce 70-75 lakh quintal of sweetener in 2018-2019 marketing year (October to September) as against the 66 lakh quintal produced in the previous year. Moreover, backed by steady performance and high brand resilience, Shriram Farm Solutions is assessing further growth opportunities. The introduction of progressive research products has bolstered the bioseed business. Fenesta demonstrated good volumes and profit growth during FY17-18, thereby emerging as a brand leader in this segment. As a result, the company is focusing on expanding its product offerings and on growing the market. The record foodgrain production, low inflation and steady growth in exports have helped maintain stable macroeconomic conditions. Furthermore, the introduction of GST, implementation of the Insolvency Code, government emphasis on infrastructure development and creation of a favourable business environment will strengthen the economy in the medium term, produce sustainable GDP growth and broaden the company’s prospects. All in all, higher capacity utilisation, capacity expansion and greater realisations will boost revenues going forward. 

Challenges 

The sugar business is in trouble as prices are substantially lower than the cost of production. Although the government stepped in to provide short-term relief, formulating a long-term stable policy is essential to protect the interests of all stakeholders and, above all, farmers. DCM Shriram demanded that the minimum selling price of sugar needs to be raised from the current levels of Rs 29 per kg in order to cut down losses. The uncertainty pertaining to the regulatory environment, particularly for biotechnology innovations, sugar and fertilisers, is a cause for concern. However, the company is coordinating with the government to develop adequate solutions. Moreover, the rising crude oil prices combined with subdued agricultural commodity prices are major challenges. During FY17-18, the company experienced a 16 per cent increase in finance costs to Rs 83 crore. Such escalation in interest costs can be attributed to the higher working capital of sugar and fertiliser businesses. Furthermore, a substantial delay in payment of fertiliser subsidy bills by the government contributed to increased cost of borrowing, and, as a consequence, increased interest rates. 

Thus, while managing its working capital requirements, the company aims to keep the overall debt at low levels to limit exposure to such risks. Rising international and domestic prices of coal, freight, duties and levies have increased total energy costs. This directly affects energy intensive businesses like chlorovinyl. As a counter measure, the company is constantly improving its technology, efficiencies and fuel mix as well as sourcing to enhance the competitiveness of the cost of production. 

Conclusion and recommendation

FY17-18 witnessed growth in the financial as well as the operating performance of the company. The new distillery is expected to contribute to revenue generation starting next year. It has been observed that the product prices in nearly all its businesses are improving. Its stable cash position, good credit track record and robust balance sheet have assisted the company in lowering the overall debt levels. The company is strategically diversified, yet it is operationally integrated. Since some of its businesses supplement others, its operating costs are maintained at lower levels, thereby rendering DCM Shriram an exceedingly competitive player. Improvement in product mix, enhanced equipment efficiencies and emphasis on cost optimisation will generate good operating margins henceforth. Moreover, on the macroeconomic front, the government impetus on agriculture and infrastructure is stimulating the growth of the agriculture and PVC industry in India. This bodes well for the company’s future prospects. The increase in import duty on all types of sugar (raw, refined and white sugar) with a view to curb cheaper imports is likely to engender greater realisations for the Indian sugar industry and for the company as well. Although the sugar industry remains under pressure owing to the higher cost of production than the market prices, the sugar business of the company has recorded positive developments. This corroborates the company’s ability to perform in the face of hardships. By virtue of these factors, we urge our reader-investors to HOLD this stock.