Recommendations From Specialty Chemicals Sectors

 This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

Himadri Speciality Chemicals 

GROW YOUR PROFIT ORGANICALLY 

HERE IS WHY
Reduction in debt over the past few years
Attractive valuation
New plants commissioning in FY20 

Himadri Speciality Chemical Ltd (“Himadri Speciality”) is a leading carbon corporation . The company is a significant player in multiple product segments like Coal Tar Pitch(CTP), carbon black, naphthalene , Sulphonated Naphthalene Formaldehyde (SNF) and speciality oils. Over the past few years, it has diversified its product portfolio by way of forward integration which includes advance carbon material and other value added speciality products. The Company has 9 manufacturing facilities across India and China. 

Himadri Speciality is the largest manufacturer of CTP in India. It caters to aluminium, steel, tyre and graphite electrode manufacturer. CTP is used in the process of aluminium smelting. The increasing use of primary aluminium across various end-use industries such as automotive, aerospace and construction among others has led to an increase in the demand for primary aluminium production, which in turn drives the demand for CTP. CTP is also one of the key raw material in making products like lithium-ion batteries, LED lights and solar panels which have high growth potential.Carbon black is largely used in tyre industries to improve longevity of tyres. More than 74 per cent of the demand in terms of volumes come from tyre industry while 19per cent is from non-tyre rubber goods like hoses, belts, appearance parts and rollers. Himadri Speciality is the largest Indian manufacturer of SNF, used by cement companies, with an installed capacity of 68,000 MTPA.

On a consolidated basis, total income from operations decreased by 21.35% year on year to Rs487.19 crore in Q2FY20. EBITDA (excluding other income) decreased by 33.90% to Rs85.97 crore and EBITDA margin stood at 17.65% (as against 21 per cent in same quarter last year). Net profit decreased by 38.38% to Rs45.09 crores. The company has been going through a challenging phase with volume slowdown due to volatility in the global environment, slowdown in aluminium and tyre industry.The company has focussed on substantial cleaning of its balance sheet over the past five years.Net debt decreased from Rs1,118 crore in FY14 to Rs430 crore in FY19. Thus net debt to EBIDTA stood at 0.8x in FY19 as compared to 6.25x in FY14. Reduction in debt would help the company boost its net profit and improve margins. Strict financial discipline at the firm level has led to working capital days significantly dropping linearly from 200 in March 2014 to 89 in March 2019.Days working capital describes the time taken by a company to convert its working capital into revenue. 

Various projects are due for commissioning in FY20. The specialty carbon black plant with an annual capacity of 60,000 MTPA is expected to commission by end of this month. Another project is of advance carbon materials with capacity of 20,000 MTPA is expected to be commissioned in phases starting from H2FY20. 

Himadri Speciality is trading at TTM PE of 9.8x, substantially below its historical median PE of 29x.The low PE factors in the current slowdown of its user industries. With recovery in user industries the stock may see revision in its PE ratio to historical median level. We expect the stock to outperform with expected recovery and improved balance sheet. We recommend BUY.