Clariant Chemicals (India) Ltd: Chemical Bonding

Clariant chemicals- When i entered in it around 600 in 2016 it was in restructuring mode as it had divested many of its units and bought businesses comprising masterbatch and carbon black. It always takes time to fit in new acquisitions to current organizational setup and derive synergy and this may affect the business temporarily. So when a company is getting most of its value from the future business performance then it is always better to do staged buying- buying in small at every significant event whether it is growth in sales or some new product launches.

So when market started falling in 2018 it also fell big time and touched 300. Although its share price was falling but i always had the confidence in the capability of the company to show great performance- It was having global chemical giant as its parent with annual sales of around $ 7 billion, operating in high growth Indian chemicals sector, environment concerns in china further supporting high growth in india, no debt in the books as recent expansions were financed by sale of non core businesses and land, althogh performance wasn't great but it was showing profits and paying dividends regularly. So the fall in stock price was a great opportunity to add more at much lower valuation like it is trading at a valuation of some 600 cr on a turnover of 1000 cr.

So i waited for improvements in results which I found in mar-19 results and started the next phase of investing in it around 270-300 levels. June-19 results were great and so as the today’s Sep-19 quarter results. So far this year for first six months the sales have been increased to Rs. 568 cr from 521 cr last year. The growth in topline is commendable keeping in view the slowness (not recession as is being shouted widely...structural shift in demand is taking place and we need local supply to spur the next phase of growth through new sectors) of the Indian economy. PBT (including like to like other income) is at 40 cr vs 23 cr last year but if we add 8.3 cr paid by Clariant for amnesty scheme of Maharashtra government to settle the outstanding sales tax litigation then the same will become 48 cr which is considerable growth. And as per the trends of last 3 quarters the improvement in performance is stable and this or even better will be the future trend. Generally when a company is in transition phase then one performance in one quarter does not indicate revival of the business so it is better to wait for the performance in at least 3 quarters (Madhya Marg of Lord Buddha) especially when with rise in turnover expenditures (other than raw material) are beginning to fall. Similar trend is visible in the recent performances of Clariant. Raw material impact (positive or negative) is universal for the entire sector (unless the company under consideration is much smaller which will have much adverse impact).

But Clariant chemicals is a company which is always in search of the next big thing and in the run up they are unloading the old baggage quite fast. In fact, this is the trend being followed by other innovative, R&D heavy global chemical giants to sell their commoditized chemical business and focus more on producing high margin innovative specialty chemicals. BASF is another giant who is regularly churning its product portfolio for finding the best fit for their business model which is to invest big for R&D for creating high margin products and when they see that their old products are getting commoditized due to entry of other players from Asia or elsewhere they just exit the business. This ensure two things- First, they get the much needed capital for investing into new novel products and second the sale of commodity business drains the capital from market for new line of products they are targeting.

Clariant started their first round of restructuring in 2013 by selling its textile chemicals, paper specialties and emulsions business to Archroma India Pvt Ltd as a part of the global sale of these businesses by parent. The business like textile chemicals was becoming a commodity after the onslaught of china and developed world was focusing more on environment friendly chemicals. So Clariant started another round of investments by buying fast growing high margin businesses of Masterbatch and carbon black in india in line with the focus of global parent. They acquired the masterbatch business of Gujarat-based Plastichemix Industries for Rs 135 crore ($22 million) and then acquired the black pigment preparations business of Lanxess, located at Nagda in Madhya Pradesh. But the funds were arranged by selling non-core businesses like textiles and the sale of land in india. So no debt was taken for these businesses and this was a master strategy.

So amid all this restructuring, the global parent was going through tough times due to disputes with minority shareholders pursuant to its plan to merge with global chemical giant Huntsman. After the deal fell through, the 25% stake of activist minority shareholders were bought by Saudi Arabia based chemical biggie Saudi Arabia Basic Industries Corp (SABIC) rescuing Clariant from a hostile takeover threat. Then, in another transformational attempt Clariant decided to divest its Masterbatch and Pigments business to focus more on high margin specialty chemicals business by forming a Jv with SABIC. But then falling auto sales (western market) made them to wait as they are developing new age auto chemicals. But their plans are still underway and very soon we may see something big in this regards. Clariant does not see much scope of growth and innovation in Pigments business as most of the pigments were invented this century and there is not much scope for any further technological innovation in these and amid competition from India and china means that margins may fall from here (Still high but not so high for their expected high return due to superior R&D capability).

Further, this SABIC is owned (70%) by none other than Saudi Aramco  which recently entered into a large deal to acquire 20% in Reliance’s petrochemical/refinery business for 15 billion USD. Petrochemicals are the raw material for chemicals/specialty chemicals business of Clariant and even the deal between Aramco and SABIC was cleared by CCI (Competition commission of India). Aramco is betting big on India and there are high chances that we may see some chemical bonding here in India.

Actually if one can see the names we are taking here are not some mavericks we encounter and invest our money with taking all the risks of the world. These names are the Giants like SABIC has turnover of some $ 40 billion, BASF has Euro 65 billion...the size and technical abilities are just beyond our comprehension. Clariant is a giant in itself but SABIC is way bigger than Clariant and i even feel that the day is not far when SABIC will even acquire majority stake in Clariant. The specialty chemicals business plan of both Clariant and SABIC is of such a gigantic scale that to meet out their share of investments Clariant has to divest its Pigments and Masterbatch businesses. Saudi government is looking to expand beyond their bread and butter Oil business and specialty chemicals is one such area where they can become a global giant and i do not rule out aggressive buyouts across the globe including India. So if Clariant decides to carry out the specialty chemicals business in india through listed entity then there is nothing better than this.

Sometimes back, our another MNC gem Linde India came out with delisting offer. We picked the same around 400 and estimated delisting price was around 1000. Although we were getting more than double but i was not happy at all as Linde India has stunning technical prowess and it is poised to capture the biggest share of industrial and medical gases in india along with launching its innovative products. Then,finally Reliance capital played the spoilsport (although blessings for us) by bidding 2000 as the bid price for delisting which was not accepted by the promoters and due to this delisting was cancelled. Due to thism stock price crashed from some 800 to 430 and i used the opportunity to buy more of this. Similarly, i would prefer sticking to Clariant in India rather than making an exit at some 2-3 times.

BASF has also sold its pigments business for euro 1.5 billion to Japanese chemical giant DIC in order to focus on new age specialty chemicals. So as one can see this is the time for consolidation in the dyes/pigments sector which is a sign that margins are falling and size of the business will be the key for future margins. So the players with higher technical abilities like BASF/Clariant who think that they have the better capabilities to create a new growth path for them are exiting the business to focus their resources on their future course of action. BASF is another stock where we have invested and is poised for even faster growth. BASF is world’s biggest chemical company based in Germany with turnover of some 65 billion Euros and annual R&D spending of 2 billion Euros. So no doubt these companies will create great wealth for us in the coming future with their top notch high tech products.

So if we assume that Clariant's Pigments and Masterbatch businesses will be divested soon (it is again in talks with USA based Polyone for $1.5 billion which i think is at significant premium to the price discussed in the media) by the parent then this will leave nothing in the business for listed arm as 93% sales is derived from both. So it means either Clariant will distribute the entire sale price (will be delisted) or will distribute some part of it and the rest will be used for venturing into specialty chemicals business. I think chances of first are quite high but I would like them to start specialty chemical business with the listed entity as they have some of the most innovative products.

But for time being, let’s try to value Clariant. Its EBIDTA is some 50 for first half this year and this is at the verge of margin expansion so we can safely assume full year EBIDTA of some 100-120 cr. Across the globe, recent chemical sector deals have been done at some 15-16 times of EBIDTA and most of the chemical companies in India are also trading at these valuations. But some deals have also happened at 19-20 times also. So let’s take 15 times- the value will anywhere be around 1500 cr to 2000 cr plus they have freehold land in the books costing 25 cr so we can assume significant value for the same also (as the same is rented so we can assume spare land). Against this the current market cap is some 600 cr which implies that the now is the golden opportunity to invest in it.

Clariant is a very liberal dividend player and we can expect handsome payouts even in case the listed Indian entity will continue to carry on the balance and next planned line of business.

Great buy at CMP of 276. Though this may not be available at this price from here on but still even at 300 it is worthy of putting money.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post.  Reach me at oscillationss@yahoo.in).