Clariant Chemicals (India) Ltd: Updates

Dear All, Clariant chemicals has just performed as per our expectations and given great returns so far keeping in view in the tough market situation.  Congratulations to all those who had picked it when it was lying low in a corner. Clariant was advised around 270 in Nov-2019 (click here) and (here) for earlier posts on it. It has touched 600 recently so a good 120% return. I added more of this one at 230 in Mar-2020 when market was hit badly due to Covid crisis. In Nov-19 when we entered, it was a special condition stock as it was expected to sell its Masterbatches and Pigments business to focus more on high margin specialty chemicals business. I was expecting it to sell the same at anywhere around 1500 cr to 2000 cr valuation while it was available at just 600 cr market cap. So the valuation discount was massive.

So as of now, it has sold off its Masterbatches business for 426 cr which is around 17 times its previous year EBITDA just as per our expectations. The turnover of Masterbatches business was 284 cr so it has got the valuations of 1.5 times of turnover. And as expected it has announced special dividends of Rs. 140/- per share distributing almost entire sale proceeds.

Now, Clariant is expected to sell its pigments business also by the end of 2020. Its Pigment business in India is much bigger than Masterbatches and so we can hope for another big dividend this year. Its Pigments business clocks turnover of somewhere around 700 cr and it is generating good profits which after acquisition by any related sector company will generate even better profits so i think it should get much higher value...its pigments business EBITDA is around 60-70 cr and at 15 times of it or 1.5 times of turnover makes it 1000 cr and also there is some land costing 25 cr in the books so i think with this the figure should grow bigger. But still after the sale of pigments, there is specialty chemicals business with topline of some 70-100 cr this year. So conservatively, I had valued Rs. 1500 cr as par value for Clariant.

So few days back when it hit 600 it was trading around 1400 cr valuation. There was dividend tax issue involved so I sold all my holdings at 580 because I booked some short term capital losses which would take care of the short term capital gain from the sale of Clariant. Actually I found it a bit overheated at 1400 cr valuation because due to covid there may be some overhang on the sale of Pigments business and its final valuations because pigments is relatively lower margin business. So as I was getting valuation near to my par valuation much ahead of the real transaction so I decided to sell this one.

Now, after the sale of Pigments business it will be left with small specialty chemicals business which is going to be the focus of Clariant globally. Turnover of this business is very small at 60-70 cr so I think delisting appears a much likely option for the management though I would like them to continue and grow this business through listed arm but chances are very less. So my buying this one again would depend upon their delisting decision...if not then I may invest more in BASF or Tata chemicals.

As on Mar-2020 Clariant has some 106 cr cash in books as compared to 40 cr last year as it has reduced inventory and debtors. That’s why apart from Rs. 140/- as special dividend they have also declared Rs. 11 as final dividend for FY-2019-20. I don’t know how much of this cash of 106 cr pertains to specialty chemicals business but specialty chemicals is a high margin business. Further, they still have valuable land in their books costing some 25 cr and in case large unused land is not the part of sale of pigments/masterbatches business then this may add further juice to the delisting offer price. But what could be the delisting price (in case it is offered) require some more data crunching about land valuation etc. So I’ll post further updates in the course of time.

But let me share something on this. When there was no deal happened, at that time Clariant was trading at very low valuations. But the stock market valuations are more about “price” than “value”. And price is influenced more by temporary forces and there may be instances where temporary forces may put tremendous negative pressure on the stock price but even in those cases value remains intact. The need is just to keep the faith in the management and let the tough time pass. Just remember- Price is transitory but Value is the fundamental. So at 1400 cr valuation for Clariant we are seeing price covering the distances towards true value of its business. So there may be times when a worthy stock is hit badly by temporary forces (whether of stock market or industry forces) then we just need to keep the faith in the capability of management to sail through the tough times with their strategic planning and execution. Just like in case of Tata power where I have invested quite a bit when it was at 29 in Mar-2020 and is still think it is a good buy even now at 49. I think, management is doing a fantastic job in solving the issues one by one and Tata power may be the turnaround story of this year.

(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).