This fortnight, we have selected Privi Speciality Chemicals Ltd, widely known in its industry segment at home as well as abroad but little known in market circles. Formerly known as HK Agro Oil Ltd and subsequently as Fair Chem Speciality Chemicals, Privi is India’s largest manufacturer,supplier and exporter of aroma chemicals which are used as ingredients for manufacturing fragrances. The company produces aroma chemicals from various terpene molecules which are used as building blocks in the flavour and fragrance industry segment. The company exports around 70 per cent of its production to all major global markets in over 100 countries. Today it is the preferred supplier to the top flavour and fragrance (F&F) houses of the world like Givaudan (Switzerland), Firmenich (Switzerland) and SJ (Germany), and leading FMCG players like P&G and Henkel. According to rating agency CRISIL, Privi has established its presence in a diversified product basket and built up relations with its reputed clientele. This has bolstered its business risk profile and the same will also facilitate the company in a steady ramp-up in its operations.

The growing business of the company is well reflected in its financial performance. During the last five years, sales turnover has expanded remarkably from Rs 185.57 crore in fiscal 2017 to Rs1,255.19 crore in fiscal 2021, with the operating profit shooting up from Rs 22.95 crore to Rs 204.96 crore and the profit at net level taking a high jump from Rs 8.46 crore to Rs 117.02 crore during this period. The company’s financial position is very strong, with reserves at the end of March 2021 standing at Rs 625 crore — more than 67 times its equity capital of Rs 39.02 crore, that too after 3 bonus issues distributed in 2012 (1:5 ratio), 2013 (1:10 ratio) and 2014 (1:10 ratio). The company has been paying dividends regularly for the last 15 years, the rate for the last year being 20 per cent.

But we have not picked this stock as the Fortune Scrip for its past laurels. We strongly feel that future prospects for the company are highly promising and will give robust returns to its shareholders going ahead. Consider:

• Privi is one of the few players globally with the capability to manufacture key inputs alpha and beta pinene from basic raw materials, crude sulphate, turpentine oil and for gum turpentine. The backward integration for key inputs insulates it from fluctuations in alpha and beta pinene. A solid arrangement with suppliers for raw material procurement also supports the company’s profitability. It has a tie-up for over 65 per cent of its capacity with customers on a yearly basis, insulating it from fluctuations in prices of key products in the spot market. This, coupled with a steady increase in capacity utilization, will lead to improved operating profit going ahead.
• The company has state-of-the-art integrated manufacturing facilities both at Mahad in Maharashtra and at Jhagadia in Gujarat. With the knowledge, experience and capacity to perform critical reactions like hydrogenation and condensation, as well as unit operations like pyrolysis, reactive distillation, high vacuum distillation and continuous distillation to deliver consistency in odour and prescribed key parameters of olfaction standards, Privi enjoys a dominant position and economies of scale in its product categories.
• Privi is recognized as one of the most dependable suppliers in terms of product quality, competitive pricing, meeting all regulatory compliances and timely delivery by customers around the globe. Little wonder it has been a partner of choice for customers like Firmenich, Symrise, Mane, Givaudan, EPF, P&G and Reckit Benckiser. The company caters to the world’s 10 largest fragrance companies which control two-thirds of the global fragrance market presence in Europe and the US.
• The company has an above-average financial risk profile. As on March 31, 2021, its net worth was estimated at Rs 690.31 crore while the gearing and total outside liabilities to the adjusted net worth ratio are estimated at 0.76 times and 1.05 times respectively as against 0.83 times and 1.26 times a year ago. Despite its planned capital expenditure over the medium term, the capital structure is expected to remain comfortable with gearing and total outside liability to the adjusted net worth ratio at below 1 time and 1.2 times respectively. Debt protection metrics were comfortable with estimated interest coverage ratio of 5.81 times and net cash accrual to total debt ratio of 0.29 times in fiscal 2021. The debt protection metrics have improved with the increased scale of operations and consequently healthy profitability and are expected to remain at similar levels going ahead.
• Privi enjoys strong liquidity driven by expected cash accruals of more than Rs 150 crore per annum in fiscals 2020 and 2023 and cash as well as cash equivalents of Rs 35 crore as on March 31, 2021. Privi Organics, a US-based subsidiary, also has access to fund-based limits of Rs 410 crore utilised to the tune of 52 per cent on an average in 2021.
• The speciality chemicals segment is in focus for a while now on the back of rising demand for their products and services. Indian speciality chemicals companies have not been performing extremely well of late, but they also have immense growth potential going ahead. These companies are poised to ride tailwinds from macro drivers including the ‘China+1’ import substitution, growing costs within China (capital, operational as well as compliances) and currency benefits. Referring to the sector’s opportunities across the next decade, an expert says in his study that “we expect India’s chemicals sector to get bigger and gain increasing marketshare in global chemicals over the next decade. Global chemicals is a large market, currently dominated by China. It is expected to grow at a CAGR of 5 to 6 per cent and with the declining dominance of China, India will emerge as a major beneficiary.”

Most Indian speciality chemicals companies are in the limelight on the stock exchanges and their stock prices have shot up remarkably. Privi, being not that well known, lags behind but it is bound to steal the limelight going ahead. Investors should include this stock in their portfolios.