Fortune Scrip     

Published: Dec 15, 2022
Updated: Dec 15, 2022

Manali Petrochemicals

Pole domestic player in propylene

Some readers have complained that we always select a high-priced stock as the Fortune Scrip. Why don’t you select a low-priced stock for this very informative column sometimes, they ask. Keeping in mind the wishes of these readers, I have selected a small cap, low-priced stock as the Fortune Scrip for this fortnight.

Manali Petrochemicals, the Chennai-headquartered petrochemical company belonging to the Muthiah group of SPI. The company manufactures propylene glycol and polyols. Annually, it produces 27,000 tonnes of propylene oxide (PO), 14,000 tonnes of propylene glycol and 15,000 tonnes of polyether polyol and polyol systems. These innovative products find applications in a variety of industries such as appliances, automotives, bedding, food and fragrances, furniture, footwear, paints and coatings, and pharmaceuticals.

The company is the only domestic manufacturer of propylene glycol (PG) and the largest manufacturer of propylene oxide (PO) – which is the input material for propylene glycol. It is focused on sustaining its leadership position in the market.

Manali has two manufacturing facilities — one plant originally built by SPIC with technology from Atochem for the manufacture of PG and PO, and the second, that of Arco, for the manufacture of polyol acquired through Technip France. The company places a lot of emphasis on innovation. According to the management, innovation and customer focus are the two guiding principles of research and development efforts at Manali.

FINANCES FINE

The company is steadily progressing on the financial front. During the last 12 years, its sales turnover on a consolidated basis has expanded from Rs 445 crore in fiscal 2011 to Rs 1,445 crore in fiscal 2022, with the operating profit spurting more than 13 times from Rs 38 crore to Rs 522 crore and the profit at net level surging over 15 times – from Rs 25 crore to Rs 377 crore during this period respectively. The company’s financial position is very strong, with reserves at the end of March 2022 standing at Rs 900 crore — over 10 times its equity capital of Rs 86 crore. The company is almost debt-free, its borrowing is only Rs 16 crore and the interest burden is a nominal Rs 9 crore (for 2022); i.e., a fractional 0.6 per cent of its sales turnover.

However, I have not selected Manali for its past performance. The company’s prospects going ahead are all the more promising. Consider:

• Last year, the company entered into a tie-up with UK-based Econic Technologies for introducing more environmental friendly Co2 containing polyols into the $ 28 billion global polyols market. In the coming years, the company plans to scale up its catalyst technology, which will enable it to substitute fossil-based raw materials with captured waste Co2 in the production of polyols. This green initiative will improve the ESG (environmental, social and governance) score of the company, which will go a long way in improving its valuation.
• With the government imposing an anti-dumping duty on imports, the demand for the company’s products is on the rise. With a view to meeting the rising demand for its products, the company has chalked out an expansion plan for polypropylene glycol (PG) from the current level of 22,000 tpa to 70,000 tpa at an estimated cost of Rs 450 crore. The expansion plan will be implemented in two phases. The first phase, expected to cost around Rs 60 crore, will add 24,000 tpa capacity within the next 15 months. Phase II, also involving a capacity of 24,000 tpa, will be within the next 10 months or so.
• This capacity expansion will prove to be most timely for Manali as the current demand for PG in India is around 100,000 tpa and at only 22,000 tpa , the company is the only manufacturer in the country. Thus, pressure is mounting on the government to remove the anti-dumping duty on PG imports. Manali’s expansion will raise the capacity to 70,000 tonnes per annum and will give a big boost to its topline as well as bottomline. At the same time, expansion will reduce the country’s dependence imports, thereby saving valuable foreign exchange.

DEBT-FREE

• The company has a robust balance sheet. It is virtually a debt-free entity. It has delivered a good profit growth of 54.8 per cent CAGR over the last five years and has been maintaining a healthy dividend payout of 19.4 per cent, providing a good dividend yield of 3.02 per cent. The company has a good return on equity (ROE) track record, its ROE for the last three years being 35.1 per cent. Its debtor days have improved from 44.9 per cent to 33.8 per cent and its working capital requirement has reduced from 33 days to 22.4 days.
• A major development which took place in December 2022 may prove to be a game changer for Manali. Towards the end of 2022, Manali acquired Penn Globe Ltd., located in Aston Way, Midpoint 18 Business Park, Middlewich, Cheshire (UK), in a deal worth 21 million pounds (around Rs 215 crore). Penn Globe, which is engaged in the manufacture of speciality chemicals like foam control agents, has two subsidiaries – Pennwhite Ltd and Pennwhite Print Solutions Ltd. Pennwhite is a speciality chemical company and manufactures foam control agents and similar chemical products, including lubricants, surface coatings, release agents and silicon emulsions. Pennwhite Print Solutions is a printing services company and a manufacturer of a range of high-performance silicon emulsions, anti-statics and consumables, developed specifically for the needs of commercial printers.
• The acquisition of this Cheshire-based speciality chemical company made through Manali’s wholly-owned subsidiary company, Amchem Speciality Chemical Singapore, is expected to change the fortunes of Chennai-based Manali, which has developed innovative products that find applications in a variety of industries such as appliances, automotive, bedding, food and fragrances, furniture, footwear, paints and coatings, and pharmaceuticals. The speciality chemicals sector is the flavour of the day in the wake of the China +1 and Europe +1 strategies being adopted by global multinationals. Hence, the acquisition of the Cheshire-based speciality chemical company will change the shape and size of the balance sheet of Manali.
• Of course, the existing businesses of Manali may face some challenges. For example, the company is thriving today on the imposition of anti-dumping duty on imports. Today, the PG industry is globally a concentrated industry with top manufacturers accounting for around 60 per cent of the supplies. These few players are not among those who will be giving up a lucrative market and are capable of even taking a hit on their margins on account of the anti-dumping in the Indian market where the requirement is over one lakh tonnes per annum. On the top of that, these players can also partner with local players in countries with ADD to create enormous supply and put pressure on the margins of even Manali.

These challenges at the most can slow down the pace of growth of Manali but cannot harm it in any other way. Interestingly, the company has set up a propylene oxide manufacturing facility which is the key intermediate raw material for manufacturing PG. Again, Manali has set up its base from commodity PO to speciality PO.

CASH APLENTY

A plus point in favour of Manali is the fact that it has managed to amass FCFE (free cash flow to equity) of Rs 700 crore in the last seven years. This is not bad for a small cap company with market capitalization of Rs 1,600 crore. Again, the company’s move towards specialities allows it to tweak the product mix and manufacturing lines as per the customer’s demand. This is something that international players would find hard to accomplish since they look for dumping a commodity mix in large volumes. What is more, the increasing use of PG in pharmaceuticals, food industries and paint will majorly benefit Manali rather than importers. This is because these industries look for reliable supplies for their speciality use case. Without the local knowledge of industries, global companies like DuPont find it had to compete in local speciality use cases. The company also has a competitive edge on the freight cost front.

And the entry into the field of speciality chemicals would enable Manali to graduate from the small cap to the mid-cap category in the near future.

Shares are available around Rs 80-85 and there is tremendous growth potential for long-term investors.