Ultramarine Pigments Ltd.

ULTRMARINE PIGMENTS LTD

Market Cap- 800

CMP-275

Why Buy Ultramarine

The company has done no dilution in its share capital and zero debt.

Fresh capex comes from the back of internal accruals in sector that is witnessing huge tailwinds and businesses/customers finding alternative to China.

Inspite of being in specialized commodity business, the company has made consistent ROCE in last 10 years.

Over 10 years, cumulative cash flow is 237 crores of which 100+ crore they’ve given as dividends.

Surfactants division capacity has doubled, fresh capacity to come on board by Q4FY21. All capex done by internal accruals.

Background

Promoter group: The company is over 50 years old and is a part of the Thirumalai chemicals group. (Cross holding of around 20%) Promoter holding stands at 52.50% with Institutional holding is around 1.37%.

i) Mr R. Sampath is the Chairman who possess more than 50 years of experience and holds a Chemical Engineering degree from Washington State University, USA.


ii) Ms Tara Parthasarthy is the Joint MD who serves as Trustee of Thirumalai Charity, Prior to joining the company she worked at the World Resource institute on sustainable energy policy issues at the National and state level.

iii) Manufacturing plants: Chennai, Ranipet and GIDC Gujarat.

Business Segments
Ultramarine Operates in 5 segments which are:

i) Pigments (Total Capacity 6,000 MTPA)

Ultramarine is one of the largest manufacturers of blue pigments in India. Ultramarine blue pigment has diverse application with high-grade pigments used in industries such as plastics, paints, coatings, cosmetics, foods, detergents etc; lower grade pigments are primarily used for whitewashing and laundry applications. The company manufactures inorganic pigments such as Ultramarine Blues, violets, Bismuth Vanadate (Pigment yellow), and various metal oxides. Global pigment growth is expected to be 4% CAGR. Capacity addition in Naidupetta of 8,400 MTPA for inorganic pigments will be done. Pigments division did a 100 crore revenue in FY 2019 and it has grown by a 10% CAGR over 5 years.

ii) Surfactants (Total Capacity 28,000 MTPA)

Surfactants are used in bars, detergents, soaps and various other chemicals. Surfactants comprised of ~24% of revenue contribution in FY 2019 and was running at full capacity till disruptions caused by Corona virus and a new plant in Naidupetta of Andhra Pradesh is under construction. The new plant will take 6-12 months to be completed and will add capacity of 40,000 MTPA. Post the proposed expansion, a phase 2 capex will add a further 7,500 MTPA to the surfactants division.

iii) Detergents of powder and liquid form

Laundry segment is not growing since the last couple of years and hence a product wise shift to pigments and surfactants is being taken from FY20. Company was manufacturing linear alkyl be

nzene suplhonic acid previously which is used in household detergent products. Now, they are shifting towards sodium lauryl sulphate which is used in shaving creams, liquid hand soaps, shampoos and many others. This shift is set to increase their margins.

iv) IT enabled services and BPO – The IT enabled division is a call center and telemarketing business. It generates free cash flow and they are not investing more in the IT business.

v) Windmill division- Very small portion of revenue and the company is not going to invest in this division.

Changing product mix into higher margin segements

New Initiatives

Customers are looking for a subsitute to China since a while, Ultramarine is stepping up to the big stage at the right time by doing some big capex in its two segments.

Surfactants Division Capex– 26,000 ton. Almost doubling capacity to existing one at 28,000 ton. Capex is 80 cr and peak revenue possibility of 160 cr. Company can make sustainable margins of 16%. Capex in this division is brownfield in the existing plant of Chennai.

Pigment Division Capex- The company is still in the nasacent stage and process of Environmental Clerance is currently on going. Capex is around 120 cr and all regulatory clearances to come by same time next year.

Financials

(Amount in crores)

Segmental Revenue Split

i) Revenue of the company has tripled since 2010 and EBIDTA increased from 17 to 71cr, and pat has grown 5x in the same time period. (FY 2010 to FY 2019). The company has a clean balance sheet with no pledging and a minimum Debt to Equity of 0.07x. CFO has been steadily increasing in the last 5 years from 23 crores to 48 crores. Very Stable CFO/PAT over the last 5 financial years:

ii) Over 10 years, cumulative cash flow is 237 crores of which 100+ crore they’ve given as dividends.

iii) Company has done good capex in the last 5 years as fixed assets have increased from 52 crore to 90 crore. Now that the industry tailwinds are prevalent, the company will get more out of this situation.

iv)The company has one of the best return ratios in the industry, over the last 5 financial years (ROE of ~18% in FY 20 and a 3 year average ROCE of 18% and a ROIC of 30% in FY 20)

v) Individual segment margins of Ultramarine are not available. However, margins of the laundry and allied segments (Detergents, surfactants and pigments) combined have had a margin increase from 16% in FY 16 to 24% in FY 20.

Key Risks

i) Volatility in price and supply of important raw materials like alpha olefin in the next 2 years can be a margin destroyer for the company. As observed the capacity for Alpha Olefin is 1,000 MT per month which is around 12,000 MTPA, the price expectation of Alpha Olefin is around 500$-1500$ for 1 MT between 2020 and 2022. Alpha Olefin which a key imported raw material of Surfactants is fully imported and total export sales accounted for around 30% for FY20.

ii) Further investment into noncore business assets of IT & Windmill. So far, there has no investments into these segments since last 5 years.

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