Market Cap: 9,750 cr

Cmp: 615

Industry:  Specialty Chemicals

Business Overview

Largest Manufacturing Plant: Chemplast Sanmar is the leading Chemical Manufacturer in India specializing in Specialty paste PVC, S-PVC, Caustic Soda, Chloromethanes & Hydrogen Peroxide. It is the largest manufacturer in paste PVC resin & 2^nd largest in S-PVC.

Segment wise contribution to the revenues

Paste PVC & Suspension PVC have the highest contribution to the revenues

1. S- PVC: 46%
2. Paste PVC: 32%
3. Custom Manufacturing: 8%
4. Caustic Soda: 6%
5. Chloromethane: 8%

Best Quality Manufacturing & State of the Art Facilities based out Tamil Nadu & Puducherry. Best in the industry margin profile due to high degree of Backward Integration.

Diversified Product Application with application in various industries:

1. Footwear
2. Auto Upholstery
3. Pharma, Agrochemicals
4. Paper
5. Textiles
6. Leather
7. Infrastructure.

Investment Rationale

Duopoly: The PVC & SPVC market is dominated by 2 players in India, Chemplast & Finolex. This gives a big advantage to Chemplast as it can command a favorable pricing as its seen in the superior return ratios.

Net Imported product: The entire domestic paste PVC market is 143ktpa, whereas production capacity is 85ktpa. Chemplast and Finolex are India’s only two paste PVC manufacturing companies, with the former having a capacity of 66ktpa and the latter having a capacity of 22ktpa. CHEMPLAS controls 75% of the domestic supply and has a 45% market share. Imports provide the remaining 45%.

Over the last few years the custom duty & freight cost has drastically increased, custom duty from 5% to 10% and global freight prices from USD 3,000 to 18,000 per container.

These factors will not only make imports less favorable but also improve realizations for domestic players.

Huge Spurt in Realization in all Segments: Due to the global factors discussed above, Chemplast is enjoying huge tailwinds in terms or of demand and realizations. The table below is self-explanatory, Chemplast to be the key beneficiary of such exorbitant commodity trends.

Supply Gut: Post COVID19, PVC capacities globally has reduced by 355ktpa causing prices to rise further and aiding domestic players. Its interesting to note Chemplast’s capacity utilization is at 65-70% giving it ample scope of replacing imports into India.

Favorable Industry Dynamics: Specialty paste PVC resin is only used to make flexible products like artificial leather, gloves, tarpaulins, conveyor belts, coated fabrics, etc.

Suspension PVC resin can be used to make both rigid products like pipes, fittings, profiles, hard flooring and flexible products like flexible pipes, wires and cables, films and sheets. Suspension PVC resin is largely a basic product, while paste PVC is a specialty product.

Aggressive Capex Plans: Chemplast has aggressive growth plans and still maintain balance sheet discipline. All segments capex plans to be completed by FY24 & FY25, giving Chemplast higher visibility of revenues.

1. Increasing  installed production capacity of specialty paste PVC resin by 35kt at Cuddalore. Plant to be ready by FY24. Cost of Capex to be 250 cr.
2. Increasing  installed production capacity of specialty S-PVC resin by 30kt. Plant to be ready by FY22. Cost of Capex to be 25 cr.
3. Setting up Custom Manufacturing at a capex of 3,200 cr. Project to be completed by FY25.

Highly Favorable Product Mix: The non speciality chemical segment ( Caustic Soda, Hydrogen Peroxide & Chloromethanes) of the business contributes not more than 20% to its revenues.

80% of revenues come from Specialty Chemicals S-PVC & Paste PVC.

Financials

Huge Spurt in Realization in all Segments: Due to the global factors discussed above, Chemplast is enjoying huge tailwinds in terms or of demand and realizations. The table below is self-explanatory, Chemplast to be the key beneficiary of such exorbitant commodity trends.

Chemplast has surplus capacity, with blended utilization at 60-65%. Higher realization & surplus capacity is a classic recipe of strong earnings growth.

At 9,500-10,000 cr market cap, we expect a FY24 PAT at 800-850 cr valuing the company at an attractive valuation of 12x FY24.

Key Risks

Delisting in 2012, Chemplast Sanmar was listed from 1992-2012 but was then delisted due to the need to recapitalise the company following a sequence of losses beginning FY09. The key reasons for the losses that triggered the delisting were: capitalisation of a large expansion programme, primarily into suspension PVC after delays in 2009 & consequently their margins were not yet at optimal levels. Following a few years of losses the company’s balance sheet was stressed (debt-to-equity of 6x at the end of FY12). The delisting of stocks mainly due to balance sheet debt & operational efficiency has created a low confidence environment amongst the investor community. But management 2012 has turned around its fortunes operationally & got Fairfax as a marquee investor in CY 2017.

Conclusion- Why Buy Chemplast

1. Aggressive Capex, higher cash flows being deployed into fresh capacities.

• Strong traction in realization trends.

• Supply starved global capacities & high nature of capex creates entry barrier.

• China+1 theme.

• Highly attractive valuation for a specialty chemicals company with consistent hIgher double digit ROCE.