Kiri Industries : Is it a long-term buy from chemical sector?

Kiri Industries

Specialty Chemicals including dyes and pigments - This is the buzzing sector in the market over the last one year. Unlike other chemical segments, Specialty Chemicals requires application-specific development, innovation, and marketing to specific companies in various geographies across the world.

Kiri Industries is one of the largest manufacturer and exporter of wide range of Dyes, pigments, intermediates, and chemicals. With a Rs. 1450 cr. market cap and a sales turnover of Rs. 900 cr. this company supplies to more than 50 countries. Kiri has 4 subsidiaries, 1 Joint Venture and 2 associate companies contributing to its revenues.

This company was doing extremely well before 2008, when it overleveraged its balance sheet with the acquisition of Dystar and JV with China-based Longsheng group. This increased the debt of the company to as high as Rs. 850 cr. by 2014–15, as it had to be funded from working capital and term loans which almost destroyed the company.

Company Profile :

Kiri Dyes & Chemicals Limited (KDCL) is an ISO 9001:2000 certified company engaged in manufacturing of reactive dyes which are called synthetic organic dyes used for cotton fabrics like garments, dress materials, bed-sheets, carpets etc. The company was incorporated in 1998 as a Kiri Dyes and Chemicals Private Limited by at Ahmedabad, Gujarat. Praveen A. Kiri and Manish P. Kiri promoted the company. All the products manufactured by the company have comes under in two groups, such as Reactive Dyes and Intermediate Dyes and also the products found global acceptance. The product range of the company comprises of more than 120 dyestuffs used by textiles, leather, paint and printing ink industries with total production capacity of 10800 MT per annum. The dyes are of basically colours like black, blue, red, orange, yellow and numerous variants of these basic colours identified by color index number internationally. The company equipped the R & D laboratories with sophisticated and technologically advanced equipment, were the highly skilled team of research chemists; engineers and technicians to serve deverse range of products of the company.

KDCL have four plants situated Gujarat, India in different districts and four different names such as Kiri Dyes and Chemicals Limited (100 % EOU UNIT), Survin Laboratory, Kiri Dyes and Chemicals Limited - Unit-II and Parkin Industries - II. The company started its overseas operations in 1999; KDCL exported its products to USA and Taiwan. An appreciation for the year 1998-1999, the company awarded outstanding export performance by CHEMEXIL and also the same was came to the company for 1999-2000 in 2001 the year. Trophy awarded to the company by Gujarat Dyestuffs Manufactures Association for export performance of more than Rs. 600 Lakhs for direct export of self-manufactured dyes & dye intermediates.

During the year 2002, KDCL obtained permission confirming eligibility of Kiri Dyes to become 100% Export Oriented Unit from Kandla Special Economic Zone. The company received prestigious Platinum Award from CHEMEXCIL for outstanding performance during the year 2002 - 2003 and became Government Recognized Trading House in 2003. The year 2004 was the turning point to the company, recognized as a Two Star Export House and converted it manufacturing unit into 100% Export Oriented Unit. KDCL obtained Environmental Clearance Certificate from the Ministry of Environment and Forest for further expansion. The company started strategic backward integration project at Padra, Dist. Vadodara in 2005 and in 2006 the commercial production of backward integration project with respect to Vinyl Sulphone Easter started at Padra, Dist. Vadodara was in ensured. Awarded by Clariant (India) Ltd as A class vender for outstanding performance as a Business Partner - Sourcing and its contribution in the growth of Clariant (India) Limited in the same year of 2006. KDCL got an ISO 9001:2000, a certificate for quality management system by ISOQAR in the year 2007 for manufacture and supply of dyes intermediates for its Unit located at Village Dudhwada, Padra, Vadodara. KDCL has one of the advanced and effective effluent treatment plants to ensure required outlet norms under the safety environment of the company and also responsible and bound to manage lands to protect and enhance wildlife and ecosystems.

Results :
KIRI INDUSTRIES LTD. has reported financial results for the period ended September 30, 2017.
The company has reported net sales of Rs.301.38 crores during the period ended September 30, 2017 as compared to Rs.297.04 crores during the period ended September 30, 2016.
The company has posted net profit of Rs.92.60 crores for the period ended September 30, 2017 as against Rs.86.09 crores for the period ended September 30, 2016.
The company has reported EPS of Rs.33.26 for the period ended September 30, 2017 as compared to Rs.30.92 for the period ended September 30, 2016.
The company has reported net sales of Rs.591.64 crores during the 6 months period ended September 30, 2017 as compared to Rs.613.56 crores during the 6 months period ended September 30, 2016.
The company has posted net profit of Rs.196.28 crores for the 6 months period ended September 30, 2017 as against Rs.167.27 crores for the 6 months period ended September 30, 2016.
The company has reported EPS of Rs.70.51 for the 6 months period ended September 30, 2017 as compared to Rs.60.09 for the 6 months period ended September 30, 2016.

The stock price of this company was at Rs. 877 in Feb 2010, after which it plunged to as low as Rs. 4 by Jul 2013.

China had a large market share of dyes and pigments in 2012–13. Since 2013, owing to crackdown on polluting sectors in China, the production started falling, and other Indian companies starting taking advantage of the situation. Kiri Industries utilized its facilities and realized higher margins and started paring down its debt. In 2015–16 the promoters infused Rs. 50 cr. by subscribing to warrants and have further fully-paid warrant allotment for a further infusion of Rs. 127 cr. This will increase the promoter shareholding from current 37% to 44.64% soon.

In the meantime, the debt also has reduced to Rs. 165 cr, a substantial reduction from Rs. 850cr. in two years, and the company plans to be debt free soon. This will help in increasing the margins further.

The financials of the company are good. The operating profit margins have been consistently increasing and are approaching the 20% mark. The major change that you will see is the reduction in the interest cost over the last 12 quarters.

This good performance is reflected in the stock price. The stock has returned 4200% in the last 5 years. That is a tremendous return for a multi-bagger !!!

Future Prospects:

• Revenue boost by implementing expansion projects for disperse dyes facility, various intermediate products and zero liquid effluent discharge project for the betterment of environment protection is on the anvil.
• Improving financials which are consistently on the upward trajectory, reduced finance costs, better-operating margins and better EPS will be a continuity from now on.
• Promoter shareholding increase to 45% will boost the investor sentiment.
• JVs and Associate Companies have started contributing to the revenues in a significant manner and their contribution is expected to be on the upswing.
• Kiri is fighting a legal battle for Dystar against the earlier promoters for a share of the profits for their shareholding and contribution to the turnaround of that company. The amount is in excess of Rs. 700 cr. If it goes through in Kiri’s favor, then Kiri would get windfall gains and if the process is resolved to complete satisfaction, we could see Kiri producing products from 14 more plants.
• With a FV of Rs. 10, P.E. of 13.5 and a diluted EPS of Rs. of Rs. 43.35 for H1 2017, this is one of the cheaper stocks in this segment compared to Thirumalai, Bodal, Pushkar or Akshar Chemicals.
• Extrapolating the same, with continuing performance, Rs. 1170 is a fair value target for the company by Mar 2018. In case, the Dystar suit is in favor of Kiri, then the stock can go much higher, to a target of Rs. 1400.

Next Read: LT Foods:A Royal Basmati Daawat
Previous Read : CANSLIM : One of the best method to pick stocks.