Apcotex Industries Ltd (NSE, BSE : 523694)

Apcotex Ltd was spun-off from the prestigious Asian Paints in 1991. Since then the co is part of the “APCO” group of companies headed by Mr. Atul Choksey (former MD – Asian Paints).

The company is one of the leading producer of polymer products namely Synthetic Latices & Synthetic Rubber. They have one of the broadest ranges of products based on Styrene – Butadiene chemistry. The company has developed the technology through in-house R&D and upgrades the same continuously.

Company has been doing very well for last 5 years and growing at a CAGR of 26% and did a turnover of 200 Cr in FY 11. It seems the management is much more aggressive now and aims to do a 500 Cr turnover by 2013!

Other scoring points are :

1. Promoter Quality – The promoters have more than 3 decades of experience in paints and chemical industry and are experts in the field of chemicals.

2. Good corporate governance – Company seems to have very good internal controls and systems. For last 5 years the company has been following the Japanese TPM method. The company has been regular in financial reporting and progressive dividend pay-outs. They even went for a buy-back during 2009.

3. Virtually debt free company with high dividend payout – In FY 2011, the co had paid dividend @ 70% and this provides a significant comfort on the downside. Usually the company pays about 30% of its earnings as dividends.

Valuation @ CMP of 163:

  • Stock trades at 8 times FY 2011 earnings.
  • In Q1, the co has reported 64.46 Cr turnover posting a growth of 57% over last year.
  • Stock trades at about 1.4 times its BV of 115.

Given the strong management pedigree, good growth prospects, liberal dividend pay-outs, it seems to be a very good long-term investment idea. One must allocate 1-2% of the portfolio to this idea and increase the exposure as the value gets better.

Financial Performance:

  • NR

    Hi,
    Thank You for again pulling up another idea. Just wanted to check with you the infra sector. Seems like the interest cycle is getting to a pause. I am monitoring Gayatri Projects for a while & it has been battered a lot in this scenario. Is it time to get into this sector & especially Gayatri.

    Waiting for your comments on Vivimed Labs & Piramal Healthcare

    Thanks

    NR

    • Trivedijayesh
    • Ayush

      Hi,

      Yeah we have infra sector on our mind but there are still lots of issues hence trying to get more comfort.

      Vivimed is an interesting idea in terms of the past growth and the aggressive guidance given by the mgmt. But again lot of understanding is needed about the business model and sustainability of the lucrative margins.

      Piramal Healthcare has been widely discussed and I also have similar opinion about the long term opportunity here.

      Thanks & Regards,
      Ayush

  • Tirumala rao

    hi,
    looks good at just under 100 cr market cap, with great pedigree. what is the market cap you are expecting in next 3 years and what is your view on the company cash flows
    regards
    tirumala rao

    • Ayush

      Hi,

      Expected market cap would also depend upon how quickly the co would grow towards its targeted turnover milestone. If they continue growing at say 25-30% pa, then PE expansion should also happen.

      Cash flows won’t look too good because of the quick pace of growth over last 3-5 years. I think they are still healthy.

      Regards,

  • Reasonable idea at the current price.

    Debt has almost doubled in the last 1 year itself. Do you have any idea whether they have a roadmap to increase/paydown this debt? Cause for concern? (inspite of comfortable interest coverage, higher discounting for high debt firms in this environment, no?)

    As you put up on one of the excel sheet, around 125-130 looks a very good price to get into this stock.

    • Ayush

      Hi Kiran,

      Given the exp mode of the co, reasonable debt is not bad. Debt : Equity ratio is quite modest at about 0.4:1.

      Yeah, 125-130 would be a very good price to load up.

    • Ayush

      Hi Kiran,

      Given the exp mode of the co, reasonable debt is not bad. Debt : Equity ratio is quite modest at about 0.4:1.

      Yeah, 125-130 would be a very good price to load up.

  • Ananth

    Hi Ayush,

    Excellent find !
    I have a couple of concerns.
    1. They have mentioned in the risk section of the AR that weak rupee may impact them badly as majority of input material is imported. Hence Q2 results might not be good and may give good entry point.

    2. Their capacity is 30000 and they are running close to full capacity. Is there any capacity expansion on the cards ? How are they going to increase their sales if they are running full capacity ?

    Regards,
    Ananth

    • Ayush

      Hi Ananth,

      Thanks for pointing out the forex risk 🙂 Yeah, it may have a short term impact as passing of costs take some time.

      They haven’t mentioned about any capacity inc as such. But last year they had expanded the capacity by abt 50% and they have been quickly able to utilize the same. They must be working on expansion.

      Regards,

  • Sandeepkoppula

    Hi Ayush,

    What about their competitors (if any) and market share?

    Regards,
    Sandeep

    • Ayush

      Hi,

      Still researching on the co…haven’t come across these details.

      Regards,

      • Sandeep Koppula

        Hi Ayush,

        I did some research on the chemicals sector and noticed that Clariant Chemicals is one of their competitors. Infact, I felt Clariant to be a better pick than Apcotex. WIll post about Clariant in a seprate thread in valuepickr. Hope we have a discussion along with Donald and others.

        – Sandeep

        • Ayush

          Hi Sandeep,

          Clariant is an established and a much bigger player while Apcotex may be an upcoming co with much higher growth rates. This is why we are more optimistic on Apcotex.

  • Hi Ayush
    I was glancing through the numbers for the company, I couldnt help but notice that the Cash flow from operations didnt look so rosy. It was quite unstable and in the past years, they’ve had a negetive CFO year too, not to mention a negative net profit year too.
    Also with the receivables have doubled in the past 5 years, with a CAGR similar to the revenue. So approximately the receivables as a % of revenues remain the same, but combined with the cash flow problem, I would like to investigate it further.
    Just a couple of red flags that I saw.

    But I am impressed with the return ratios and margins that the company has been able to show.

    Definitely a company worth investigating further.

    Thanks for the analysis.

    • Ayush

      Hi Robin,

      Thanks for your comments.

      Though i keep reading about the fear of negative cash flow, but IMHO, one needs to understand the reason behind the same. Cash flows won’t be great in cos which are fast growing and the business is industrial sort of thing. In business like these, debtors will be there.

      The good thing is – the co seems to have discipline on the debtor side and the same has remained stable as a % of turnover over last several years.

      I think the opportunity here is on the mgmt quality side and we should try to get an insight if the mgmt is ambitious and wants to be a 500 Cr turnover co in 2-3 years. If yes, then the stock should do well 🙂

      Regards,

  • Pingback: Discussion on Can Fin Homes, VST Tillers and AstraZeneca India()

  • Vishal

    Any current thoughts about Apcotex? They havent really grown toplines as fast as I would like.

    • Ayush

      We had exited because the growth hadn’t been coming as we had expected it to be. Don’t have any new update on the company.