Sunday, 13 March 2016 00:00

Chembond Chemicals: Growing Through Joint Ventures

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Investment Summary – Chembond Chemicals, listed in BSE with a current stock price of INR359 and market capitalization of INR240 Crore is a multi-bagger in the making. Chembond Chemicals is involved in the manufacturing a diverse range of specialty chemicals like water treatment, polymers, construction chemicals, high performance coatings, animal nutrition’s and industrial biotech products. In my view, the company is trading at attractive valuations and investors can consider the stock with a time horizon of 3-5 years.

Chembond Chemicals Business

Value Created Through Joint Venture – On May 23, 2015, Chembond Chemicals announced that it has signed an agreement to divest its 49% shareholding in Henkel Chembond Surface Technologies for a consideration of INR175 Crore. The 20 year partnership witnessed sales growth of 40 times and the initial investment was mere INR45 lakh. This puts into perspective the value created by the JV. Importantly, Chembond Chemicals received INR175 Crore for investment in other high potential business (company’s current market capitalization of just INR240 Crore).

Current Joint Ventures

Joint Venture With Solenis - Solenis is a global supplier of water treatment and process chemicals. Chembond has a joint venture with the company under the name of Chembond Solenis Water Technologies Limited wherein Chembond owns 55% equity. The JV has presence in industrial water and waste water treatment sector where it offers chemical, equipment and bio-remediation solutions. The solutions cover industries like steel, power, refining, fertilizer, paper, chemicals and petrochemicals among others.

Joint Venture With Calvatis GmbH – On May 16, 2015, Chembond Chemicals formed a JV with Calvatis GmbH (55:45 JV) for manufacturing the distribution of disinfectants and cleaning solutions for the food, beverage, diary and brewing industry in the Indian sub-continent. With all these industries growing at a robust pace in India and with industrial hygiene and cleaning solutions gaining in importance, the JV has significant growth potential.

Joint Venture With I-Chem Solution Sdn Bdh – On February 25, 2016, Chembond Chemicals signed a JV with I-Chem Solution Sdn Bdh, Malaysia with 51% stake in the JV. The joint venture would serve the high potential water treatment market in Malaysia.

Chembond Chemicals divested stake in Henkel Chembond Surface Technologies with an objective of focusing on the water treatment business among others. With focus on environmental protection, preservation of fresh water and industrial hygiene in India, I see big potential for these JVs in the coming years. While the JV with Solenis is already an established JV, the other two JVs have potential to be significant revenue growth drivers.

Another Division In Incubation Stage – Besides two joint ventures being in incubation stage, Chembond Chemicals has also forayed in the polymers business, which is also in incubation stage. In this segment, the company plans to develop unique bio-based polymers. According to Chembond, Dr. Prakash D. Trivedi has been inducted in the company’s BOD. Mr. Trivedi is recognized as one of the foremost authorities in this business and with him joining Chembond, the company has successful filed its first patent in the polymers segment. The outlook therefore seems bright.

Construction Chemicals – At Inflexion Point

Chembond Chemicals is also in the business of construction chemicals with applications in roads and bridges, airports and metro transit, infrastructure building, in industrial, commercial and residential construction and repair and rehab projects.

From a marketing and growth perspective, Chembond Chemicals is working aggressively in this segment and already has a quality client list that includes NTPC, GMR, HCC, Reliance, Tata Steel and Gammon among others.

With current government initiatives such as housing for all by 2022, Make in India, investment in road infrastructure and the smart city programme, the demand for construction chemicals is likely to surge in the next 5 years and Chembond Chemicals is well positioned to benefit.

Having strong cash buffer allows Chembond Chemicals to aggressively work on product innovation and marketing. With an increasing portfolio of industrial and retail products, the segment will deliver strong top-line growth.

Other Business Segments

The chart below summarizes the other business segments for Chembond Chemicals.

Chembond Chemicals Business Segments

While these business segments will continue to deliver revenue, I believe that the water chemicals and treatment segment along with the constructions segments will be the key revenue driver in the coming years.

However, there can be potential surprises from these segments and just as an example the company’s biotech segment witnessed growth of 50% in FY14-15 as compared to FY13-14. Similarly, the polymers business that is in incubation stage can be a potential game changer for the company through innovation.

Financial Overview

Chembond Chemicals has a strong balance sheet with zero net debt. As of September 2015, the company had INR10.3 Crores in debt with INR15.9 Crores in cash and INR36.0 Crores in current investments. Further, the company’s balance sheet shows INR122 Crore in non-current investments and this includes cash proceeds from JV sale invested in current subsidiaries and JVs. With INR174 Crore in investments and cash, the company seems attractive at current market capitalization of INR240 Crore.

While the company’s revenue for 9M 2015-16 was INR200 Crores as compared to INR227 Crore for 9M 2014-15, I don’t see near-term decline in revenue as a concern. When industrial growth trends higher in India along with accelerating investments in the infrastructure and real estate segment, Chembond Chemicals is likely to return to strong growth trajectory.

Positive operating cash flows is an important consideration in financial analysis and Chembond Chemicals has delivered positive OCF in the last five years with OCF of INR24 Crores in FY14-15. The company’s OCF provides additional liquidity buffer for investments and dividends.

Overall, Chembond Chemicals has a strong balance sheet, high financial flexibility and great business segments to deliver strong revenue growth in the coming years.

Conclusion

Considering the company’s current and non-current investments coupled with cash in hand, Chembond Chemicals is trading at an attractive market capitalization. Further, the company has some high growth segments that are likely to deliver strong growth in the coming years.

Once the various businesses in incubation stage start gaining traction, the upside potential for Chembond Chemicals is likely to be significant.

 

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Note: The article is not a research report but assimilation of information available on public domain and it should not be treated as a research report.

Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that I have long-term positions in the stock discussed. Investors should carefully do their own research and verify points discussed before investing.

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