Bodal Chemicals : A turnaround story

Introduction

4–5 years back, Bodal chemicals was in lot of debt. The company had debt-equity ratio of 8.78. However, Chinese government’s crackdown on specialty chemicals companies changed picture of Indian counterparts. Chinese government imposed strict pollution control norms on chemical companies. This led to under-utilization of their capacities. So, this move vacated Chinese dominance in chemical sectors. So, who would be favored by this event? Obviously, Indian chemical companies. Bodal is the beneficiary of this favorable event. Generally, I don’t believe in turnaround stories, unless they show consistent earnings growth and strong, predictable business model. However, Bodal deserved a serious analysis.

Business model

Bodal chemicals manufactures specialty chemicals for textile, paper, plastic and leather. 71% revenue comes from domestic markets and 29% revenue comes from exports. They export to more than 50 countries. Bodal has wide customer base of 375+ customers worldwide. The company has total 9 Manufacturing Units in Gujarat-India. Bodal Chemicals has a modern, well–equipped and in-house R&D Lab for testing and new product development; and constant improvement in the existing product lines. Expansion in new plants and inorganic growth through acquisitions and joint ventures will drive revenues growth in long run. These expansions happened without using significant debts. Their long term debt is negligible.

In detail, Bodal has following divisions :

1. Sulfur and bulk chemical division
2. Dye intermediates : Nearly 70% of production is being exported worldwide to various clients including several multinationals. Apart from being leader in indigenous market, products are being exported to China, Korea, Thailand, Taiwan, Japan and European belt. Today, Bodal is one of the largest manufacturer & exporter of Intermediates in India. Bodal enjoys 25% share for dye-intermediates in Indian market.
3. Dyestuff : Bodal has invested more than 0.5 million U.S.D for making International level Dyestuff, technical service laboratory, dyes quality control laboratory, paper, leather and textile dyestuff. Bodal enjoys 9% share for dyes in Indian market.
4. Trion : TRION T.C.C.A, the compound is a disinfectant, algaecide and bactericide mainly for swimming pools and dyestuffs, and is also used as a bleaching agent in the textile industry. It is widely used in civil sanitation for pools and spas, preventing and curing diseases in animal husbandry & fisheries, fruit & vegetable preservation, wastewater treatment, as an algaecide for recycled water in industry and air conditioning, in anti-shrink treatment for woolens, for treating seeds and in the organic chemical synthesis. Main market is US. It has received license in USA for environment protection. Trion Chemicals manufactures specialty chemicals and its base products.

Positives of Bodal Chemicals

1. As other countries are regulating their dyestuff industry with mandatory norms for waste treatment, it eliminates their domestic companies’ ability to dump the goods to global companies. This level-playing field of competitive pricing only adds to advantage to expand market share globally with quality conscious products and solutions.
2. Bodal will continue to make sustained investments for capacity expansion and keep a comfortable debt profile. E.g. SPS processor and Trion Chemicals.
3. Large population, low per-capita consumption of chemicals, strong GDP growth outlook and favorable initiatives by the Indian government.
4. Certain recent developments in China have presented a substantial opportunity to the large and organized Indian manufacturers of dye intermediates and dyestuff.

Negatives of Bodal Chemicals

1. Revival in Chinese Market : If Chinese player starts to manufacture at the capacity utilization level of pre-crackdown period, Indian companies in this sector are going to be disrupted. This is the primary threat for Bodal.
2. Unfavorable commodity cycle : Bodal is a commodity player. If demand from end industry turned down, Bodal will get hurt. This had happened in last couple of quarter.
3. Unorganized players may turn up the heat : This segment has many unorganized players which could sell products at lower prices. However, after the advent of GST, unorganized players have to conduct their business in formal sector. This has turned negative for unorganized players because they have to pass all the pollution control tests, which may not easy. So, for this sector, Government’s regulations act like strong barrier to entry.
4. Increase in raw material prices : Bodal uses crude as raw materials. If crude prices increase, their turnover decreases. They pass on cost to consumers.
5. Scalability of growth : In last 2–3 years, Bodal could show stellar growth in earnings. But, considering some of the headwinds in the sector, growth may slow down.

Management quality

Management has very good experience in chemicals sector and built the company from scratch. Mr. Suresh Patel is a first generation entrepreneur. The important thing is company has negligible long term debt. This management could make the company almost debt-free. Company is expanding in organic and inorganic ways which I believe, moat-widening acquisition. So, overall management is hungry for growth, with little debt on their financial statements.

Investment rationale

I bought bought Bodal Chemicals at Rs. 171.9 per share. The main reason is favorable outlook for the company in next few years. Their expansion plans will add significant revenues. Management could achieve significant return on equity (30%+) in last 3 years, with less debt. Given the commodity nature of the business, I don’t want to allocate too much investment capital to this stock. So, I have very small holdings in this company. But, I believe that in the long run of 3–5 years, this business may grow satisfactorily. Recent correction in the stock gives very nice opportunity to accumulate shares at cheap valuations.

References

1. https://www.bodal.com/
2. Annual reports of 2013, 2014, 2015, 2016 and 2017.

Call to action

If you like the article, please share and comment your views on it. Also, I have decided to revamp my investment strategies. As part of the same, I want to concentrate my holdings to 2 businesses per year. Earlier, I invested in a company per quarter. That was 4 businesses per year. These new strategies will be applicable since year 2018. So, I will share 2 businesses where I have invested in. Also, I will share 2 blog posts on my investment philosophy. Also, I will share updates on business performance and my views on the businesses in my portfolio. So, next stock will be shared in Jun-2018. Please stay tuned.

Disclaimer

Investment in equity market is subject to market risk. Please analyze annual reports carefully. Views expressed in this article are personal. Views should not be treated as recommendations to buy or to sell stock.

Also published on Medium.