Analysis: Vinyl Chemicals (India) Limited

Modified on July 1, 2018

This article provides in-depth fundamental analysis of Vinyl Chemicals (India) Ltd, an Indian manufacturer of Vinyl Acetate Monomer (VAM).

 

Vinyl Chemicals (India) Ltd

Q: Hi Vijay Sir. First, I must say that I am very impressed by the extensive research you do before stock selection. Also, thank you for your assistance in helping us with our research with your views.

Can you please advise me on Vinyl Chemicals (India) Ltd, a micro-cap stock with market capitalization of INR 120 cr? Vinyl Chemicals is a Pidilite Group company who was into manufacturing of Vinyl Acetate Monomer (VAM). But because this business was continuously loss making, it was de-merged into Pidilite Industries Ltd in 2008 and since then Vinyl Chemicals (India) Ltd has been into trading VAM.

  • Sales and net profits of Vinyl Chemicals (India) Ltd have been growing decently well since then.
  • The Average ROE of Vinyl Chemicals (India) Ltd over the past 5 years has been consistently high.
  • However, Operating profit margins are low as is the net profit margins.
  • Debt to Equity of Vinyl Chemicals (India) Ltd is low at 0.02 and
  • the company seems to be consistently paying tax @30%.
  • The Dividend payout of Vinyl Chemicals (India) Ltd has also been good for the past couple of years.

Keeping in mind that the management is trustworthy (promoters of the Pidilite group) and at a P/E of 6.41, Vinyl Chemicals (India) Ltd seems to be undervalued.

Can you please let me know your views on Vinyl Chemicals (India) Ltd? Can it be invested for long term? Thanks a lot,

Author’s Response

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

 

Financial Analysis of Vinyl Chemicals (India) Ltd:

Vinyl Chemicals (India) Ltd equity analysis research report

Vinyl Chemicals (India) Ltd has been growing its sales at a good pace of 25-30% year on year since FY2009 after it sold its manufacturing plant to Pidilite Industries Ltd. However, since then it has become a purely trading company, whose only job is to import Vinyl Acetate Monomer (VAM) and sell it in India. Out of total sales, it sells about 80% to Pidilite Industries Ltd.

This business activity is very low value adding where a company only buys a product from one place and sells it at another. Such businesses do not command high profitability margins and the same is visible in case of the company as well. As pointed by you, operating profit margins (OPM) have been varying from 0-4% and net profit margins (NPM) have been fluctuating from 1-5% over the years.

The financial data indicates that Vinyl Chemicals (India) Ltd is not able to pass on the increase in cost of VAM to its major buyer Pidilite Industries Ltd, even though it is a group company. In years FY2010 & FY2011, its operating activity (trading of VAM) barely produced any profit. The company could show profits only due to non-operating/other income. Since FY2012, the performance seems to be improving, however, the low value adding business of trading does not provide confidence of any bumper business performance in future.

The company has been paying taxes nearly at the rate of standard corporate tax rate in India, which is a good sign.

 

Operating Efficiency Analysis of Vinyl Chemicals (India) Ltd:

Operating efficiency parameters of Vinyl Chemicals (India) Ltd reflect that it has not been able to improve its efficiency levels over the years. Inventory turnover ratio and receivables days have been showing deteriorating trend over the years. Net fixed assets turnover though at very high levels, does not provide any meaningful information for a trading company, which only has to buy & sell a product.

The company has not been able to convert its profits in to cash flow from operations. PAT for last 10 years (FY2005-14) is INR 28 cr. whereas the CFO over the similar period is negative INR 2 cr. Even if we compare the PAT & CFO since FY2009, when the company became a purely trading company, its PAT is INR 29 cr. (FY2009-14), whereas CFO for the same period is INR 5 cr.

Delayed collections  from Pidilite Industries Ltd, its primary customer,  is getting reflected by increasing receivables days. Effectively, Pidilite Industries Ltd is decreasing its cost of funds (working capital) by delaying payments to the company. Similarly, decreasing inventory turnover ratio also indicates that more funds are now being stuck in inventory.

 

Margin of Safety in the market price of Vinyl Chemicals (India) Ltd:

Vinyl Chemicals (India) Ltd is currently available at a P/E ratio of about 7.5, which offers a margin of safety as described by Benjamin Graham in his book The Intelligent Investor.

Read: 3 Simple Ways to assess the Margin of Safety in a Stock

 

Conclusion:

Overall, Vinyl Chemicals (India) Ltd seems to be a trading company growing at fast pace but unable to maintain its profitability margins due to low bargaining power with its customers. The company has seen its operating efficiency decline over the years, which mainly seems to be due to arrangements with its major customer & group company Pidilite Industries Ltd. The company is currently debt free and has seen its business improving recently. However, the low value adding trading business does not generate a lot of confidence of sustained performance.

These are my views about Vinyl Chemicals (India) Ltd. However, you should do your own analysis before taking any investment related decision about the company.

You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company

Hope it helps!

Regards,

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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