Analysis: Atul Ltd

The current section of the “Analysis” series covers Atul Ltd a leading chemical company in India producing life sciences and performance chemicals. The company owns one of the largest chemical complexes in the world.

“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.

To benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

Atul Ltd Research Report by Reader

Hello Sir,

Based on your inputs and readings on your wonderful website, I have tried to analyze the company Atul Ltd. I would like to share the same with you.

Thanks and Regards

Manish Kumar

About Atul Ltd:

Atul Limited (Atul) was originally promoted by Padma Bhushan Late Shri Kasturbhai Lalbhai in 1947 as Atul Products Ltd. as a step towards backward integration of their cotton textile business and was later renamed as Atul Ltd. in 1996. It has one of the biggest integrated chemical complexes in India with a well-diversified product portfolio of around 900 products and 400 formulations. It has manufacturing facilities located at Ankleshwar and Valsad in Gujarat & Tarapur in Maharashtra, with its main site spread across 1,250 acres. Geographically, its sales are almost evenly distributed between domestic and export. It has marketing offices through its subsidiaries in the USA, UK, Germany, UAE, China, Brazil, etc.

Financial analysis of Atul Ltd:

Company’s sales are continually increasing except an exception over the last few years. I assume we can also safely ignore the 2020 situation as a one-time.

The operating profit margin increased from ~10 % in 2011 to ~20% in 2020 giving an impression that the company can pass the cost to its customer, which I found not entirely true while doing detail analysis.

As per the annual report, many times, the company felt the pressure due to price, which resulted in a decrease in sales in one or another product

Also mentioned in the credit rating reports: Exposure to volatility in raw material prices, which are largely crude oil-based along-with presence in the competitive and cyclical chemical industry.

The company’s products can be classified into two categories: Life Sciences and Performance & Chemicals. Overall Life Science consists of ~ 30 % and POC ~70%. Overall polymers constitute the largest share of approx. 27%.

It also shows the expected growth based on my Annual report reading, This only represents the volume growth and the company going future can achieve more or less based on the Price Increase & margin improvement under each categorization.

While sales of the company increased, its interest expense decreased. It means that the company has reduced the debt, which is a good sign.

Also, SSGR is approx. 25% from the last 5 years, whereas the company’s sales growth is 10-11%. It indicates that the company can continue the growth without raising the debt. This is also indicated in the credit research reports.

Tax is also within the normal range and around 30%

Net profit margin (NPM) has increased from 6 % to 16 % in 2020. It is majorly due to (i) a steady shift in the product mix from commodity-grade to research-oriented speciality chemicals leading to healthy profitability over the years; (ii) also, the company plans to expand its retail market, which results in greater profit margin.

The asset turnover ratio of the company is between 3-4. It is capital-intensive, which indicates high barriers to entry into the industry. It reduced in the last few years due to the capacity increase plans that the company has executed.

Working capital has also decreased over the year.

Atul Ltd is generating free cash flow and I understand that most of it will be used in managing working capital.

Cash Flow/Net Profit for the last 10 years is more than 100%. It means that the company can turn its sales into cash.

Management analysis of Atul Ltd:

SS Lalbhai and SA Lalbhai are the major promoters of the company. The salary is within the Companies Act limits and is about 2.5-3.5 % of the total profits.

• SS Lalbhai (variable pay includes 1% of profit or 60 months’ basic salary whichever is lower)
• SA Lalbhai (variable includes 0.5% of profit or 30 months’ basic salary whichever is lower)
• The ratio of the remuneration of SS Lalbhai to the median remuneration of the employees is 350 times, which I feel is on a higher side.

The company is also achieving its CSR responsibilities.

The company is investing approx.  0.75 – 1% of its total sales in R&D.

A loan taken from the related party is at a high-interest rate compared to the banks.

Also, interest-free and unsecured loans are given to a few of the subsidiaries.

Margin of safety for Atul Ltd:

Currently, the stock is at 30 PE, which I understand is on a higher side considering the current scenario of running bull market.

Dr Vijay Malik’s Response

Dear Manish,

Thanks for sharing the analysis of Atul Ltd with us! We appreciate the time & effort put in by you in the analysis.

While analysing the history of Atul Ltd., an investor notices that throughout the last 10-years (FY2011-2020), the company has had many subsidiaries, joint ventures and associate companies. As per the FY2020 annual report, pages 226-227, the company has 36 such entities in its corporate structure. As a result, throughout the last 10 years (FY2011-2020), Atul Ltd has reported both standalone as well as consolidated financials.

We believe that while analysing any company, an investor should always look at the company as a whole and focus on the financials, which represent the business picture of the entire group. Consolidated financials of any company, whenever they are present, provide such a picture.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Therefore, in the analysis of Atul Ltd, we have used consolidated financials in the assessment.

With this background, let us analyse the financial performance of the company.

Financial and Business Analysis of Atul Ltd:

While analyzing the financials of Atul Ltd, an investor notices that the sales of the company have grown at a pace of about 10%-12% year on year from ₹1,532 cr in FY2011 to ₹4,093 cr in FY2020. During the 12-months ending September 2020 (i.e. October 2019-September 2020), the sales of the company have declined to ₹3,670 cr.

The sharp decline in the sales of the company during the 12-months ending September 2020 seems to be due to the lockdown and the demand recession due to the coronavirus pandemic. Otherwise, the company has witnessed a nearly consistent increase in its sales year after year from FY2011 to FY2020 barring an exception in FY2016.

When an investor analyses the profit margins of Atul Ltd, then she notices that the operating profit margin (OPM) of the company has increased from 10% in FY2011 to 23% in 12-months ending September 2020. The increase in OPM has been consistent year after year except for FY2018 when the OPM declined from 18% in FY2017 to 14% in FY2018.

To understand the reasons behind such a performance of Atul Ltd and to assess whether the company can repeatedly face the decline in its sales as seen in FY2016 and the decline in its profit margins as seen in FY2018, an investor needs to understand the business model of the company. The investor needs to understand what the key factors are influencing its sales, its profits, its margins, the competition etc. so that she may make an insightful judgment about the future performance of Atul Ltd.

The company has two main business segments. The first segment is life science chemicals, which contains crop protection chemicals, pharmaceuticals and some aromatic chemicals. The second segment is performance and other chemicals, which contains aromatics, bulk chemicals, colours, and polymers. Apart from these major segments focused around chemicals, the company has a small division focusing on date production via tissue culture. Nevertheless, the business of date-production is very small and practical considerations; an investor may assume Atul Ltd to be a chemicals company.

While reading about Atul Ltd, an investor notices that its business has the following key characteristics. The business involves converting basic chemicals, which are primarily crude oil derivatives into advanced products. Therefore, the cost of key raw materials of the company is dependent on crude oil prices.

The credit rating agency, CARE, in its report for Atul Ltd in Oct. 2017 highlighted it.

The above rating strengths are, however, partially tempered by its exposure to raw material price volatility (which are linked to international crude oil prices)

Dealing in products depending on crude oil as well as the operations in the chemical industry, in general, expose the business of Atul Ltd to cyclical factors of demand and production.

The credit rating agency, CARE, highlighted the exposure of Atul Ltd to cyclical factors of the chemicals industry in its Oct. 2017 report.

presence in the cyclical chemical industry along with susceptibility of its profitability to competition from China for some of its products

Atul Ltd has also indicated to the shareholders the cyclical nature of the demand for its business divisions.

FY2020 annual report, page 53:

The demand and price of bulk chemicals are cyclical in nature.

Therefore, an investor would appreciate that the business model of Atul Ltd is exposed to challenges of the volatility of crude oil prices and the cyclicity of the chemicals industry. Let us see some instances where Atul Ltd has intimated the shareholders about the challenges it faces due to these factors.

In FY2012 annual report, Atul Ltd described that the prices for the raw materials for its divisions like colours fluctuate rapidly whereas its customers expect it to keep its prices steady. As a result, its profit margins get impacted.

FY2012 annual report, page 31:

The prices of key raw materials, which are derived from crude oil fluctuate almost monthly whereas the customers in the user industries expect the prices of the finished products to remain firm for a quarter or even more; on such occasions, it is possible to get affected adversely.

At times, Atul Ltd is stuck in a situation where its cost of raw material increases but it is not able to pass on the same to its customers as a result; it has to take a hit on its profit margins. Atul Ltd faced such a situation in FY2018 when its operating profit margin (OPM) declined sharply to 14% from 18% in FY2017.

In the FY2018 annual report, the company told its shareholders that for some divisions, it could not pass on the increased cost of raw materials to its customers and as a result, its profit margins declined.

FY2018 annual report, page 48:

Higher raw material prices, which can not be passed on to customers, impacted profitability.

The credit rating agency, CARE in Oct. 2017, also highlighted the deteriorating impact of increasing raw material costs on the profitability of Atul Ltd as it could not increase prices of its products due to intense competition and it faced pricing pressures.

PBILDT margins continued to remain healthy at 18.29% during FY17. However, it moderated to 12.32% during Q1FY18 as compared to 19.18% during Q1FY17 on account of increase in the prices of key raw material and foreign exchange rate fluctuations on one hand with simultaneous pricing pressure on its finished goods on the other hand owing to competitive pressures

September 2018, credit rating report by CARE:

However, PBIT margins of both the segment witnessed some moderation on the back of exchange rate fluctuations and increase in raw material prices, which has led to decline in, overall PBILDT margins of the company from 18% during FY17 to 16% during FY18.

An investor would notice that Atul Ltd faces competitive pressures, especially from China.

September 2018, credit rating report by CARE:

dependence on China for key intermediates as well as competition from it for some of its finished products.

Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

Due to competitive forces, when raw material prices go down, then Atul Ltd has to pass it on to its customers. As a result, during the periods in the past when crude oil prices declined sharply, then Atul Ltd had to reduce the prices of its products. The reduction in the product prices was such that despite an increase in the quantity or volume of products sold, the overall sales of Atul Ltd in value (INR) declined.

While looking at the history of crude oil prices in the following chart from Macrotrends, an investor would notice that during 2015-2016, crude oil prices declined sharply.

The competitive pressures in the business ensure that during this period, Atul Ltd had to pass on the benefits of lower raw material costs to its customers and the sales of the company declined in FY2016 by about 4% from FY2015. The decline in sales of 4% was despite an increase in sales volume by 3% because Atul Ltd had to give a price reduction of 7% to its customers.

FY2018 annual report, page 21:

Sales decreased by 4% from ₹ 2,510 cr to ₹ 2,407 cr mainly due to lower prices (7%) partly offset by higher volumes (3%).

The company faced a similar situation in FY2010 as well when it had to reduce prices to its customers.

FY2010 annual report, page 15:

Sales volume on an average grew by 18%. However, operating revenues at Rs 1,198 crores recorded only an insignificant growth of less than 1% mainly due to a decline in the prices of raw materials and consequently those of finished goods.

FY2010 annual report, page 28:

In value, sales came down mainly on account of price reduction that followed the reduction in the prices of the raw materials.

Therefore, from the above discussion, an investor would notice that the business model of Atul Ltd is exposed to the following factors:

• Cyclicity of demand and prices of the chemical industry
• Highly fluctuating raw material prices, which are linked to crude oil prices
• High competition especially from China, which ensures that when raw material prices go up, then the customers expect it to hold on its prices whereas when raw material prices go down, the Atul Ltd has to reduce prices of its products

Further advised reading: How to do Business Analysis of Chemical Companies

Most of the time, when companies are exposed to these factors of fluctuating raw material prices combined with high competition and cyclicity in the industry, then the investor would notice that those companies tend to have highly fluctuating profit margins. Usually, such companies tend to have periods of increasing profit margins followed by periods of decreasing profit margins and vice-versa.

However, in the case of Atul Ltd, an investor notices that despite the exposure to these factors, the company has witnessed a steady improvement in its profit margins over the last 10 years. The OPM of the company increased from 10% in FY2011 to 23% in the 12-months ending September 2020 (i.e. Oct. 2019-Sept 2020). Such a performance is in contrast to the normal expectations of any company operating in the cyclical chemical industry exposed to high competition and fluctuating raw material prices.

To understand the reasons behind the improving profit margins of Atul Ltd, an investor needs to read its annual reports as well as its credit rating reports in detail.

The credit rating agency, CARE, in its report dated August 24, 2020, for Atul Ltd highlighted that over the years, the company has shifted its production from commodity-grade chemicals to research-oriented speciality-grade chemicals, which have higher profitability.

Steady shift in product-mix from commodity grade to research oriented specialty chemicals leading to healthy profitability over the years:

Atul was earlier one of the largest dyestuff manufacturing companies in India; however, through its strong R&D initiatives, JV with multinational companies and acquisitions, Atul has expanded its product portfolio significantly over last few years in the areas of aromatics, crop protection, polymers and pharma intermediates, which are speciality chemicals as compared to conventional dyestuff products. This shift in product mix has led to better profitability, which has also shown greater degree of resilience compared to the scenario of around a decade back.

The credit rating agency, CARE highlighted that over the last decade, Atul Ltd has changed itself from a commodity-grade dyestuff manufacturing company to a research-oriented speciality-grade chemical manufacturing company producing aromatics, crop protection, polymers and pharmaceutical products. These speciality-grade chemicals have a higher profit margin. Therefore, with the increasing share of speciality chemicals in its revenue, the profit margins of Atul Ltd have increased consistently over the last 10 years.

In FY2015, Atul Ltd received its first USFDA approval for the production of Dapsone, an antibiotic used in the treatment of Leprosy and skin infections. (Source: Business Standard). As per the company website, now, it is one of the largest manufacturers of Dapsone in the world.

While analysing the operating profit margin (OPM) and the cost structure of Atul Ltd over FY2011 to FY2020, an investor notices that the key factor leading to the improvement of 12% in the OPM from 10% in FY2011 to 22% in FY2020, is the decline in the percentage of raw material costs as a percentage of sales. An investor notices that the raw material costs as a percentage of sales for Atul Ltd declined by 11% from 59% of sales in FY2011 to 48% of sales in FY2020.

As a result, an investor would appreciate that due to the increased contribution of research-oriented speciality chemicals in the sales as well as backward integration, Atul Ltd could charge a price to its customers where it could improve its profit margins.

A shift to the speciality chemicals and the large market share of some of its products has helped Atul Ltd to pass on the increase in the cost of its raw material to its customers. As a result, the company has been able to protect itself from declining profit margins over the years.

Credit rating report, CARE, August 24, 2020, page 2:

For few products, where Atul has large market share, the increase in raw material price can be largely passed onto its customers although with some time lag. However, Atul’s profitability is susceptible to fluctuation in international crude oil prices on many of its product segments; although, over a period of time, with greater product diversification, Atul has demonstrated relatively good resilience against crude oil price fluctuations.

From the above discussion, an investor would notice that even though Atul Ltd is exposed to challenges of the cyclical chemicals industry with intense competition and fluctuating crude oil prices. Still, it has managed to show consistent increasing profit margins over the last 10 years. This is primarily due to a shift in production from commodity-grade dyestuff to research-based speciality-chemicals and a large market share for some of its products. As a result, the company could protect its profit margins from falling.

Nevertheless, from the disclosure in the CARE report above, an investor would notice that for many products, Atul Ltd is still exposed to fluctuations in crude oil prices.

Therefore, going ahead, an investor should keep a close watch on the profit margins of Atul Ltd. This is because, until now, the company has protected itself from deteriorating profit margins over the last 10-years. However, going ahead, the cyclicity of the chemical industry, intense competition and fluctuating crude oil prices may overpower its business strengths and result in the cyclical performance of its business in line with other chemical manufacturers.

In case, in future, an investor notices that the profit margins of Atul Ltd have started to move in a cyclical pattern with periods of high-profit margin followed by periods of low-profit margins, then an investor should reassess whether the company stills maintains its competitive advantages.

Advised reading: How to do Business Analysis of a Company

While looking at the tax payout ratio of Atul Ltd., an investor notices that in most of the last 10 years (FY2011-2020), the tax payout ratio of the company has been in line with the standard corporate tax rate prevalent in India. Only on a few occasions, the tax payout ratio of the company has been lower than the standard corporate tax rate.

For example, in FY2017, the tax payout ratio of Atul Ltd was lower than the standard corporate tax rate. When an investor analyses the “reconciliation of effective tax rate” section in the FY2017 annual report, page 191, then she notices that the lower tax payout ratio is primarily due to (i) income exempt from income tax and (ii) income tax incentives.

FY2017 annual report, page 191:

Statutory income tax rate 34.61%

Differences due to:

• i) Expenses not deductible for tax purposes 0.76%
• ii) Income exempt from income tax (2.33%)
• iii) Income tax incentives (3.37%)
• iv) Others (0.04%)

Effective income tax rate 29.63%

In FY2020, the lower tax payout ratio was primarily on account of deferred taxes.

FY2020 annual report, page 203:

Statutory income tax rate 25.17%

b) Differences due to:

• i) Non-deductible expenses 0.19%
• ii) Exempt income (0.86%)
• iii) Income tax incentives (0.03%)
• iv) Effect of deferred tax expense (3.92%)
• v) Others 0.09%

Effective income tax rate 20.64%

Therefore, an investor would notice that over the last 10-years (FY2011-2020), Atul Ltd has paid taxes in line with the standard corporate tax rate prevalent in India. On a few occasions when its tax payout ratio was lower, then it was due to the income tax incentives and the deferred taxes.

Further advised reading: How to do Financial Analysis of a Company

Operating Efficiency Analysis of Atul Ltd:

a) Net fixed asset turnover (NFAT) of Atul Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Atul Ltd in the past years (FY2011-20), then she notices that the NFAT of the company has declined from 4.3 in FY2012 to 3.7 in FY2020. The NFAT has reached a high of 4.9 in FY2015; however, it has declined since then.

A declining NFAT indicates that the company is not able to maintain the efficiency of utilization of its assets.

While analysing the reasons for such a decline in the net fixed asset turnover ratio for Atul Ltd, when an investor reads the various public disclosures by the company, then she notices that the incremental manufacturing projects undertaken by the company are the ones that have a lower asset turnover.

For example, in the presentation of the company in its August 2015 AGM, at slide no. 12, Atul Ltd disclosed that for the investment of ₹354 cr done by the company in its completed as well as under-completion projects, it expects sales of about ₹700 cr at full capacity. It amounts to an asset turnover ratio of 2.

Similarly, in the July 2019 AGM presentation, at slide no. 8 (mentioned as 5|15); the company disclosed that for its investment of ₹400 cr in its projects, at 100% capacity utilization, it expects sales of ₹850 cr. This amounts to an asset turnover ratio of 2.1.

Therefore, from the above disclosures, an investor would appreciate that in recent years, the manufacturing projects undertaken by the company have the potential of a lower asset turnover ratio of about 2 at full utilization. The investor would understand that creation of new projects of lower turnover ratio would bring down the overall asset turnover ratio.

In addition, the projects constructed by Atul Ltd took longer than the expected time to reach their full potential. This delay put further pressure on the asset turnover ratio of the company.

The credit rating agency, CARE, highlighted this delay in optimal utilization of manufacturing projects by Atul Ltd in its report in September 2018, page 2.

Atul has incurred capital expenditure of around Rs.800 crore during FY15-FY18; returns from which are not yet fully realised as reflected in decline in ROCE during this period.

As a result, the investor would appreciate that the higher asset turnover ratio enjoyed by the company in FY2012 (4.3) or FY2015 (4.9) came down to 3.7 in FY2020.

Another reason for a low asset turnover on the capital expenditure can be that a significant amount of money has been spent to replace the old existing plants. As such, investment in the replacement of an old plant would not increase sales to the extent investment in a new-additional plant would generate.

In the FY2009 annual report, Atul Ltd had intimated its shareholders that the plants of its bulk chemicals division are old and require upgradation with a significant investment.

FY2009 annual report, page 20:

Its plants are old with small capacities and will require upgradation and expansion involving a sizable investment.

Going ahead, an investor should keep a close watch on the asset turnover ratio of the company. This is because investing money in such assets, which are not able to generate sufficient sales and profits, can lead to an increasing debt burden on the company that may increase the risks for the company.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio of Atul Ltd:

While analysing the efficiency of inventory utilization by Atul Ltd, an investor notices that the inventory turnover ratio (ITR) of the company has shown a consistent increase from 5.8 in FY2012 to 8.1 in FY2020. An increase in the inventory turnover ratio highlights that the company has become more efficient in running its operations.

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of Atul Ltd:

While analysing the receivables position of the company, an investor notices that the receivables days of Atul Ltd have consistently been in the range of 62-65 days.

A consistent trend of receivables days indicates that the company has been consistent in its policies of giving credit periods to its customers. A stable receivables days’ situation indicates that the company has been able to keep its working capital position under control.

Further advised reading: Receivable Days: A Complete Guide

When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Atul Ltd for FY2011-20 then she notices that the company has collected all the profits as cash flow from operating activities.

Over FY2011-20, Atul Ltd reported a total cumulative net profit after tax (cPAT) of ₹2,733 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹3,226 cr.

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than the PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Learning from the article on CFO will indicate to an investor that the cCFO of Atul Ltd is higher than the cPAT due to the following factors:

• Depreciation expense of ₹774 cr (a non-cash expense) over FY2011-FY2020, which is deducted while calculating PAT but is added back while calculating CFO.
• Interest expense of ₹244 cr (a non-operating expense) over FY2011-FY2020, which is deducted while calculating PAT but is added back while calculating CFO.
• One factor that had the impact of lowering the CFO than PAT was the other/non-operating income of ₹382 cr over FY2011-2020, which is included in the PAT; however, is deducted while calculating CFO.

Overall, the above factors led to a CFO, which is more than the PAT of the company by about ₹500 cr.

The Margin of Safety in the Business of Atul Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

An investor may calculate the SSGR using the following formula:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

• SSGR = Self Sustainable Growth Rate in %
• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

While analysing the SSGR of Atul Ltd, an investor would notice that the company has consistently had an SSGR of 20-20% over the years, which is higher than the sales growth of 10-12% achieved by the company over the years.

Therefore, an investor would appreciate that Atul Ltd has been growing at a rate lower than what its business profits can sustain. As a result, over the last 10-years (FY2011-2020), the company has been able to grow its sales from ₹1,532 cr in FY2011 to ₹4,093 cr in FY2020 and at the same time, it has reduced its debt from 327 cr in FY2011 to ₹108 cr in FY2020. In addition, the company did not raise any money from equity dilution over this period.

An investor gets similar observations about the business model of Atul Ltd when analysing its free cash flow position.

b) Free Cash Flow (FCF) Analysis of Atul Ltd:

While looking at the cash flow performance of Atul Ltd, an investor notices that during FY2011-2020, it generated cash flow from operations of ₹3,226 cr. However, during the same period, it did a capital expenditure of about ₹1,787 cr.

Therefore, during this period (FY2011-2020), Atul Ltd had a free cash flow (FCF) of ₹1,439 cr (=3,226 – 1,787).

In addition, during this period, the company had a non-operating income of ₹382 cr and an interest expense of ₹244 cr. As a result, the company had a net free cash flow of ₹1,577 cr (= 1,439 + 382 – 244). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.

Atul Ltd used this free cash flow generated in the last 10-years (FY2011-2020) in the following manner:

• ₹219 cr reduction of debt from ₹327 cr in FY2011 to ₹108 cr in FY2020
• ₹309 cr payment of dividend excluding dividend distribution tax over FY2011-2020 and
• ₹1,066 cr increase in cash & investments from ₹107 cr in FY2011 to ₹1,173 cr in FY2020.

Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Additional aspects of Atul Ltd:

On analysing Atul Ltd and after reading its publicly available past annual reports since FY2009 and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Management Succession of Atul Ltd:

The company is a part of the Lalbhai group of companies having well-known companies like Arvind Mills.

Currently, two members of the promoter family, Mr. Sunil Lalbhai (age 60 years) and Mr. Samveg Lalbhai (age 59 years) are managing the company as Chairman & Managing Director and Managing Director respectively. Apart from them, any other member of the Lalbhai family does not seem to be a part of the board of directors.

However, while reading the annual reports of the company, in the section on the related party transactions, an investor notices that since FY2016, Atul Ltd is paying remunerations to three other members of the Lalbhai family. They are:

1. Astha S Lalbhai (Daughter of Mr Sunil Lalbhai)
2. Nishtha S Lalbhai (Daughter of Mr Sunil Lalbhai)
3. Saumya S Lalbhai (Son of Samveg Lalbhai)

It might be a case that the son and daughters of the promoter have joined the company; however, they are currently working at junior positions in the company. An investor may contact the company directly to understand the exact role they are playing in the management of the company.

An investor would appreciate that the presence of the next generation of the promoter-family members in the company when the elders are still playing an active role in the company seems a good succession plan. This is because such an arrangement allows time for the next generation to learn under the guidance of elders before the transition of leaders takes place.

Further advised reading: How to do Management Analysis of Companies?

2) Project execution by Atul Ltd:

While reading the annual reports of the company, an investor notices that over the years, Atul Ltd has undertaken many expansion projects. Over FY2011-2020, it did a total capital expenditure of ₹1,787 cr where almost every year, the company kept on initiating and completing projects in one division or the other.

A regular expansion of manufacturing capacity indicates good project execution by any company.

Nevertheless, one project where Atul Ltd has witnessed significant delays is its joint venture project with Akzo Nobel (now Nouryon) in the 50:50 JV company named Anaven to manufacture Monochloroacetic acid (MCA).

The project was originally envisaged in FY2017 and was initially expected to be completed in December 2018.

Credit rating report by CARE in Oct. 2017, page 2:

The project is expected to be completed by December 2018 at an envisaged cost of Rs.200 crore to be funded in project D/E ratio of 1:1

However, in the FY2019 annual report, the company intimated to its shareholders that the project is running behind schedule. FY2019 annual report, page 20:

Anaven, JV with Nouryon, is expected to start production in early 2020-21 — the project is running behind schedule.

Early 2020-21 meant that the company expected to complete the project by September 2020. However, as per the latest available information, on October 21, 2020, in a corporate announcement by Atul Ltd to Bombay Stock Exchange (BSE), the company intimated that the project has received environment clearance; however, the project would complete by the end of the year.

Atul, Gujarat, October 21, 2020: Anaven, a joint venture of Nouryon and Atul, has received the environmental clearance for its 32,000 metric tons monochloroacetic acid (MCA) plant in Gujarat, India. Construction is due to be completed this year to supply MCA to the Indian market by the end of the year.

Therefore, an investor would note that the JV project to manufacture MCA is one of those instances where Atul Ltd could not complete the project on time. However, while reading the annual reports of the company, year after year, an investor comes across multiple instances where the projects were completed by the company in its various division.

Going ahead, an investor should keep a close watch on the completion of the Anaven JV project as well as many other projects that Atul Ltd intends to start as a part of its ₹550 cr per year capital expenditure program for the next three years.

Credit rating report by CARE, August 24, 2020, page 3:

Atul, on a consolidated basis, has envisaged to incur large size capex of around Rs.550 crore per annum during each of the next three years-ended FY23

Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

3) Related party transactions of Atul Ltd:

In business groups that have many subsidiaries, JVs and associate companies, the transactions between one group entity and another are also classified as related party transactions. However, these transactions between such entities may be normal transactions like one company buying raw material from another group entity and then processing it to make a product.

While discussing related party transactions, we focus primarily on the transactions that the listed company & its entities do with the promoters and other promoter-owned entities. This is because the transactions of the listed company with its promoters have the potential of shifting the economic benefits from the company/public shareholders to the promoters.

Therefore, in the case of related-party transactions of Atul Ltd, we have focused on the transactions of the company with the entities where its promoters are involved.

i) Taking loans or deposits from promoters:

While analysing the financial position of Atul Ltd, an investor notices that almost throughout the last 10-years, the company has generated surplus cash and as a result, it has reduced its debt.

However, in such a situation when the company is repaying its lenders, it comes as a surprise to the investor that the company has been taking loans or deposits from its promoters and promoter-owned entities.

In FY2010, the promoters Sunil Lalbhai along with his mother, Dr Vimlaben S Lalbhai, sister, Ms Swati S Lalbhai and daughter, Ms Nishtha S Lalbhai gave deposits for a total amount of ₹ 86 lac to Atul Ltd (FY2010 annual report, page 124). In FY2010, the total debt of the company had declined from ₹369.51 cr in FY2009 to ₹295.08 cr in FY2010 (FY2010 annual report, page 105). A reduction in the total debt by the company indicates that in FY2010, Atul Ltd was cash surplus and probably did not need deposits.

In FY2014, Atul Ltd took loans of ₹10 cr from three promoter owned entities Aavishkar Finance and Trade Pvt Ltd (₹5 cr), Par Investments Ltd (₹2.50 cr) and Rewant Investments Pvt Ltd (₹2.50 cr) (FY2014 annual report, page 130). In FY2014, the total debt of the company had declined from ₹370 cr in FY2013 to ₹367 cr in FY2014.

In FY2015, Atul Ltd took loans of ₹10 cr from Aagam Holdings Pvt Ltd (FY2015 annual report, page 148). In FY2015, the total debt of the company had declined from ₹367 cr in FY2014 to ₹299 cr in FY2015.

In FY2018, Atul Ltd took loans of ₹11.2 cr from Aagam Holdings Pvt Ltd (FY2018 annual report, page 186). In FY2018, the total debt of the company had declined from ₹168 cr in FY2017 to ₹16 cr in FY2018.

In FY2018, the company disclosed in its annual report that it has become debt-free. FY2018 annual report, page 8:

Our Company repaid its entire debt – it became debt-free, for the first time since 1950.

However, despite being a cash surplus company that has reduced its debt consistently year after year, an investor is surprised when she notices that the company has regularly raised deposits or taken loans from promoters and promoter-owned entities.

Even in FY2019, Atul Ltd took a loan of ₹5 cr from Aagam Holdings Pvt Ltd (FY2019 annual report, page 218). In FY2019, the company had cash & investments of ₹807 cr. In such a cash surplus situation, an investor is surprised that the company is taking loans from promoter-owned entities.

While calculating the interest paid by the company to promoters on their deposits an investor notices that it is about 10% per year in FY2011 as well as in FY2012. As per the FY2011 annual report, page 82 and FY2012 annual report, page 124, Atul Ltd paid an interest of ₹4 lac to Mr Sunil Lalbhai for his deposit of ₹40 lac.

Paying an interest rate of 10% to the promoters looks high when an investor notices that in FY2012, Atul Ltd was paying an interest rate of about 6.99% to 7.46% to financial institutions for loans.

FY2012 annual report, page 71:

Rupee term loan from a financial institution amounting to ₹ 62.50 cr (Previous year: ₹ 72.91 cr)…

• Repayable in 15 equal half yearly installments beginning from January 14, 2011 along with interest ranging from 6.99% p.a. to 7.46% p.a.

Going ahead, an investor should keep a close watch on the transactions of Atul Ltd involving deposits and loans from promoters or promoter-owned entities. This is because, if Atul Ltd pays a higher rate of interest to the promoters than what it can get from other lenders, then it may be similar to shifting economic benefits from the company to the promoters at the cost of public shareholders.

Further advised reading: How Promoters benefit themselves using Related Party Transactions

ii) Sale of stake in Amal Ltd to promoter-owned entities:

As per the corporate announcement done by Atul Ltd to stock exchanges on March 16, 2020, Atul Ltd sold 3% stake in Amal Ltd to two promoter-owned entities, Aagam Holdings Private Limited and Aayojan Resources Private Limited. As per the disclosure:

Aagam Holdings Private Limited and Aayojan Resources Private Limited are promoters of Atul Limited and Amal Limited.

As per the disclosure, after this sale, the stake of Atul Ltd in Amal Ltd declined from 52.86% to 49.86% and the status of Amal Ltd changed from a subsidiary to an associate company of Atul Ltd.

When an investor looks at the history of Amal Ltd, then she notices that the company had been facing financial problems for a very long time. It was making continuous losses and therefore, it was declared a sick company in 2006. In 2009, a revival plan was sanctioned for the company.

FY2017 annual report, page 211:

Amal Ltd was declared sick by the Board for Industrial and Financial Reconstruction (BIFR) on July 20, 2006 and the BIFR, vide its order dated July 16, 2009, sanctioned the revival scheme for Amal Ltd.

Over the years, Atul Ltd infused additional money in Amal Ltd as per the instructions of the Board of Industrial and Financial Reconstruction (BIFR).

In FY2009, Atul Ltd invested ₹21.29 cr in Amal Ltd as per BIFR order.

FY2009 annual report, page 80:

Included under loan & advances is an amount of Rs2,128.89 lacs given to an associate company. The said Company is registered under BIFR in the process of implementing its revival plan.

In FY2011, Atul Ltd invested an additional ₹3.29 cr in Amal Ltd.

FY2011 annual report, page 89:

The said company is registered under BIFR and is implementing its revival plan. First charge over all their assets has been assigned exclusively in favour of the Company. The Company has also given an unsecured loan of ₹ 3.59 crores (Previous year ₹ Nil) as Promoters contribution.

In FY2015, the company had to make these loans interest free as per the order of BIFR.

FY2015 annual report, page 147:

Interest free pursuant to Board for Industrial and Financial Reconstruction Order.

Therefore, an investor would notice that the shareholders of Atul Ltd have supported Amal Ltd during its tough phases by investing additional money in it in the form of interest-free loans and equity contributions.

Finally, in FY2020, it looked like the efforts of the last many years are bearing fruits when the chairman of Atul Ltd intimated to its shareholders in the July 2020 AGM that Amal Ltd would clear its accumulated losses soon. In addition, Amal Ltd is evaluating new projects to grow its business.

Chairman’s speech, AGM, July 31, 2020:

Amal, (formerly Piramal Rasayan) in which our Company holds 50% of the equity share capital, has brought down its carried forward loss from 56 cr to 9 cr by consistent improvement and is looking forward  to wiping out the remaining carried forward loss soon. The company is now evaluating a new project to reasonably grow its business.

In FY2020, when the business of Amal Ltd is reviving, Amal Ltd sold a 3% stake in the company to its promoters for ₹2.97 cr.  An investor may note that in FY2020, Atul Ltd had a cash & investment surplus of ₹1,173 cr. Therefore, in all probability, Atul Ltd is not in a financial-distressed situation where it needs to sell a stake in a subsidiary whose business is reviving.

Therefore, Amal Ltd looks like a case where the company faced a troubled time, required additional investments and after a long wait, the company’s business started reviving. When there were signs of revival in the business of Amal Ltd, then the promoters decided to increase their stake in Amal Ltd by purchasing its shares from Atul Ltd.

Going ahead, an investor may keep a close watch on the transaction of Atul Ltd with its promoters or promoter-owned entities. This is because the transactions between the public-listed company and its promoters have the potential of shifting economic benefits from the public shareholders to the promoters.

Further advised reading: How Promoters benefit themselves using Related Party Transactions

4) Continued poor performance of the colors division of Atul Ltd

While reading the annual reports of the company, an investor notices that the colours division of the company has performed poorly even when the overall performance of Atul Ltd has improved.

In the FY2010 annual report, page 27, an investor gets to know that the colours division has been making losses for the last many years and the losses are continuing.

It has consistently brought down its loss over the last three years.

In FY2012, when the sales of Atul Ltd grew by about 16%, the colors division saw a decline in the sales volume indicating that the business of colors division was shrinking. FY2012 annual report, page

Degrowth on account of volume was 5%.

In FY2013, when the sales of Atul Ltd grew by about 14%, the sales of the colors division declined by 4%. FY2013 annual report, page 29:

During the year, sales decreased by 4% to ₹ 330 cr.

In FY2016, when the overall sales volume of Atul Ltd increased by 3%, the colors division saw its sales volume declined by 18%.

Degrowth on account of volume was 18%.

In FY2017, the chairman of the company accepted that Atul Ltd continues to perform poorly in colors division. FY2017 annual report, page 8:

We are not happy with our performance in 2016-17 as our potential is much higher – we continued to perform poorly in Colors;

Therefore, it looks like the colors division is a continuous drag on the overall performance of Atul Ltd. An investor may do a deeper analysis of the performance of the colors division to understand whether any additional investment in the colors division is throwing good money after bad money.

Further advised reading: How to Identify if Management is Misallocating Capital

5) Product concentration risk in the crop protection division of Atul Ltd:

While analysing the performance of the crop protection division of the company, an investor notices that it faces a product concentration risk where the performance of a single product can affect the performance of the overall division.

In FY2015, the sales of the division declined by 21% when the demand for one herbicide declined. FY2015 annual report, page 47:

During 2014-15, sales decreased by 21% from ₹ 433 cr to ₹ 342 cr…..Decline on account of volume was 20%. Sales decreased mainly because of lack of demand for one of the key herbicides.

The product concentration became evident once again in FY2019 when the sales value of the division increased despite a decline in its sales volume. The increase in sales despite a decline in sales volume was due to the higher price realization of one of the herbicides.

FY2019 annual report, page 56:

During 2018-19, sales increased by 16% from ₹ 651 cr to ₹ 754 cr….Decrease on account of volume was 9%. Sales increased mainly because of good demand and higher price realisation for one of the key herbicides.

The investor again realized the product concentration risk in the crop protection division of Atul Ltd when she gets to know the draft notification by Govt. banning 27 insecticides. The list includes 2,4-D, a herbicide produced by Atul Ltd. It constitutes about 50% of the sales of the crop protection division.

Credit rating report by CARE, August 24, 2020, page 3:

Uncertainty associated with probable ban on sale of few insecticides in India: Through the draft gazette notification issued by ‘The Ministry of Agriculture and Farmers ‘Welfare’ on May 14, 2020 the GoI proposed placing of 27 insecticides into banned category. From the list of these 27 insecticides, Atul is into manufacturing and sales of 2,4 D herbicide which comprises of around 50% of total sales of its crop protection segment i.e., around Rs.350 crore….sales of 2,4 D constitutes less than 10% of Atul’s total sales; and moreover, around 70-80% of 2,4 D sales of Atul is towards the export market wherein as per latest updates the exports of these insecticides shall be allowed on case to case basis.

This incidence exposes the regulatory risk as well as product concentration risk of the crop protection division of Atul Ltd. The company has stated that the impact of the proposed ban would be limited as most of its production of 2,4-D is exported, which would be allowed.

Going ahead, an investor should keep a close watch on the final decision about the banning of 2,4-D as well as the strategic decision of Atul Ltd if it can reduce the product concentration risk in its crop protection division.

Advised reading: How to do Business Analysis of a Company

6) Polluting nature of products of Atul Ltd/environmental regulations risk:

The business of production of chemicals seems to be polluting in nature. Environment protection regulators seem to be very serious about breaches conducted by companies in this regard. An investor gets to know the seriousness of this aspect while reading the FY2013 annual report of Atul Ltd.

In FY2013, the company intimated to its shareholders that it was ordered by the Gujarat Pollution Control Board to close its Valsad plant as some of the pipelines of the plant were creating a lot of pollution.

FY2013 annual report, page 23:

In September 2012, the Company was directed by Gujarat Pollution Control Board to close down manufacturing at its Valsad Complex and take measures to dismantle the old pipelines used for carrying liquid effluents; accordingly, manufacturing activity at the complex remained closed for most of October 2012 with its consequential decrease in sales and profit in the second half of the year.

Because of this shutdown, the company had to spend a lot of money on improving its environmental compliances as well as other steps to reduce the pollution from its manufacturing activities.

In FY2013, the company spent ₹71 cr on projects to reduce pollution. FY2013 annual report, page 23:

Moreover, the Company undertook 25 projects to further enhance its performance in the area of environment protection with an investment of 71 cr.

In the next year, FY2014, the company spent another ₹47 cr on environment protection related projects. FY2014 annual report, page 19:

14 projects with an investment outlay of ₹ 47 cr to enhance environment performance

Again, in FY2016, the company had to invest another ₹27 cr on environmental protection related projects. FY2016 annual report, page 8:

During 2015-16, our Company completed 5 expansion projects with an investment of ₹213 cr and invested ₹27 cr in the areas of environment and safety

Advised reading: Understanding the Annual Report of a Company

The investor would appreciate the impact of environment-protection costs on any chemical manufacturer when she recollects the sharp reduction in chemical production in China in 2014-2016 when the govt. there implemented strict environment control norms. Because of strict environmental regulation by the Chinese govt., the competition around the world in the chemicals sector from exports of China declined significantly. This was because the cost of meeting the strict environmental norm of China made many chemical manufacturers cost-inefficient and they could not compete in the international market.

Moreover, investors would remember the incidence of Sterlite Copper Ltd.’s plant in Thoothukudi (Tuticorin), Tamil Nadu, which was closed by the govt. in May 2018 due to pollution-related concerns. This plant was functioning at the location since the early 1990s.

Source: Tuticorin protest: Tamil Nadu government orders permanent closure of Sterlite plant

Therefore, an investor would appreciate that in her due diligence she should not underestimate the analysis of environmental pollution related aspects of the business of any company. This is because any non-compliance on this aspect can close down the business overnight.

Going ahead, an investor should closely monitor the developments around the environmental compliance of the company.

7) Date palm business of Atul Ltd has a very long gestation period:

While analysing the business of the company, an investor notices that Atul Ltd has a segment of date palm production where it produces tissue-culture-raised date palms.

The company started this venture in FY2010, in collaboration with Govt. of Rajasthan. FY2010 annual report, page 10:

Atul Rajasthan Date Palms Ltd, a subsidiary joint venture company with 74% shareholding by our Company and 26% by the Government of Rajasthan, will commission the largest facility in India to produce tissue cultured date palms.

The facility to produce tissue-cultured date palms was commissioned in FY2012.

FY2012 annual report, page 12:

Commissioned tissue culture facility of Atul Rajasthan Date Palms.

After 3 more years, in FY2015, Atul Ltd intimated to its shareholders that Atul Rajasthan Date Palms Ltd would start sales only in FY2016.

FY2015 annual report, page 8:

Atul Rajasthan Date Palms will commence sales only during 2015-16.

In FY2020, after more than 10-years of the initial idea (FY2010) and more than 8 years since the start of the tissue culture facility (FY2012), Atul Rajasthan Date Palms Ltd reported a sale of ₹1.82 cr and a net profit after tax of ₹0.1 cr. The net profit after tax of ₹10 lac (₹0.1 cr) from this business in FY2020 represents a return of 0.46% on the assets of ₹21.7 cr of Atul Rajasthan Date Palms Ltd (FY2020 annual report, page 227).

Therefore, an investor would appreciate that the business of date palms has a very long gestation period. Even after waiting for more than a decade, the shareholders are able to get a net profit margin of only about 5.3% (= 0.1 / 1.86) and a return on assets of 0.46%. Therefore, it is not a case where a wait over a long gestation period is able to produce supernormal returns for the shareholders.

Going ahead, an investor may monitor the developments related to the date palm business closely and check if the company deploys a significant amount of funds in this business.

Advised reading: How to do Business Analysis of a Company

8) Pledge of promoters’ stake in Atul Ltd:

While analysing the shareholding details of Atul Ltd, an investor notices that at Dec 31, 2020, about 1.50% shares of the promoters (200,000 shares) were pledged with lenders.

The value of these shares at the closing price of ₹6,429.40 on December 31, 2020, on BSE is about ₹128 crores. Usually, lenders provide a loan of about 50% of the value of the shares (e.g. HDFC); therefore, it might be a situation where the promoters of Atul Ltd have raised about ₹64 cr against the value of the 200,000 shares.

An investor may note that the pledge of shares by promoters of Atul Ltd is continued for a long time. At times, the percentage of pledged shares exceeded 60%.

• At March 31, 2020, 1.686% stake of promoters’ shares was pledged and at March 31, 2019, 2.529% was pledged (FY2020 annual report, page 40).
• At March 31, 2018, 5.495% stake of promoters’ shares was pledged and at March 31, 2017, 4.316% was pledged (FY2018 annual report, page 35).
• At March 31, 2016, 47.944% stake of promoters’ shares was pledged and at March 31, 2015, 67.175% was pledged (FY2016 annual report, page 38).

Therefore, an investor would notice that the promoters of Atul Ltd continuously raise money from lenders by pledging their shares. An investor should be cautious while analysing the pledge of shares by promoters and increase her due diligence.

An investor may contact the company directly to get clarifications about the exact reason for the pledge of shares by the promoters. She may also ask whether the promoters are facing any liquidity crunch.

Further advised reading: Share Pledge by Promoters: A Complete Guide

The Margin of Safety in the market price of Atul Ltd:

Currently (January 16, 2021), Atul Ltd is available at a price to earnings (PE) ratio of about 32 based on consolidated earnings for 12-months ending September 2020 (i.e. Oct. 2019-Sept 2020). The PE ratio of 32 does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.

However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, taking into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.

• 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Hidden Risk of Investing in High P/E Stocks

Analysis Summary

Overall, Atul Ltd is a company that is growing its business at a rate of 10-12% over the last 10 years (FY2011-2020) with continuously improving profit margins. The profit margins of the company have more than doubled over the last 10-years despite its exposure to the cyclical nature of the chemicals industry, intense competition and fluctuating raw material prices dependent on crude oil. It seems that the company is able to improve its profit margins due to continuous focus on increasing the share of research-oriented speciality chemicals in the revenue over commodity chemicals.

Over the years, Atul Ltd has done significant investments in its manufacturing capacities; however, its asset turnover ratio has declined to indicate that the capital expenditure has not provided desired return on the investments. Nevertheless, the company has kept its working capital requirements under control and has managed to grow its business using its business profits without the need for any additional external capital.

As a result, the company has generated a significant amount of free cash flow, which the company has used to reduce its debt, pay dividends and increase its cash & investments.

The promoters of the company seem to have put in a management succession plan where the next generation seems to be working in the company at junior positions. The promoters of the company frequently enter into transactions like giving deposits or loans to the company even when the company is cash-rich and has been reducing debt from other lenders. At times, the deposits or loans from the promoters are at a higher interest rate than other lenders. In addition, the promoters of Atul Ltd have continuously created a pledge on their shareholding in the company.

The business of Atul Ltd has some divisions, which are continuously performing poorly like colors division; or that face high product concentration risk like crop protection division or that have a high gestation period with suboptimal return on investments like the date palm division. An investor should do a detailed analysis of each division of Atul Ltd along with the potential impacts of regulatory challenges that it may face. In FY2013, the company had to shut down its plant for about a month due to pollution-related issues and in FY2021, the company faces a potential ban on one of its products that constitutes about 50% of sales of its crop protection division.

Going ahead, an investor should keep a close watch on the trend of profit margins of Atul Ltd. This is because the emergence of any cyclical pattern would indicate that the competitive advantage of the company is going away. In addition, the investor should monitor the fixed asset turnover, its transactions with promoters and promoter-owned entities, additional investments in divisions like colors and date palm as well as product diversification in the crop protection division.

Further advised reading: How to Monitor Stocks in your Portfolio

In case of any additional information and clarifications, an investor may contact the company directly.

These are our views on Atul Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

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Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.