Analysis: Bodal Chemicals Ltd

The current section of “Analysis” series covers Bodal Chemicals Ltd, an Indian manufacturer and exporter of dyestuff, dye intermediates and basic chemicals.

“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.

In order 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.

Bodal Chemicals Ltd Research Report by Reader

Dear Dr. Vijay,

I had attended your session in Mumbai on 29th July 2018.

Please find attached a document wherein I have analysed and put in my thoughts on the company Bodal Chemicals Ltd.

Request to provide your inputs. I would be happy if you can publish it on your website.

Thanks and Regards,

Dileepraj R

Introduction:

Bodal Chemicals Ltd is India’s leading domestic fully integrated manufacturer of dye intermediates and dyestuff catering to textile, paper and leather industries.

Few notable points are taken from the Company’s Investor presentation:

• India’s share in global dyestuff production is 16%
• Organised sector’s share in Indian dyestuff production is 50%
• Bodal’s 69% revenues come from domestic and 31% from exports (for FY 2018)
• The company has got a good cluster of reputed domestic and international customers

Products are classified broadly as:

1. Basic Chemicals
2. Dye Intermediates
3. Dyestuff

Manufacturing Capacity (Annual) is as:

1. Basic Chemicals – 190,000 MT (10.4% Revenue Contribution)
2. Dye Intermediates – 33,000 MT (53.1% Revenue Contribution)
3. Dyestuff – 39,000 (31.9% Revenue Contribution)

Notable events from 2016 onwards for Bodal:

• Amalgamation: Bodal Agrotech, LABSA, Unit X
• Acquired 70% of SPS Processors, Dye Intermediates Zero discharge facility
• Acquired 42% of Trion Chemicals, TCCA specialist Zero discharge facility

An Analysis of Past Performance of Bodal Chemicals Ltd:

1) Sales and Operating Profit:

Bodal has been growing Sales at a consistent (though fluctuating) pace in the last ten years at a CAGR of 12%. We witness downtrends in years 2013 and 2016. However, in the last 5 years, sales growth was at a rate of 23%, which demanded further investigation.

The operating margin widely fluctuated in the years from 2008 to 2013 ranging from -1% to 11%. However, from 2014 onwards the company has maintained a 2 digit operating margin with the years 2015, 16 and 17 giving margins of 18%, 16%, and 19% respectively.

We need to analyse further, whether the trend seen in recent years in both sales growth and operating margin is sustainable or not.

The growth of sales has come from consistent capacity additions and backward and forward integrations through the years.

2) Peer Comparison of Bodal Chemicals Ltd:

When compared to some listed peers, Bodal stands out on both high ROE and high ROCE.

Given the capacity additions taking place, high ROCE is a good indicator of the company’s prospects to earn relatively better returns on the investments done by it.

The high ROE and ROCE also demand a further investigation on how the company is achieving it when compared to its peers.

Striking Years:

The company had reported losses in 2012 and 2013 after which it began to display a consistent trend. This needed a detailed look into the Annual Reports of 2012 and 2013

Foreign exchange fluctuation and heavy interest burden were termed as reasons for the loss. External headwinds like uncertainty in global markets and volatility in crude prices were also cited as the reasons. He puts on record that the issues shall be settled halfway through next financial year.

FY 2012-13 also posted losses and the forex fluctuations and strong dollar were cited as reasons (above excerpt from Chairman’s statement in Annual Report 2012-13)

The Dollar vs Rupee chart is shown below and if this is an important feature Bodal would have posted good results in years to come (FY 2013-14 and 2014-15), which it did too.

Other reasons for the loss cited were uncertainty in global markets, higher input costs, higher crude prices and higher interest rates.

If true, better performances should follow in coming years. As can be seen, turnaround started from here and the company started posting profits from next year onwards. The Capex put in along with favourable macros seems to have yielded results in the following years for the company.

As mentioned in Annual Report 2012-13, revenues, as well as margins, did improve in the coming years.

3) Net Profit and Interest Coverage of Bodal Chemicals Ltd:

As seen of the operating margin, Net Profit Margin has also increased during the last four years after moving through wide fluctuations in previous years. The increase in Sales coupled with higher interest coverage has helped to bring the NPM to two digit figures.

As seen from Annual Reports of 2012 and 2013, the company was having a difficult time on many fronts, which can be seen on its operational performance indicators also. Net Fixed Asset Turnover (NFAT) was hovering around 2 to 3 and Inventory turnover was 6 to 9 times. Though these were not bad numbers, both the parameters showed significant improvement in the last four years. NFAT moved above 5 and was 6 times in 2017. Inventory turnover moved to 13 times in 2015 and was 10 times in 2016 and 2017.

The better numbers reflect the operational improvements, especially in working capital management, done by the company recently as well as the ability to extract immediate benefits from the Capex made.

The investor should also note that the company had increased its capital expenditure (capex) recently and it stood at ₹46 Crore in 2017. Given its previous trend, and if macros favour, significant improvements in revenue and bottom line can be expected in coming years.

4) Cash Flows

Over the last ten years, Bodal has generated a cumulative net profit of ₹325 Cr. The cumulative Cash from Operations (CFO) is ₹632 Cr, meaning it has been able to convert its profit into cash, which is a good sign. Its current Cash Return on Invested Capital (CROIC) is 48%, which is also good compared to peers.

To increase the Sales from Rs 413 Cr in 2008 to Rs 1184 Cr in 2017, the company had put in a cumulative Capex of Rs 298 Cr. Over the same period, the company had generated a cumulative CFO of Rs 632 Cr, leading to a surplus of Rs 334 Cr as Free Cash Flow. (FCF). Dividends paid were a total of Rs 23 Crore.

The FCF was used in reducing the debt in the last four years.

The same was visible earlier, reflecting as higher interest coverage (owing to decreasing trend in interest payments). The Debt to Equity (D/E) had reduced from 5.4 in 2014 to 0.4 in 2017, which was the prudent utilisation of the FCF.

The FCF was also ploughed back into further investments and Capex as can be seen by an increase in Capex reaching Rs 46 crore in 2017.

5) Taxes

The company has maintained an average of 34% tax throughout which reflects good.

Macro Reasons for the good show:

In addition to the points discussed above, there are macro factors that proved favourable to the company, which helped it to turn profitable in 2014 and keep the trend going. Some of those were mentioned by the Chairman in Annual Report 2013-14.

6) Credit Rating Analysis of Bodal Chemicals Ltd:

The Company had received a rating upgrade, which was mentioned in the Annual Report 2016-17, which is again a positive outlook.

Associate / Subsidiary Companies of Bodal Chemicals Ltd:

Bodal has one associate and one subsidiary company.

SPS Processors Pvt. Ltd. is a company engaged in manufacturing of dye intermediates.

The Company has made an investment of Rs 40.9 Million for the acquisition of a 70% equity stake in SPS Processors Pvt. Ltd, which is therefore now a subsidiary company of Bodal Chemicals Ltd.

In line with the Company’s diversification strategy, Bodal Chemicals Ltd has made an investment of Rs 29 Million in TCPL and acquired 42% ownership of the Company. The investment in TCPL opens a new line of activity for the Company and enables expansion and diversification in Specialty Chemicals.

Management Analysis of Bodal Chemicals Ltd:

1) Management Remuneration:

CMD had taken a total remuneration of 0.8%, Mr Bhavin Patel 0.6% and Mr Ankit Patel 0.6% of Net Profit in FY 2017.

2) Management / Leadership Continuity:

Both Mr Bhavin Patel and Mr Ankit Patel, sons of Mr Suresh Patel, are actively involved in the business of the company and serve as Executive Directors. One can expect the continuation of leadership to the next generation, which in a way holds good for the company. At the same time, there is also a concern that a sibling rivalry could occur in future since both of them serve at equal designations now.

3) Related Party Transactions:

Loans are being taken by promoters and being paid back. I could not understand/ get much detail regarding this.

Conclusion:

Bodal Chemicals Ltd trades at a P/E of 12.5. This reflects an earnings yield of 8%. We can assume a short margin of safety in the price at this level. As discussed above on the business front, FCF being generated does give a margin of safety on the business front, and the relatively good ROCE, CROIC, and ROE can warrant a slight premium.

Bodal Chemicals Ltd is into commodity products and now seem to be making acquisitions like Trion to foray into specialty chemicals too. Being integrated gives it adequate operating leverage and a cost advantage in high volume years. As a nature of its business, it is highly affected by crude prices, forex fluctuations etc. It has done a lot of cost related improvements leading to good operating profits and net margins in the past four years. The management seems committed to taking the company to higher levels and seeing the trend, Bodal as a company can witness further glory with favourable macros in coming years.

Dr Vijay Malik’s Response

Hi Dileepraj,

Thanks for sharing the analysis of Bodal Chemicals Ltd with us! We appreciate the time & effort put in by you in the analysis. Your hard work provides good insights about Bodal Chemicals Ltd to all the investors.

Let us analyse the performance of Bodal Chemicals Ltd over the last 10 years.

While analyzing the past financial performance data of the company, an investor would notice that until FY2010, Bodal Chemicals Ltd used to disclose only standalone financials. This is because; the company did not have any subsidiary until then and in FY2011, it formed it subsidiary Bodal Agrotech Limited. Since the FY2011, the company has been preparing both standalone as well as consolidated financials.

We believe that while analysing any company, the investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire group. Therefore, while analysing Bodal Chemicals Ltd, we have analysed standalone financials until FY2010 and consolidated financials from FY2011 onwards.

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

Financial Analysis of Bodal Chemicals Ltd:

While analyzing the financials of Bodal Chemicals Ltd, an investor would note that in the past (FY2008-18), the company has been able to grow its sales at a moderate rate of 10-15% year on year. Sales of the company increased from ₹413 cr. in FY2008 to ₹1,142 cr in FY2018. However, an investor would also notice that this growth journey has not been smooth. During the last 10 years, Bodal Chemicals Ltd has to witness some tough periods during which it witnessed its sales to decline as well like during FY2009, FY2013 and FY2016.

Similarly, the company has witnessed a lot of fluctuating performance in its profitability as well. Up to FY2013, the company has seen its operating profit margin (OPM) fluctuate widely. OPM declined from 7% in FY2008 to operating losses in FY2009. OPM then increased to 11% in FY2011 only to decline again to 1% and 4% in FY2012 and FY2013 respectively. Since the FY2014, the OPM has improved significantly. Recently, OPM seems to have stabilized at 17-19%.

An investor would appreciate that fluctuating operating profitability is the first sign of any company working in a cyclical industry. Such companies usually find it very difficult to pass on the increases in the raw material prices to their end customers. As a result, the companies have low profits/losses when the raw material prices increase. On the contrary, when raw material prices decline, then such companies are not able to earn high profits. This is because of the intense competition within such cyclical industries. Many competitors are willing to supply products at lower profit margins in order to gain customers. Therefore, whenever raw material prices decline, then the companies are not able to earn high profits for a prolonged period.

Bodal Chemicals Limited is facing these challenges in its business. A reading of the annual reports for the years in which it faced operating losses/reduced profitability will highlight the inability of the company to pass on the increase in its costs to its customers.

In FY2009, the company disclosed to its investors that it had to reduce final product prices to its customers despite the high cost of its raw material. This was because the Chinese competitors were supplying dyestuff at a very low to cost in India and the rest of the world. As a result, the final product prices declined to result in losses for the company.

The FY2009 annual report, page 4:

The Indian Dyestuff market was at its peak in global market for almost six to eight months during January —August 2008 when China has under utilized its capacity of production of dyestuff and dye intermediates due to introduction of stringent environment laws during Beijing Olympics games. This compelled Indian Dyestuff manufacturers to stock the raw materials heavily in months prior to Olympic to enable them to continue their plants. This fueled the demand and stocking was done despite high prices.

After Beijing Olympics games were over, China’s dyestuff industry is back quickly on volume production of Dyes and Dye Intermediates and has restarted dumping its materials at very cheap price in the world market including India. While this started in August/September 08 onward, there was global economic recession and financial meltdown across the world resulting into industrial slow down across the industries and across the world. These factors affected particularly heavily, to Indian Dyestuff Industry. Large values in stocks had to be written off as finished products prices plummeted down. Market could not absorb the high costs of raw materials. Further US Dollar went as high as Rs. 52, i.e. more than 30% depreciation in the value of Rupee during 6 to 8 months time for the first time. Result : Losses in the dyestuff industry companies.

Further advised reading: How to do Business & Industry Analysis of a Company

The impact of competition from China was so huge that in some cases, the final product prices declined by even 50%.

The FY2009 annual report, page 4:

At the same time company could maintain its level of Turnover almost at the same level of earlier year. And quantities produced and sold were infact higher then previous year. However growth in value could not be there as prices went down between August 08 to December 08 in range of 50% to 27%.

An assessment of the annual reports of Bodal Chemicals Ltd during the next difficult phase of FY2012 and FY2013 again brings similar insights. The FY2012 annual report indicates that the key reason for losses is the fluctuations in its raw material prices and the inability of the company to pass on this increase in raw material costs to its customers.

The FY2012 annual report, page 2:

Your company has faced several unprecedented adversities like uncertainty in global market leading to lower demand, higher inflation leading to higher inputs cost, volatility in crude prices, fluctuation in currencies and high interest rate and others.

Further advised reading: Understanding the Annual Report of a Company

Moreover, the credit rating agency CARE has also highlighted this aspect in their credit rating report for the company for April 2018, page 2:

Majority of BCL’s raw materials are petroleum and sulphur based, which are subject to volatility of crude oil and sulphur prices in domestic and international markets. This makes operating margin of BCL susceptible to fluctuations in its raw material prices.

Further advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

Bodal Chemicals Ltd witnessed a decline in its revenue and profits in FY2018. The management has mentioned that this decline was due to an increase in the cost of raw material, which it seems that the company could not pass on to the customers.

The FY2018 annual report, page 17:

Total Consolidated Revenue of the Company was lowered by 12.90% and profit after tax was lowered by 8.28%. The same is mainly because of there had been some abnormal price hike in one of the dye intermediate during FY2017.

While reading the conference call transcript of Dec 2012, an investor comes to know that in the chemicals industry, many times, the market price of products falls below the cost of production.

Dec 2018 conference call, page 11:

Srinath Sridhar: Okay. But is it viable to continue the current one?

Ankit Patel: Yes, it is viable to continue because whenever there is a dip in sulfuric acid price, sometimes it goes even below the production cost. So at that time, we can consume that and have a value addition and avoid that loss. So that is there.

An investor would appreciate that Bodal Chemicals Ltd is operating in a cyclical industry with intense competition both from national and international manufacturers. Such competition explains the fluctuating operating profitability until FY2013. However, upon analysing the OPM of the recent years, an investor notes that the OPM of the company has significantly improved and stabilized from FY2014 onwards.

In FY2014, Bodal Chemicals Ltd reported an OPM of 12%. After the FY2014, the OPM of the company has consistently been in the range of 17-19%. This is a remarkable change in the business performance of any company, which has been facing strong challenges to maintain its profitability in the past.

An analysis of the annual report of FY2014 indicates that the improvement in the profitability of Bodal Chemicals Ltd is due to reduced supply of dyestuff in India because of declining manufacturing in China. The dyestuff production in China has reduced due to strict enforcement of environmental protection regulations, reduction in export incentives and electricity subsidies.

The FY2014 annual report, page 2:

Earlier Indian dye industry faced hazard of low-priced imports from China. However, in current time demand has moved to India due to stronger Yuan vis-à-vis Indian Rupee, technological and awareness advancement of Indian Industry in the area of environment compared to china, substantial reduction in export incentive and electricity subsidy at China, cheaper labor etc. All these have compact competitiveness of Chinese exports and will seems to sustain in future.

Furthermore India and China are the major supplier at globe level. Both countries are now strict in following the implementation of various environment and pollution norms and provide environment safety and this has lead the players to either exit or reduce the size of operations by many small units in India and forced shutdown of many dye intermediate units in China. This has resulted in restricted supply of dyestuffs in domestic market and the same has benefited large and integrated domestic players like Bodal Chem and that resulted in increase in sales volume and improved realization in the financial year and also will remain in the coming years.

Further advised reading: How to do Business & Industry Analysis of a Company

The reduced supply of the dyestuff from China has reduced the competition in the industry and as a result, Bodal Chemicals Ltd is able to get higher prices for its products in the market. This has resulted in the improvement of the OPM for the company.

An investor would notice that from FY2015 onwards, the OPM of the company has stabilized to 17-19%. The stable OPM indicates that now the company is able to pass on the changes in the raw material prices to its customers. The OPM of any company shows a stable pattern over long periods of multiple years when the company increases its product prices when raw material prices increase and when it had to decrease its product prices when raw material prices decrease.

Usually, such kind of changes in the final product prices, which are linked to changes in the raw material prices are a result of long-term contracts entered by companies with their customers. In long-term contracts, the prices of final products are usually linked to prices of raw materials by a formula. As a result, the final products keep changing according to raw material price changes and the company is able to maintain a stable profit margin.

In this light, when an investor analyses the publicly available information about Bodal Chemicals Ltd, then she comes to know that the company does not have any long-term contract with its customers.

The company has disclosed this fact in its prospectus for the Qualified Institutional Placement (QIP) in October 2017, page 44:

We have not entered into long term purchase agreements with our customers and therefore, they are under no obligation to place orders with us. Dyestuff industry is highly fragmented and competitive. We have experienced long term customer relationship and retention in the past. There can be no assurance that our clients will continue to deal with us, or if they do, they might reduce the quantity of material they procure from us, both of which can have adverse impact on our financial condition, results of operations and cash flows.

On further analysis, the investor gets to know that almost all the contracts that Bodal Chemicals Ltd has with its customers are only for 1-2 months duration. The executive director of the company, Mr. Ankit Patel has disclosed during the conference call with analysts in May 2018 (page 5 &6) that the company does not have any long-term contracts with customers. Mr. Patel explained in an answer to a query that Bodal Chemicals Ltd has only 1-2 months long contracts with the customers.

Conference Call, May 2018, page 5 & 6:

S Viswanathan: But do you have any long-term contract for supply of Dyestuff which you have to honor anyway. those requirements of Dye Intermediates for those Dyestuff business cannot be channelized, right?

Mayur Padhya: Yes, definitely we have around 1-2 months Dyestuff contract on hand, not more than that. So we cannot transfer total production for sale.

S Viswanathan: Let us say now 29.000 MT Dyestuff capacity, how much is dismayed to long-term contracts which you have to service anyway and you cannot route that those Dye Intermediates to the trade?

Ankit Patel: We do not have any long-term contracts first of all in our Dyestuff or Intermediates. Since we have large capacities and large production numbers. our orders can go around one month. even 25-days sometime, but that has been the practice for the industry. So other than that, we do not have any long-term contract. So let us say, if Vinyl Sulphone and H Acid prices have gone up from this week. then all our Dyestuff orders from this week will be from the new rates only. So we have nothing to lose and none of our capacities are blocked by our Dyestuff orders or anything.

Looking at the above analysis, an investor would appreciate that in recent years, Bodal Chemicals Ltd has been able to maintain a stability in its OPM because it renegotiates the price with its customers whenever they place new orders with it after every 1-2 months upon expiry of old orders.

An investor would also appreciate that in the absence of long-term contracts, there is no obligation for the customers to keep coming back to Bodal Chemicals Ltd for their orders. An investor would remember from the above discussion that the dyestuff industry is highly fragmented (many manufacturers) and highly competitive. The company had to face this hard truth in FY2009, FY2012 and FY2013 when it had reported losses.

Therefore, investors would observe that the newfound ability of the company to maintain stable OPM by quoting higher prices to its customers in order to pass on the increase in the cost of raw material in the recent year, might be only a result of the current phase of reduced manufacturing in China. If due to any change in circumstances, the manufacturing of dye intermediaries and dyestuff revives in China or any other country, then the ability of Bodal Chemicals Ltd may not remain the same. As a result, in case, the competition from international manufacturers (China etc.) revives, then the customers of Bodal Chemicals Ltd will again have a large choice of suppliers. In such situations, Bodal Chemicals Ltd may again face tough times like those that it did in FY2009, FY2012 and FY2013.

Moreover, while reading the credit rating report of Bodal Chemicals Ltd prepared by India Ratings in April 2018 (page 2); an investor gets to know that despite the current shutdown of dye units, China still has over-supply in the country.

The recent closure of several chemical industries in the Chinese markets owing to strict environmental norms has boosted the outlook for Indian companies. Increased environmental compliance costs, rising manpower wages and reduced state support have improved the relative cost competitiveness of Indian manufacturers. Yet, any increase in Chinese production remains a key risk, given the available spare capacity. BCL suffered losses over FY12-FY13, partly due to cheap imports from China. The textile sector accounts for 50%-60% of its revenues, making it sensitive to industry cycles.

Further advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

In the conference call with investors in May 2018 (page 11), the company communicated that the bare minimum EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of the company is 15%, which should increase in future to 18%.

Mayur Padhya: If you can recollect since last four years we have been guiding market that though we are generating 17-19% EBITDA recently but bare minimum EBITDA for our business is something 15% or so. At the same time the initiatives which we took that is cogeneration power plant, EC, Dyestuff expansion, once all this will be fully functional, our bare minimum EBITDA will increase to about 18%.

Investors would appreciate that in the absence of long-term contracts, a company producing commodity products can maintain stable profit margins only until the competition from other suppliers is limited. The moment other suppliers increase their production, the ability of any company to charge the customers its desired prices will vanish. Investors would observe that Bodal Chemicals Ltd faced this situation in FY2009, FY2012 and FY2013 when the OPM declined sharply and it reported net losses.

Therefore, investors would note that the stable/improving profitability margins predicted by the management of Bodal Chemicals Ltd would sustain only in the situation when the outgoing entrepreneurs & the governments in China and other countries ignore the loss of business and the people’s livelihood completely and do nothing to sustain the manufacturing in their countries.

Investors would note that the responses of governments in situations of the loss of livelihood and the business are highly unpredictable. As a result, it becomes essential that investors should keep a close watch on the developments in China’s policies regarding dyestuff industry and their manufacturing levels in order to believe that sustainability of profit margins of dyestuff producers in India including Bodal Chemicals Ltd. Any change in the policy from China can prove the current assumptions of stable profit margins of dye industry players wrong.

Being commodity products, the prices of dye intermediaries and dyestuff are highly volatile. The management of Bodal Chemicals Ltd in its May 2018 conference call (page 4) told the analysts that the prices of key products like H-Acid declined more than 50% in Q4-FY2018:

Giriraj Daga: My next question is on the price as you mentioned about H Acid Rs. 750/kg and Vinyl Sulphone Rs. 325/kg. What was the fourth quarter average if you can also give us?

Mayur Padhya: This quarter Vinyl Sulphone’s average was Rs. 239/kg and H Acid was Rs. 360/kg.

An investor would note that such wide fluctuations in the prices of the products in the dye intermediary and dyestuff industry when seen along with the lack of long-term formula-based pricing contracts with customers, put the existing players in dyestuff industry in a very precarious position. Investors would appreciate that as and when the supply resumes from competitors within India, China or any other country, the pricing ability and the current stable profit margins enjoyed by the existing companies may quickly go away.

To conclude from the above discussion on the operating profit margin of Bodal Chemicals Ltd, the key parameters that influence its pricing power and its performance over the years, we believe that Bodal Chemicals Ltd operates in a highly competitive brutal industry. This intense competition in this industry of commodity type chemicals does not allow the manufacturers to have stability in their business model. Cyclical phases of oversupply from producers within the country as well as from outside countries like China lead to severe declines in the profitability of the manufacturers. Bodal Chemicals Ltd suffered these consequences in the past. The current phase of stable & consistent operating profit margins of the company has arisen from the fact of reduced competition from manufacturers in China due to changes in government policies. As and when the policies of the government in China/other countries change, the dyestuff industry in India may return to old days of intense competition with players undercutting margins and resultant losses.

Therefore, we believe that while analysing the improvement in the operating profit margins of Bodal Chemicals Limited, investors should always keep in mind the continuous threat from overseas suppliers from countries like China. The current pricing power of dyestuff players in India has resulted from external factors (actions of Chinese govt.) and the pricing power may go away if the Chinese govt. amends its policies. Investors should safeguard themselves from blindly falling into the “This time it is different” phenomenon.

The net profit margin (NPM) of Bodal Chemicals Ltd has followed the trend of its OPM. The NPM was fluctuating until FY2013 and after FY2014, like OPM, its NPM has also improved and is currently stable at 9-10%. During FY2009, FY2012 and FY2013, when the company witnessed a decline in its OPM, it reported net losses, as the operating profit was not sufficient to meet other expenses.

Over the years, Bodal Chemicals Ltd has a tax payout ratio of 33-35%, which is in line with the standard corporate tax rate prevalent in India.

Further advised reading: How to do Financial Analysis of Companies

Operating Efficiency Analysis of Bodal Chemicals Ltd:

When an investor analyses the net fixed asset turnover (NFAT), then she notices that over the years, Bodal Chemicals Ltd has shown significant improvement in its NFAT. Net fixed asset turnover used to be 3.90 in FY2009, which declined to 1.94 in FY2013. However, since then, the NFAT increased significantly to 5.97 in FY2017 and in FY2018, the company had an NFAT of 3.50.

An investor would note that the basic formula for NFAT is:

Sales/Net Fixed Assets

(Please note that we use average of net fixed assets at the start and the end of the year in our calculations).

Therefore, increasing revenue of the company over the years due sale to higher volumes of dye intermediate/dyestuff as well as higher prices of these final products have led to improvement in the NFAT.

However, while analyzing the past annual reports of Bodal Chemicals Ltd, an investor would notice one change in the accounting policy by the company in FY2014, which has led to significant reduction in value of fixed assets. This change in accounting has also contributed to the sharp improvement in NFAT esp. from 1.94 in FY2013 to 4.43 in FY2014.

While analysing the past annual reports, an investor would notice that until FY2013, the company used to follow the straight-line method of calculation of depreciation on its fixed assets.

The FY2013 annual report, page 29:

Depreciation on fixed assets is provided on straight line method on pro-rata basis at rates and in manner specified in Schedule XIV of the Companies Act, 1956.

However, in FY2014, the company changed its depreciation calculation method from straight-line (SLM) to written down value (WDV) method:

The FY2014 annual report, page 39:

Depreciation on tangible fixed assets is provided on written down value method on pro-rata basis at rates and in
manner specified in Schedule XIV of the Companies Act, 1956.

Further advised reading: Understanding the Annual Report of a Company

Because of the change in the method of calculation of depreciation, in FY2014, apart from the routine depreciation of ₹25 cr., Bodal Chemicals Ltd recognized additional depreciation of about ₹74 cr.

The FY2014 annual report, page 47:

The recognition of such large amount of depreciation in FY2014 led to sharp decline in the value of net fixed assets by more than 35% in a single year from ₹264 cr. in FY2013 to ₹167 cr. in FY2014.

The significant reduction in the value of net fixed assets of the company because of the change in the method of calculation of depreciation has also contributed to the sudden improvement in NFAT from the low level of 1.94 in FY2013 to 4.43 in FY2014. Therefore, we believe that while interpreting the improvement in the efficiency of asset utilization by the company over the years, an investor should keep in mind the impact of the change in method of calculation of depreciation as well.

An investor would note that during FY2018, the NFAT of the company has declined sharply from 5.97 in FY2017 to 3.47 in FY2018. Many factors seems to have contributed to this decline like the reduction in the revenue from ₹1,233 cr in FY2017 to ₹1,142 cr. in FY2018 and additional capital expenditure (capex) of ₹237 cr. done in FY2018 to increase manufacturing capacity, which is yet to contribute to sales. However, another factor, which investors need to keep in mind in this regard, is the change in method of calculation of depreciation by Bodal Chemicals Ltd once again in FY2018.

As per the FY2018 annual report, page 164, the company has once again changed its method of calculation of depreciation. This time the company has changed it back from the written down value (WDV) method to straight-line method (SLM).

During the year, the Group has changed its method of providing depreciation on fixed assets from Written Down Value Method (WDV) to Straight Line Method (SLM) with effect from 1st April, 2017.

Due to the change in the method of depreciation, the amount of depreciation has been lower by ₹177.28 million for the year ended on 31st March, 2018 and hence the said figures are not comparable with the figures of the corresponding year.

If the Company would have continued to provide depreciation on earlier method (WDV) on its assets, the profit after tax would have been ₹1129.53 million instead of ₹1219.23 million for the year ended 31st March, 2018.

An investor would appreciate that after the two changes in the method of calculation of depreciation, first in FY2014 from SLM to WDV and then in FY2018 from WDV to SLM, the impact of the changes done in FY2014 get nullified in FY2018. Therefore, looking at the long-term trend of NFAT before FY2014 and the NFAT in FY2014, an investor would notice that the efficiency of usage of assets has indeed improved from the NFAT level of 1.94 in FY2013 to 3.47 in FY2018.

However, an investor should note that while analysing financial and operating performances, she should always look for any changes in accounting practices, which might have contributed to the improving/deteriorating parameters.

Read on: How to Assess Operating Efficiency of Companies

The inventory turnover ratio (ITR) of the Bodal Chemicals Ltd. has been varying year on year. Over the years, ITR has been fluctuating from 7.2 to 11.2. However, over the years, the ITR has remained constant from 9.4 in FY2009 to 9.4 in FY2018. Therefore, it seems that the company has been able to maintain its inventory utilization efficiency at a stable level.

An investor would notice that over the years, the receivables days of Bodal Chemicals Ltd have been within the range of 60 to 90 days. On further analysis, the investor would note that during the tough years in which it made losses like FY2009, FY2012 and FY2013 it had comparatively high receivables days (82-84 days). This indicates that whenever the dyes industry goes through the down-cycle, not only the price and demand for final products fall but the customers also delay making payments in time. This presents a double whammy to the companies.

Many times, it is very difficult for companies to handle such situation of reducing sales and stuck receivables. No wonder that Bodal Chemicals Ltd could not repay its loans to banks in FY2013 and it had to enter into a corporate debt restructuring in FY2013.

Further Advised Reading: Receivable Days: A Complete Guide

These observations should point out to the investors the nature of the industry in which Bodal Chemicals Ltd operates and the situations that manufacturers in the dyes industries might face.

Overall, it seems that Bodal Chemicals Ltd has managed its working capital efficiently. As a result, over the years, it has been able to convert its net profits (PAT) into cash flow from operations (CFO). Over FY2008-18, Bodal Chemicals Ltd reported a total cumulative net profit after tax (cPAT) of ₹443 cr. whereas during the same period, it reported a cumulative cash flow from operations (cCFO) of ₹624 cr.

An investor may refer to the following article to understand more about the situations in which a company may be able to report a lower cCFO when compared to its cPAT and vice versa:

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

Margin of Safety in the Business of Bodal Chemicals Ltd:

i) Self-Sustainable Growth Rate (SSGR):

Further advised reading: 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 is able to 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.

While analysing the SSGR of Bodal Chemicals Ltd, an investor would notice that until FY2014, the company had an SSGR, which was deeply negative. The SSGR was in the range of -5% to -15%, which indicated that the business strength of the company did not allow it any growth from its internal resources. However, during the same time, the company kept on doing a lot of capital expenditure (capex). Over FY2009-2013, the company did a capex of about ₹229 cr. As a result, the net fixed assets of the company increased from ₹97 cr. in FY2008 to ₹265 cr. in FY2013.

An investor would appreciate that in the absence of inherent business strength supporting the capex, the company had to rely on external financing to meet the capex requirements. As a result, the company witnessed its debt level increase from ₹140 cr. in FY2008 to about ₹350 cr. in FY2013. In addition, the company also raised equity by way of rights issue along with detachable warrants in FY2009 and then again by way of warrants in FY2012.

Investors would note that continued reliance on external funding in absence of inherent business strength & cash flows to meet the capex requirements has the potential to put the company at high risk. Under such circumstances, every person who provides money to the company will want attractive returns. A look at the interest rates charged by the lenders on the loans given to Bodal Chemicals Ltd will indicate the risk perceived by the financial institutions in lending to Bodal Chemicals Ltd during this phase.

The FY2012 annual report, page 44, indicates that the lenders charged it an interest rate of 14.50-15.00% for the loans, which is a high-interest rate to be by any corporate with a stable business model.

No wonder that when the company faced tough times of business losses and simultaneously the delay in payments from customers in FY2012 & FY2013, it could not repay its lenders. As a result, it had no option left but to seek the restructuring of its loans. FY2012 annual report, page 8:

The company has incurred heavy loss and the financial liquidity remained tight during the year under review. Hence, the company has approached, through its lead banker i.e. Union Bank of India, to the Corporate Debt Restructuring cell (CDR) for the suitable realignment of its entire debt. The proposal has been admitted by CDR cell and the final proposal is under process to get approval from CDR cell.

Upon restructuring, the rate of interest increased further. The FY2014 annual report, page 45, indicates that the interest rate on the loans increased to 15.00-16.00%.

5.1.4 Working Capital Term loan amounting to Rs.374.42 lacs (P.Y.:Rs.384.50 lacs) is secured by 1st pari pasu charge on entire current assets of the company and Repayable in 40 quarterly installments starting from April, 2012. Last installment due in March, 2022. Rate of interest 15.75% (P.Y. 15.75%) p.a. at year end.

5.1.5 Working Capital Term loan amounting to Rs.2037.00 lacs (P.Y.:Rs.2090.38 lacs) is secured by 1st pari pasu charge on entire current assets of the company and repayable in 120 monthly installments starting from April, 2012. Last installment due in March, 2022. Rate of interest 16.00% (P.Y. 15.25%) p.a.at year end

Further advised reading: Understanding the Annual Report of a Company

An investor would appreciate that the decisions of the management to focus on high capex, which was not supported by the business cash flows but by the external sources of funds like debt and equity infusion led the company on a downward path, which resulted in the company facing near bankruptcy in FY2012 when it opted for debt restructuring.

When an investor looks at these troubled times faced by Bodal Chemicals Ltd during FY2012-FY2013, then she realizes that in FY2014, the decision of the Chinese govt. to tighten the environment regulations, reduce the export and electricity subsidies came as a savior for the Bodal Chemicals Ltd.

As per our discussion above, because of the closure of manufacturing factories in China, the supply in the dyes industry declined and companies like Bodal Chemicals Ltd could sell their products at good profit margins. The policy change by the Chinese govt. reversed the fortunes for Bodal Chemicals Ltd. In subsequent years, it could sell a higher volume of its products at high prices and thereby it could generate a good amount of cash. As a result, it could repay its lenders and get out of the corporate debt restructuring (CDR) in FY2015.

An investor can imagine what would have been the situation if the Chinese govt. had not reduced its support for the dye industry in its country.

As discussed above, post FY2015, the business of Bodal Chemicals Ltd has been doing well. It has been able to post good sales growth, sustained high-profit margins. As a result, its SSGR has increased to 20-30%. Therefore, the company has been able to repay its lenders, come out of restructuring, and reduce its debt from about ₹372 cr. in FY2014 to ₹181 cr. in FY2018.

ii) Free Cash Flow (FCF) Analysis of Bodal Chemicals Ltd:

While looking at the cash flow performance of the company, an investor notices that during FY2009-2012, the company had a cumulative cash flow from operations of ₹97 cr. However, during this period it did a capex of ₹228 cr. The company had to meet a large amount of negative free cash flow from debt. As a result, it got burdened with unsustainable levels of debt. Eventually, the company ended up with debt restructuring.

After the policy changes in China in FY2014, the company could generate cumulative cash flow from operations of ₹491 cr. in FY2014-2017. The company did a capex of ₹149 cr. during this period. As a result, the company generated a lot of free cash flow during this period and it could repay its lenders and come out of debt restructuring.

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

(Please note that if we consider the reduction in fixed assets due to change in depreciation method in FY2014, the calculation shows a negative capital expenditure of ₹63 cr. However, we have replaced this negative capital expenditure with the ₹18 cr, which is the amount of cash used in capex as per the cash flow statement of FY2014)

It looks like the company was on a downward path due to aggressive debt-funded capital investment decision taken by the management. However, the policy changes in China pulled the company out of the tough situation. It remains to be seen how long the policy restriction in China limits the supply from its manufacturers. This is because if China goes back to the old way of manufacturing dyes, then the dyes industry across the world may revert to its old times of fierce competition with oversupply where players undercut profit margins and it becomes difficult for the companies to make profits like during FY2009, FY2012 and FY2013.

In FY2018, the company has done a capex of ₹237 cr whereas it had a CFO of ₹7 cr. The company funded this capex from the incremental debt of ₹30 cr. (total debt increased from ₹151 cr in FY2017 to ₹181 cr in FY2018) and from the equity of ₹225 cr raised by QIP during the year.

Free cash flow (FCF) and SSGR 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 Bodal Chemicals Ltd

On analysing Bodal Chemicals Ltd, an investor comes across certain other aspects of the company:

1) Management Succession:

When an investor analyses the annual reports of Bodal Chemicals Ltd, then she notices the founder promoter Mr. Suresh Patel (age 62 years) has brought in his sons Bhavin (age 37 years) and Ankit (age 35 years) as executive directors in the company.

Presence of the next generation of the promoter family in active management roles in the company when the founder promoter is still active is a sign of good management succession. Such a situation provides sufficient time for the next generation to learn the management skills to run the business under the guidance of founder promoter. It provides for continuity in the leadership of the company.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

2) Inefficient capital allocation decisions:

The discussion above in the article highlighted that promoters of the company decided to go for capex during FY2009-12, which was large when compared to the business strength of the company. As a result, the company had to rely on debt to meet the capex requirements. When tough times arrived in FY2012-FY2013, it could not repay its lenders and as a result, it faced near bankruptcy and had to go for debt restructuring. This indicates that the capital allocation decisions from the management could have been better.

3) Multiple attempts at diversification:

Moreover, an investor would also recollect the discussion that the dyes industry is fiercely competitive where tough times may make it difficult for companies to survive. While analysing the history of the company by reading past annual reports, an investor would notice that the promoters have taken multiple attempts to diversify into other businesses. However, until now most of their diversification attempts have not seen good results.

While analysing the past investment decisions of the company, an investor comes across multiple instances where the promoters/management decided to implement a business strategy but it had to reverse the decision after failing to implement the strategy. Let us see a few such decisions:

i) Agriculture based businesses/ Agro-products:

In FY2010, the company disclosed its plans to set up a wholly owned subsidiary company as Bodal Agrotech Ltd. (BAL) to focus on technology-based agriculture businesses. The management disclosed its plans to start a fertilizer plant of Single Super Phosphate (SSP) as the first project of BAL.

The FY2010 annual report, page 5 & 6:

Considering the future growth planning and as a part of diversification strategy of the company, your company has identified the Technology based Agricultural Business for exploiting the opportunities for diversification……The Agriculture business covers area of contract farming, fertilisers like SSP, plant development, agriculture equipments etc…..To exploit said business, “Bodal Agrotech Ltd” the wholly owned subsidiary company has been floated.

The Company expects that SSP plant will generate Rs. 240 crore Turnover and having 20 to 25% operating profitability margin. The construction work of SSP plant will be started after necessary formalities/approvals. Once the construction work of SSP plant start, it will take a time of 15-18 months for commencement of production.

The management projected that BAL will be able to generate revenue of ₹240 cr. once the SSP fertilizer plant is functional.

In FY2011, the management informed the shareholders that the SSP plant is still under process; however, BAL has started the business of trading in vegetables, fruits, and food grains.

The FY2011 annual report, page 9:

Bodal Agrotech Ltd.(BAL): This company has been incorporated in the month of August, 2010, as wholly owned subsidiary company. The company has started its business in the area of trading of vegetables, fruits, and foodgrains initially. BAL has also acquired business of one retail store, in Ahmedabad, for direct selling of vegetables and fruits to retail customers and BAL also plans to open more retail stores, with same line of business, in the name of “Bodal Agro” in Ahmedabad city.

BAL plans to manufacture Single Super Phosphate (SSP)-Fertilizer with 3.5 lacs MTPA capacity near by our existing manufacturing facility of Sulphuric Acid, Dye Intermediates and Dyes, located at our Padra unit, Vadodara. During the year, BAL has applied to government authorities/agencies for licenses/approvals of SSP project..

Further advised reading: Understanding the Annual Report of a Company

In FY2013, the company intimated the shareholders that after looking at the losses incurred by it in the agro-products business, the management has decided to stop all the business activities of BAL including the trading/retailing of vegetables, fruits etc. as well as the SSP plant.

By reviewing losses and comparatively small turnover, your company has, at present, discontinued all the activities of Bodal Agrotech ltd. for the time being. This will also enable the management to concentrate more on the main company i.e. Bodal Chemicals Ltd.

The management cited that closing the operations of BAL would allow it to focus on the main company i.e. Bodal Chemicals Ltd. Investors would appreciate that venturing into trading and retailing of vegetables & fruits may be a case of moving out of the area of expertise.

ii) Tissue culture, contract research, microbial bio-fertilizers, genetic research:

Bodal Chemicals Ltd entered into the business of culture plants, microbial bio-fertilizers, genetic improvement of crops and contract research in FY2011 by acquiring a 51% stake in Sun Agrigenetics Pvt. Ltd (SAPL) through its subsidiary Bodal Agrotech Ltd. (BAL)

The FY2011 annual report, page 17-18:

BAL has acquired 51% equity stake in Sun Agrigenetics Pvt. Ltd.(SAPL) during January, 2011. Hence, SAPL becomes subsidiary of BAL.

SAPL is in business of production of tissue culture plants, Microbial bio-fertilizers, Genetic Improvement of crops, contract research etc. SAPL has tissue culture laboratory with production capacity of 2 million plants p.a. Green House and Nursery complex spread over an area of 70,000 sq.ft. R&D centre recognized by Department of Science and Industrial Research (DSIR), Gov. of India, New Delhi. SAPL plans to expand its capacities and also launch new products through R&D.

We expect that these two companies will not contribute much in consolidated top line and bottom line for the financial year 2011-12 but it will contribute significantly for the financial year 2012-13.

In FY2013, the company said that it plans to conduct research & development in SAPL and launch new products.

The FY2013 annual report, page 5:

Sun Agrigenetics (SAPL): SAPL is fellow subsidiary of BCL. SAPL is in business of production of Tissue Culture plants, Microbial. bio-fertilizers, Genetic Improvement of crops, contract research etc. SAPL has tissue culture laboratory with production capacity of 2 million plants p.a. Green House and Nursery complex spread over an area of 70,000 sq.ft. R&D centre recognized by Department of Science and Industrial. Research (DSIR), Gov. of India, New Delhi. SAPL plans to launch new products through R&D.

However, an investor would notice that within the next two years, Bodal Chemicals Ltd sold off its stake in SAPL. It sold a part of the stake in FY2014 and some part in FY2015.

The FY2014 annual report, page 13:

Sun Agrigenetics (SAPL): Bodal Agrotech Ltd. had sold some of its holding from Sun Agrigenetics Pvt. Ltd. and due to this transfer of holding; Sun Agrigenetics Pvt. Ltd. is no more subsidiary of Bodal Agrotech Ltd. and fellow subsidiary of Bodal Chemicals Ltd as on 31-03-2014. So, SAPL is only the associate company of the Bodal Agrotech Ltd.

SAPL is in business of production of Tissue Culture plants, Microbial bio-fertilizers, Genetic Improvement of crops, contract research etc. SAPL has tissue culture laboratory with production capacity of 2 million plants p.a. Green House and Nursery complex spread over an area of 70,000 sq.ft. R&D centre recognized by Department of Science and Industrial Research (DSIR), Gov. of India, New Delhi. SAPL plans to launch new products through R&D.

The FY2015 annual report, page 13:

Sun Agrigenetics (SAPL): Bodal Agrotech Ltd. had sold some of its holding from Sun Agrigenetics Pvt. Ltd. and due to this transfer of holding; Sun Agrigenetics Pvt. Ltd. is no more subsidiary or associates company of Bodal Agrotech Ltd. and fellow subsidiary of Bodal Chemicals Ltd as on 31-03-2015.

Investors would note that Bodal Chemicals Ltd entered the business of culture plants, microbial bio-fertilizers, genetic improvement of crops and contract research in FY2011 and exited it in FY2015. However, the business could not do any meaningful contribution to Bodal Chemicals Ltd.

Advised reading: How to do Business Analysis of Fertilizer Companies

iii) LABSA (a chemical used in detergents):

In FY2015, Bodal Chemicals Ltd decided to make investments in Bodal Agrotech Ltd to manufacture LABSA, which is a chemical used in the detergent industry. The company said that it would be able to generate a revenue of ₹100 cr from LABSA.

The FY2015 annual report, page 36:

NEW PROJECTS: Bodal Agrotech Ltd.: It is 100% owned subsidiary company of Bodal Chemicals Ltd.It had applied for environment clearance from Ministry of Environment and forest, New Delhi for several products. We are pleased to inform our shareholders that we have already received the said clearance. Out of the several products company has finalized to start project for the product named LABSA which is further used in detergent industry. On of the raw material for producing the product is Sulphuric Adic and for the same ample production is there in Bodal Chemicals Ltd. It may take about 10 months to start commercial production and at optimum capacity it will do about Rs. 100 Cr. Turnover at investments cost of upto Rs.15 crores.

In FY2016, the company communicated its shareholders that it has started commercial production of LABSA and that the product has received a very encouraging response from the market.

The FY2016 annual report, page 9:

During the latter part of the financial year, we also started commercial production of LABSA. The market feedback for the product has been absolutely encouraging so far and it gives us great confidence to enhance production of the same.

Further advised reading: Understanding the Annual Report of a Company

However, in May 2018 conference call, the company intimates its shareholders that it is exiting the LABSA business (page 7):

Now when we decided to put LABSA business, that was actually for sulphuric acid before not realizing even up to the cost amount from the market at that point. So we just tried to add some value addition into that and convert into different products and sell it in the market. So we tried to do that but meanwhile while we are exiting the LABSA business, the sulphuric industry has been transformed and changed completely. Now sulphuric acid is sold in the market at a very good premium. So now we do not need to convert much into the LABSA, anyhow try to sell as LABSA. So that is one of the reasons why we are not very keen on LABSA business or do not produce too much of LABSA.

Investors would note that over last a few years, Bodal Chemicals Ltd initiated multiple new businesses as a part of its wholly owned subsidiary, Bodal Agrotech Ltd (BAL). After initiating and then closing these businesses, finally, the company merged BAL in itself.

When an investor analyses the financial position of BAL disclosed in the FY2017 annual report of Bodal Chemicals Ltd, then, she would notice that BAL has accumulated negative reserves & surplus in its balance sheet. The negative reserves are usually due to the losses accumulated by the companies over the years.

The FY2017 annual report, page 115:

Therefore, it might seem that Bodal Chemicals Ltd formed a subsidiary, BAL, to start new businesses. However, after experimenting with multiple businesses for over 5 years, the company accumulated losses and then merged it into the main company.

(iv) Trichloro Isocynuric Acid (TCCA) by investment in Trion Chemicals Pvt. Ltd. (TCPL)

In FY2015 annual report, Bodal Chemicals Ltd intimated its shareholders that diversification is a key part of its business strategy and as a result, it plans to invest ₹15 cr in Trion Chemicals Pvt. Ltd. (TCPL). In FY2017 Bodal Chemicals Ltd acquired 42% stake of TCPL, which it increased further to 59% in May 2018.

The FY2015 annual report, page 36:

Trion Chemicals Pvt. Ltd.(TCPL): Your Company has always considered diversification strategy for the future growth of the company. Your Company has identified the business space for exploiting the opportunities for diversification by making investments in other chemical Company, namely TRION CHEMICALS PRIVATE LIMITED. To exploit said business, Your Company is making investment of about Rs.15 crores for taking stake in Trion Chemicals Pvt. Ltd. (TCPL) and will become the single majority stake holder.

TCPL was incorporated in the year 2013 and ready with various required approvals for a project falling under the head of specialty chemicals having good export potential and better profit margin then the existing product line of Bodal Chemicals Ltd. Project construction work has just started and expected to start commercial production by July 2016. At the optimum capacity utilization level it will be able to generate turnover of about Rs. 240 Crore. It will add wealth to the business of the company as well as wealth of the shareholders of the company. It will be kind of first project in India.

As per FY2015 management communications, TCPL was to start commercial production in July 2016 and generate potential revenues of ₹240 cr. However, as per the management comments in the August 2018 conference call (hh:mm:ss = 12:00:00 to 14:00:00), the company has not yet started production in the TCPL plant even after a delay of more than two years from the initial expected date of July 2016. (Please note that the transcript of the August 2018 conference call is not yet available publicly).

As per FY2018 annual report, page 54, TCPL is facing many issues related to price increases in its raw materials.

Trion and SPS: In case of Trion, the company is facing issues related to the price hike of raw materials.

An investor would appreciate that the new business segment entered by Bodal Chemicals Ltd by acquiring TCPL, also faces the similar intense competition like its core business. As a result, the company is finding it difficult to charge higher prices to its customers and has not been able to start production of TCCA despite significant delays from original plans.

Therefore, it remains to be seen whether the company can successfully execute its plans to generate significant revenue from TCPL.

Moreover, the company disclosed in its QIP document, Oct. 2017 that in TCPL, it is completely dependent on others for generating any benefits from TCPL:

We are entirely dependent on our Associate for TCCA, which is used in water treatment and textile industry. In the event of any major disagreement with promoters of our Associate, the production of TCCA will be affected which could in turn have an adverse impact on our financial performance..

In Fiscal 2017, we acquired 41.51% stake in our Associate, engaged in production of a speciality chemical, TCCA. TCCA’s production is export oriented and specifically targets the US market. We cannot unilaterally control the actions in respect of our Associate, including any non-performance, default or bankruptcy of its promoters. In the event the promoters do not observe their obligations, it is possible that our Associate would not be able to operate in accordance with our business plans and strategy. Differences in views with the promoters of our Associate may also result in delayed decisions or in failures to agree on major matters may adversely affect the business and operations of our Associate. This could in turn adversely affect our operations with respect to TCCA which is supplied to the water treatment and textile industry. Our Associate had no turnover in Fiscal 2016 and 2015. Thus, any disruptions in our Associate will affect our financial performance and growth prospects

As per the Dec 2017 conference call, the other promoters of TCPL, three individuals, had brought the project to Bodal Chemicals Ltd. As a result, Bodal decided to invest in TCPL and acquired about a 42% stake. However, in the light of continued delays in the production of TCCA by TCPL and the sale of stake by other promoters (17%) to Bodal in May 2018, an investor may need to explore the possibility of whether the prospects of TCCA remain good. This is because the other promoters may be selling out if they are not seeing bright prospects of TCCA/TCPL.

Therefore, an investor would notice that over last a few years, Bodal Chemicals Ltd has attempted to diversify its business stream by entering various kinds of businesses. However, it is yet to achieve any significant success from these ventures. We believe that investors should keep this past record in mind when they appraise future ventures of the company.

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

4) Some of the promoters competing with Bodal Chemicals Ltd in the same business:

The company disclosed in its QIP document, Oct 2017, that one of the promoters of Bodal Chemicals Ltd, Mr. Ramesh P. Patel- HUF, operates in the same line of business as Bodal Chemicals Ltd.

One of our entities forming part of Promoter Group operates in a similar line of business as we do, which may lead to competition with these entities and could potentially result in a loss of business opportunity for our Company.

Our Promoter Group’ Ramesh P. Patel HUF um in a similar line of business. Ramesh P. Patel- HUF is proprietor of M/s Laxmi International, engaged in the business of export and import of dyes and dyes intermediates. We may have to compete with M/s Laxmi International for business, services and employees. Our Promoter may have conflicts of interest with our interests or the interests of our shareholders and favour this/proprietorship in certain situations, or not direct opportunities to us. Any of the above may impact the trading price of our equity shares, our business, financial condition and results of operations.

Promoters’ shareholding pattern, June 2018, from BSE website:

In such situations where promoters run competing businesses in their personal capacity, an investor should be cautious and do a deeper analysis to understand whether promoters of the public listed company are favoring their personal business interests over the public shareholders.

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

5) Inter-corporate loans given by the company:

As per FY2018 annual report, page 156, Bodal Chemicals Ltd has provided loans of about ₹16.8 cr to some corporate bodies, where the terms and the details of the parties to whom these loans have been given, are not disclosed.

Investors may seek clarifications from the company about the terms of these inter-corporate loans given by the company like the name of the counter-parties, rate of interest, whether these loans are secured by any collateral etc.

Analysis of the loans becomes important when an investor notices that during FY2018, the Bodal Chemicals Ltd did a capital expenditure of ₹237 cr. whereas it had a cash flow from operations of only ₹7 cr. An investor can appreciate that the company had to raise debt and dilute its equity (QIP in Oct 2017) to meet its capital needs. In such circumstances, any loan given by the company to other corporate bodies (e.g. ₹16.8 cr. in FY2018) is essentially given out of the debt raised or equity diluted (QIP funds) by Bodal Chemicals Ltd.

6) Reduction in the promoters’ shareholding in the company:

Investors would notice that the shareholding of the promoters in the company is on the continuous decline during the past a few years. As per BSE website, the shareholding of the promoters has declined from 74.09% at March 31, 2011, to 55.69% at June 30, 2018.

In the Dec 2017 conference call, the company mentioned that recent selling of shares disclosed to stock exchanges, as promoter stake sale is actually the sale of shares by certain people who are not part of the actual promoter group. As per the management, the recent share sale is by some professionals. These professionals got the equity stake long back when the company was a partnership firm.

Dhruv Kashyap: I just wanted to check that actually my first question is that the promoter holding is significantly decreasing. Is there any particular reason for that?

Mayur Padhya: See, there are two groups. In promoter group, one is promoter family and there are several persons who were professional category. And when it was a partnership firm, then at that time, they were given some free equity kind of things. So they are selling their share. Whereas the core promoter family, which were having almost 44% before two years, they have increased their share to 51%. So they are increasing. But yes, after QIP, that has decreased. But the core promoter family is increasing their share. Those who are selling is a professional promoter.

The management intimates that the core promoter family has instead increased its stake in the company in recent years, which has however declined after the recent QIP.

However, investors should make her own opinion regarding the shareholding changes in light of the following aspects:

• Long-term shareholders, who are classified as promoters and have been with the company for decades, are leaving the company.
• The promoters have preferred equity dilution (QIP) as a source of funding. This is despite the communication from the company that it has access to low-cost debt.

May 2018 conference call, page 15:

Parag Tare: Any debt reduction plan in FY2019?

Mayur Padhya: No, presently what debt we are using is packing credit in foreign currency and that cost us hardly 3-4%, so we do not have any plan to reduce it further. Whatever extra generation is there, that is we are deploying into liquid fund, etc.

When an investor analyses the history of changes in the equity capital, then she finds that the company has been consistently raising money by issuing additional equity over the years:

• FY2008-FY2009: Bodal Chemicals Ltd came up with a rights issue where it issued two additional detachable warrants to shareholders.
• FY2011: the company issued warrants in May 2010 to counterparties, which included the promoter group.
• FY2018: raised equity capital by qualified institutional placement (QIP).

Moreover, the company has claimed that it might dilute the equity further if it feels appropriate.

India Ratings credit rating report, April 2018, page 2:

BCL expects the entire FY18-19 capex to be funded from proceeds from its recent INR2,250 equity issuance and internal accruals. It aims to maintain its conservative debt: equity ratio and would consider a fresh equity issuance, if needed.

We believe that an investor should keep these details in front of her while she makes any final opinion about the promoters’ approach to their shareholding in the company.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

7) The sharp increase in trade receivables:

While analysing the FY2018 annual report, an investor notices that during the year, the trade receivables of the company have witnessed a significant increase from ₹230 cr in FY2017 to ₹347 cr. in FY2018.

The FY2018 annual report, page 156:

An investor may also notice that over the last two years, the receivables have increased by about 110% from ₹165 cr in FY2016 to ₹347 cr in FY2018. This is significant in comparison to the sales, which have increased by about 25% from ₹908 cr in FY2016 to ₹1,142 cr in FY2018.

An investor may seek clarifications from the company about this sharp increase in the receivables. An investor should closely monitor the position of the receivables of the company.

Further advised reading: How to Monitor Stocks in your Portfolio

8) Frequent lending transactions with promoters:

While analysing the related party transaction section of the FY2018 annual report, an investor notices that the company has been entering into frequent lending transactions with its promoters/directors. It seems that the company frequently takes loans from the promoters/directors and repays them during the year.

The FY2018 annual report, page 176:

Investors would note that the loans to and from related parties is the area from where most of the corporate issues arise in life.

An investor may also wish to read the disclosure by the company in its QIP document, where it cautions the investors that in future, the related party transactions may be detrimental to the company and thereby to the shareholders. The company cautions the shareholders that it cannot assure the shareholders that such transactions will not have an adverse impact.

QIP document, Oct 2017, page 50:

We have in the past entered into related party transactions and may continue to do so in the future, which may potentially involve conflicts of interest with the equity shareholders.

We have in the course of our business entered into, and will continue to enter into, several transactions with our related parties. For further details, see “Financial Statements” on page 157. We cannot assure you that we will receive similar terms in our related party transactions in the future or that we could not have achieved more favourable terms had such transactions been entered into with unrelated parties. The transactions we have entered into and any further transactions with our related parties have involved or could potentially involve conflicts of interest which may be detrimental to our Company.

Further, the Companies Act, 2013 has brought into effect specific compliance requirements with respect to related party transactions, such as obtaining prior approval from the audit committee, board of directors and shareholders for certain related party transactions. We cannot assure you that such transactions, individually or in the aggregate, will not have an adverse effect on business and financial results, including because of potential conflicts of interest or otherwise.

Therefore, investors should monitor the section of related party transactions closely for red flags.

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

Margin of Safety in the market price of Bodal Chemicals Ltd:

Currently (August 26, 2018), Bodal Chemicals Ltd is available at a price to earnings (PE) ratio of about 11.9 based on consolidated FY2018 earnings. The PE ratio of 11.9 offers a small 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, takes 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, 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.

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

Analysis Summary

Overall, Bodal Chemicals Ltd is a company that has seen two phases in the last decade. In the first phase from FY2008 to FY2013, the company did aggressive debt-funded capital expenditure, faced the brutality of cyclical businesses, reported losses, almost faced bankruptcy and entered debt restructuring. The next phase (FY2014-FY2018) started with the policy changes in China that led to a reduction in competition in the dye products industry. As a result, the fortunes of the company revived and it could charge higher prices to its customers. It started making large profits and repaid most of its debt.

While analysing the good performance of the company in the recent years, an investor should always keep in mind that Bodal Chemicals Ltd operates in a very competitive industry. As a result, the manufacturers are not able to gain long-term contracts with customers, are not able to pass on the increase in raw material costs to buyers and many times have to sell the products below the cost of production. In the recent years, the industry dynamics have changed a bit due to policy changes by China. However, an investor should always keep it in mind that in the case in future due to any reasons, China increased its production either by relaxing the environmental protection norms or the manufacturers come up with alternative solutions, then the industry might go back to its old hyper-competitive days. Therefore, within a short period, investors may see the pricing power of current players go away.

The management of Bodal Chemicals Ltd recognizes the challenges of operating in such a commodity business and therefore, over time has taken many initiatives to diversify in different businesses. However, most of these initiatives like agro-products, retailing of fruits & vegetables, tissue culture, LABSA, and TCCA have not yielded any fruitful results until date. The company made losses on most of these initiatives. It remains to be seen whether the company is able to add any value to shareholders by way of its diversification attempts in future.

The company has done aggressive debt-funded capital expenditures in the past, which were more than what its business cash flows (CFO) could support and as a result, it had to go under restructuring. The company has been frequent in raising money by diluting equity capital in the past. In FY2018, the company has done significant capital expenditure while it has very low cash flow from operations (CFO). The company met its funding requirements by taking debt and diluting equity by qualified institutional placement (QIP). The company has claimed (as per India Ratings report, April 2018) that if needed it may go for further equity dilution. We believe that investors should keep these aspects in mind along with stake sale by long-standing investors (termed as professionals by the company) while making their opinion about the confidence of promoters in the company.

There are certain other aspects related to promoters, which an investor should keep in mind like competing business run by promoters in their personal capacity and frequent lending transactions of the company with the promoters, which investors should explore further. The investors should seek clarification from the company about the inter-corporate deposits funded from the cash raised by the company from debt and/or equity.

The promoters seem to have a strategy of management succession planning in place. As a result, two sons of the founding promoter have joined the company as executive directors and seem to play an active role in the management of the company.

We believe that going ahead; most importantly, the investors should monitor the policy decisions of the Chinese govt. in relation to dye products industry. Investors should monitor the profit margins, level of trade receivables, debt levels along with further equity dilution and related party transactions.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Bodal Chemicals Ltd. However, investors should do their own analysis before taking any investment related decision 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”

Hope it helps!

Regards,

Dr Vijay Malik

P.S.

• Subscribe to Dr Vijay Malik’s Recommended Stocks: Click here
• Mumbai “Peaceful Investing” Workshop, July 27, 2025: Register here
• To learn stock investing through videos, you may subscribe to the Peaceful Investing – Workshop Videos
• 25% savings on buying our Stock Analysis Excel Template and all ebooks together: Analysis Package: Excel Template + All eBooks (25% savings)
• To download our customized Stock Analysis Excel Template for analysing companies: Stock Analysis Excel
• Learn about our stock analysis approach in the e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
• To learn how to do business analysis of companies: e-book: Business Analysis Guide
• To pre-register/express interest in a “Peaceful Investing” workshop in your city: Click here

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.