Atul Ltd: Rough and Tough!

7 June 2010 By Rathin Shah Powered by ValueNotes - www.valuenotes.com/ About the company Atul Ltd is a member of Lalbhai Group (of Arvind fame), and is a manufacturer of Chemicals and Dyes which are quite commoditized in nature and lack differentiation qualities. It operates through six business divisions, namely, Agrochemicals, Aromatics, Bulk Chemicals & Intermediates, Colors, Pharmaceuticals & Intermediates and Polymers.
Stock data (04 Jun 2010) Share Price (Rs.) 52 week high/low (Rs.) Market Cap (Rs million) P/S (x) P/E (x) No. Of Shares (Million Nos.) Source: BSE BSE 95.4 54 / 112 28,635 0.25 5.02 29.66

Segments and products

Segments Agrochemicals Description In 1967, Atul Limited started manufacture of phenoxy herbicides and in subsequent years added more products to the range, including urea & sulfonylurea herbicides, triazole fungicides and carbamate; neonicotinoid; organophosphorus & pyrethroids insecticides. Phosgene, a vital raw material is manufactured by the division Aromatics Division is one of the worlds largest manufacturers of para anisic aldehyde, para cresol and para anisic alcohol, supplying its products to diverse industries, including cosmetics, flavours and fragrances, bulk drugs, dye intermediates; and plant and animal micro-nutrients. The Bulk Chemicals and Intermediates division manufactures a variety of bulk chemicals and semi-speciality intermediates. A separate Division of Atul, Pharmaceuticals Intermediates has diversified into a wide range of specialty intermediates and APIs. Atul is the world leader in Dapsone, an anti-bacterial drug. The Division has recently launched a range of new products based on phosgene chemistry namely various Chloroformates, Isocyanates, NCA, Carbonates & Dicarbonate, Chlorides, Ureas & other products. The Colors division is the largest business division of Atul Ltd, manufacturing a wide range of dyestuffs for the textile, leather, paper, wool and silk industries. The division is the largest supplier of dyestuffs in India and exports nearly 40% of its production to more than 40 countries worldwide. Lapox Epoxy Resins and Hardener systems are manufactured and marketed by Polymers division of Atul Limited. Floras was started with a view of productive utilizing of large land holdings of Atul Ltd. Its objective is to give genuine herbal extracts which are obtained from scientifically grown crops. Products Herbicides, Fungicides, and Others Contribution to total revenues 21%

Aromatics

p-Cresol, p-Anisic aldehyde, p-Anisic alcohol and Others

26%

Bulk Chemicals and Intermediates Pharmaceuticals and Intermediates

Resorcinol Caustic, Chlorine, Chlorsulphonic acid, and Sulphuric acid API Intermediates, APIs and Others

7%

6%

Colors

Textile dyes, Paper dyes, Pigments and Others

22%

Polymers Floras

Epoxy Resins, and Others

16% N/m

Source: Valuenotes Research

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Positives 1. Despite being a purely commoditized company, Atul limited is quite diversified with more than 700 products catering to ~2500 customers. 2. The company is trying to improve its operational efficiencies. It has brought down its receivable days to 66 days in FY2009 from 93 days in the previous year, thereby improving its working capital position. 3. The company is bringing down its debt levels, and any reduction in debt levels would have incremental earnings. Negatives 1. Products manufactured lack differentiation factors, and as a result it cannot raise prices of the products easily. 2. The debt / equity ratio is 0.9 which is still quite high considering its a commoditized company. Financials
(in cr.) Revenues Growth % Cost of sales Growth % Operating profit OPM % Net profit Growth % Net margins % Shareholders' Equity EPS DPS Dividend payout % ROE (%) 2.3% 192.8 5.5 2 36.5% 8.4% 58.7 8.4% 16.3 637.1 FY05 695.8 FY06 827.1 18.9% 752.1 18.1% 75.0 9.1% 84.3 418% 10.2% 265.7 28.4 3 10.6% 31.7% FY07 910.9 10.1% 834.6 11.0% 76.3 8.4% 25.7 -70% 2.8% 292.2 8.7 3 34.7% 8.8% FY08 1013.1 11.2% 940.0 12.6% 73.2 7.2% 34.8 36% 3.4% 311.7 11.7 3 25.6% 11.2% FY09 1183.2 16.8% 1027.4 9.3% 155.8 13.2% 35.6 2% 3.0% 346.0 12.0 3 25.0% 10.3% 15.7% 21.6% 10.7% 21.6% 27.7% 12.7% CAGR (%) 14.2%

Source: Religare Technova Database

The net revenues of the company have grown 14% CAGR since FY2005, and net profits have grown at 21% CAGR during the same period. The high growth in net profits compared to the sales was due to better operating margins which grew from 8% in FY2005 to 13% in FY2009. Atul Ltd. is consistently paying dividends and has 25% of dividends payout ratio. However, the ROE is quite low at 10%. Going forwards, this might increase because of better asset utilization. The net worth of the company has grown by 15% without any necessity of increasing capital.

Valuation The CMP is Rs95 (I am sorry, I didnt write about this company when this was trading at Rs85 on 1st June 2010just 3 days ago), but this price is still below the book value of Rs150. Considering that the company has low returns on equity and somewhat high debt levels, the journey to Rs150 will take at least a few years (around 3-5 years) but the growth in net worth is a plus. The P/E seems reasonable at 5x, but the stock is really cheap by Price / Sales which is just 25%, and there are chances that this ratio will improve to more rational levels. For more information, please contact vneditor@valuenotes.com
Disclaimer: The author has taken due care and caution to compile and analyze the data. The recommendations are his/her personal views. He/she shall not accept any liability whatsoever arising from the use of any of the above content. Sources have been mentioned at relevant places in the article. In spite of this, the author does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. The author does not hold positions in the stock.

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