Ultramarine & Pigments - Our 5-Bagger Stock in 26 Months

Dear Reader,

We are pleased to inform you that our Hidden Gem stock of September 2015 - Ultramarine & Pigments Ltd (BSE Code: 506685) which was released on 11th Oct'15 is almost a 5-bagger stock for our Hidden Gems members, giving as on date returns of 384% in period of 2 years and 2 months. Our team suggested Buy on Ultramarine & Pigments Ltd at price of Rs. 83.35 on 11 Oct'15 with a target price of Rs. 150 which was achieved sooner than later. We are glad to inform you, Ultramarine & Pigments stock made its 52 week high of Rs. 424.40 and closed at Rs. 403.55 today giving absolute as on date returns of 384% to our Hidden Gems members in period of 2.2 years.

In Sept'17 quarter, net profit of Ultramarine & Pigments rose 52.62% to Rs 13.69 crore against Rs 8.97 crore during the previous quarter ended Sept 2016. Sales rose 1.87% to Rs 64.91 crore in the quarter ended Sept 2017 as against Rs 63.72 crore during the previous quarter ended Sept 2016.

Below is the summary of Ultramarine & Pigments Ltd shared by our team under Hidden Gem stock of September'15 released on 11th October 2015.

Note: This report is shared only for the purpose of information and not an investment advice. Kindly carry out your own due diligence in case of investment in Ultramarine & Pigments. 

Company Background:

Established in 1960, Ultramarine & Pigments has its manufacturing facilities at Ambattur, Madras and Ranipet in North Arcot, Tamilnadu. It is the largest manufacturer of ultramarine blue and synthetic detergents. The company also manufactures ultramarine colours, organic and inorganic pigments, metal powders, chemicals, raw materials for the paint industry, varnishes, enamels, oils and plastics. Company’s sales footprint has expanded from 2 countries to 50 countries and is still growing widely in emerging markets in Latin America and Africa.

This is the only company in India to receive the ISO 9002 certification for both laundry and industrial grades of ultramarine blue.

In 1987, the company diversified by setting up a unit to manufacture HDPE woven sacks. In 1995, the company purchased about 150 acres of land in Coimbatore, Tamilnadu, and set up four windmills which can generate one MW of electricity pa. The company also set up a new plant in Sep.'95, to manufacture synthetic detergent bars/cakes with an installed capacity of 15,000 mtpa.

In 1995-96, the company issued bonus shares in the ratio 1:1. Its new plant to manufacture alkyl benzene sulphonic acid with a capacity of 16,000 mtpa, commenced production in Apr.'96. During 1996-97, the company has set up a Linear Alkyl Benzene Sulphonic Acid plant with an installed capacity of 16,000 mtpa was commissioned.

In 1997-98, the company expanded the installed capacity of its Ultramarine Blue by 1,500 MT. The company has amalgamated with Sri Narasimha Plastic Industries Pvt. Ltd. in 1999-2000 which enabled the company to carry out the combined HDPE business more economically and advantageously. Also during the year, the ultramarine blue unit and detergent unit at Ranipet has been awarded ISO 9002 Certificate.

Company also launched its IT Enabled Services Division at Chennai. The company diversified into the ITES segment and started Lapiz Digital Services in early 1993, which has been performing well in its sector. 

During 2000-2001, the company received ISO 14001 Certificate for Blue and Detergent Divisions at Ranipet during 2000-2001. The company has expanded the installed capacity of HDPE/PP Woven Fabric during the year 2003-04 by 180 MT and with this expansion, the total capacity has risen to 900 MT.

Ultramarine & Pigments Ltd is equipped with an excellent infrastructural setup which includes most modern production equipments, process and Quality control instruments, continuously updated technical know-how, Quality management and assurance systems. The Quality assurance system ensures that every batch of products conforms to the grade specification in all aspects.

Technically superior approach to analysis and measurements are constantly identified and implemented. Besides, the organization has implemented ISO 9001 Quality system management standard and ISO 14001 Environment system management standard.

Company operates in 3 segments, Pigment division, Surfactants division and IT division.

Pigment Division

This division caters to the domestic & export markets. Unseasonal rain in South India affected the demand from the domestic market, causing a dip in sales. The European market remained flat this year, and did not show any revival. This division achieved a net revenue of Rs. 60.17 crores (4152 MT) as compared to Rs. 54.58 crores (4542 MT) in financial year 2013 -14. Due to a better product mix, realization per MT was improved by 21% resulting in a better profitability.

Surfactants Division

The Company has achieved a net revenue (including processing) of Rs. 79.10 crores during the financial year ended March 31, 2015 as against Rs. 65.41 crores in the previous year, showing an increase of 21%. This improvement in revenue and the margins is due to a sustained focus on broadening the customer base, with an emphasis on the organized sector and corporate customers. The increase in margins is also attributable to the improved supply of imported Alpha Olefin (a key raw material) in the first two quarters of the year. However in the latter part of the year, due to the volatility of crude prices, we faced erratic and inconsistent supply of raw material.

IT Division

IT division reported an income of Rs. 28.88 crores, an increase of 5% over last year. The profitability has improved considerably (15%) due to better margins and controls on overhead costs.

Products & Services

Pigment Division:

• Ultramarine Blue
• Ultramarine Violet
• Bismuth Vanadate Yellow
• Mixed Metal Oxides

Surfactants:

• Linear Alkyl Benzene Sulphonic Acid
• Alpha Olefin Sulphonate
• Sodium Lauryl Sulphate
• Sodium Lauryl Ether Sulphate

Others:

• Dry Mixed Detergents
• IT Enabled Services
• Wind Mill Generation

Wind Mill Generation
  

In FY 2014-15, the total revenue of the windmills was Rs. 216 lacs, an increase of 24% over the previous year. Company repaid the entire term loan availed from EXIM Bank, and as a result, faced lesser interest charges. This helped company to improve the profit from the Windmills significantly. In the coming years, company hope that the constraints and bottlenecks faced by Windmill operators will be reduced, as the Tamil Nadu State Grid capacity is augmented. This will help the company to avoid production loss during peak season. 

2. Recent Developments: (as on 11th Oct'15)

i) Plan to expand Surfactant business with initiation of Gujrat-Dahej Project

Gujrat Industrial Development Corporation (GIDC) is in the process of establishing infrastructural facilities at the industrial site at Dahej, Gujarat. The Company has paid water contribution charges for the year, and is waiting for further progress, based on which the Company will initiate the necessary steps for setting up the project to expand its Surfactant Chemical business.

ii) Increasing Focus on IT Enabled Services

In ITES division, company has a renewed focus on improving the operational efficiency, broadening of customer base and enhancing the revenues of the domestic division.

IT division reported an income of Rs. 28.88 crores, an increase of 5% over last year. The profitability has improved considerably (15%) due to better margins and controls on overhead costs. In FY2013-14 EBITDA margin of this segment was 20.4%, in FY2014-15 it was at 22.4%, increased by 200 basis points.

With recent initiatives and developments, company is expected to deliver better top line and bottom line growth with increase in operating margins. 

iii) Promoters consistently increasing their stake in the Company  

As per shareholding pattern submitted by the company for Sept’15, promoter’s shareholding in the company is 51.99%. Promoters have increased their holding by 1.38% in last one year and by 4.83% in last 3 years. 

Promoters buying own company's share from the open market is a signal of highest commitment and confidence in the company's business. From above, it is evident that management of Ultramarine & Pigments Ltd has steadily made purchases via open market to increase their stake in the company. 

  

Promoters buying shares from open market adds comfort in terms of associated downside risk in stock price in case of market correction

3. Financial Performance:

Ultramarine & Pigments standalone net profit rises 25.17% in the June 2015 quarter

Net profit of Ultramarine & Pigments rose % to Rs 5.22 crore in the quarter ended March 2015 as against Rs 5.04 crore during the previous quarter ended March 2014. Sales rose % to Rs 50.92 crore in the quarter ended March 2015 as against Rs 42.08 crore during the previous quarter ended March 2014.

Ultramarine & Pigments standalone net profit rises 25.17% in the March 2015 quarter

Net profit of Ultramarine & Pigments rose 25.17% to Rs 3.68 crore in the quarter ended March 2015 as against Rs 2.94 crore during the previous quarter ended March 2014. Sales rose 4.06% to Rs 41.55 crore in the quarter ended March 2015 as against Rs 39.93 crore during the previous quarter ended March 2014.

For the full year, net profit rose 30.23% to Rs 18.74 crore in the year ended March 2015 as against Rs 14.39 crore during the previous year ended March 2014. Sales rose 14.46% to Rs 171.66 crore in the year ended March 2015 as against Rs 149.98 crore during the previous year ended March 2014.

In FY 14-15, the overall performance of the Company both in terms of revenue & profit before tax increased by 14% & 27% respectively. The total revenue was Rs. 172.21 crores & profit before tax was Rs. 27.51 crores. The profitability of all the major segments improved due to several steps initiated by the management. 

We believe company will continue to show improvement in operating margins from ITES division and its exports sales with increase in product offerings.   

4. Peer Group Comparison:

5. Key Concerns & Risks:

i) The domestic market for pigments continued to pose challenges. There is shrinking demand for laundry and white washing applications, and there is a slowdown in the manufacturing sector.

ii) As there was an erratic supply of Alpha Olefin due to fluctuations in crude pricing. This has had an adverse impact on the Surfactants division, and has limited company plans to expand its customer base.

iii) Revenues in the detergents division are limited by the need for huge outlays on sales promotions and distribution for retail sale. While company has consolidated its retail operations for detergents and its retail pigments, overheads remain prohibitive and a limiting factor

6. Saral Gyan Recommendation: (as on 11 Oct'15)

i) Ultramarine & Pigments has made a continuous effort to bring in more value added products in pigments division, and has developed products like violet, cobalt blue & yellow. This will help company in improving overall realization of Pigments division. The utilization of the sulphonation plant capacity will also improve due to committed off take of sulphonated products by leading corporates.

ii) In ITES division, company has a renewed focus on improving the operational efficiency, broadening of customer base and enhancing the revenues of the domestic division. We expect company will continue to achieve good revenue growth and profitability from its ITES division going forward. 

iii) In FY 2014-15, exports earnings of the company have increased by 17% (Rs. 55.56 crores as against Rs. 47.29 crores) on account of better performance of both manufacturing & ITES divisions. The Company continues to focus on the export market. Management has been consistently successful in broadening the customer base and at offering custom grade material at faster pace. In order to improve realization, company has focused on offering finer grades of material. The emphasis on in-house R&D augurs well for export market. 

iv) Company’s EBITDA and PAT margins are expected to improve considering better margins from IT segment and focus on exports with increase in product offerings.

v) Ultramarine & Pigments is a debt free company with reserves of Rs. 99 crores. Promoter’s shareholding is at 51.99% (as on Sept’15) without pledging any shares. FII shareholding in the company is nil and DII shareholding is negligible at 0.14%. 

vi) Management has rewarded shareholders by paying regular dividend in the past. For FY 14-15, the company has paid dividend of 150% i.e Rs. 3 per share. At current share price of Rs. 83.35, this results in a dividend yield of 3.6%. 

vii) Gujrat Industrial Development Corporation (GIDC) is in the process of establishing infrastructural facilities at the industrial site at Dahej, Gujarat. The Company has paid water contribution charges for the year, and is waiting for further progress, based on which the Company will initiate the necessary steps for setting up the project to expand its Surfactant Chemical business. viii) Management has rewarded shareholders by paying regular dividend in the past. For FY 14-15, company has declared dividend of Rs. 1.25 per share.

viii)  During last 3 years, promoters have increased stake by 4.83% in the company. Considering reasonable valuations and good future prospects, we expect promoters will continue to buy the shares from open market to further increase their stake in the company. Moreover, management has been maintaining a healthy dividend payout of 56.3% and rewarded shareholders by issuing bonus shares in the ratio 3:5 in 2005 which is impressive. 

ix)  As per our estimates, Ultramarine & Pigments Ltd can deliver PAT of 26 crores for full financial year 2016, annualized EPS of Rs. 8.9 with forward P/E ratio of 9.4X for FY16. Valuation looks attractive for a debt free company with expected expansion in its profit margins.

x) On equity of Rs. 5.84 crore, the estimated annualized EPS for FY 15-16 works out to Rs. 8.9 and the Book Value per share is Rs. 34.07. At current market price of Rs. 83.35, stock price to book value is 2.45. 

Considering company’s initiatives to increase its product offering with focus on higher revenues from exports, improvement in operating efficiency from IT division and company’s expansion plans to drive business growth, Saral Gyan team recommends “Buy” on Ultramarine & Pigments Ltd at current market price of Rs. 83.35 for target of Rs. 150 over a period of 12 to 24 months.  

Buying Strategy:

• 80% at current market price of 83.35
• 20% at price range of 70-75 (in case of correction in stock price in near term)

Portfolio Allocation: 2-3% of your equity portfolio

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