Monday, August 15, 2016

Transpek - Creative Chemistry


Background:

Transpek Industry Limited was set up in 1965 for manufacturing Transparent Acrylic Sheets. Transpek now manufactures a range of Sulphur & Chlorine based chemicals & is currently the largest producer of Thionyl Chloride & Acid Chlorides in Asia. Transpek is part of Shroff group of companies. It is affiliate of Excel Industries, which is involved in Pharmaceutical intermediates, agro chemical intermediates and phosphorous derivatives. Transpek derives strategic strength and access to larger customer base through Shroff group of companies.  



Transpek serves following industries:  

1. Pharma Products: Transpek supplies raw material to Indian Pharmaceutical companies. Management expects growth in this business line. However, meeting demands from Pharma companies takes longer due to specific requirements to comply with regulatory aspects.

2. Agrochemical: Transpek supplies agro-chemicals to the Agri-fertilizer & seed companies. Major risks for Transpek include cheaper imports of agrochemicals and monsoon dependency of agriculture sector. Management envisages a moderate growth in agrochemical sector. Transpek is developing raw materials for herbicides, where management expects steady growth in near future.

3. Personal care & Surfactants: Transpek has developed products to manufacture Surfactants. Management expects good growth from Surfactants business line. Transpek plans to introduce products in Personal care segment too.  

4. Dyestuff: Thionyl Chloride is Transpek’s key offering to Dyestuff industry which is facing problems of lower capacity utilisation due to effluent disposal issues. 

5. Polymers and Speciality Plastics: Management expects continued growth in this segment. The high end Polymers production is in its nascent stage in India. The local consumption may remain subdued in near term, however management expects good offtake through exports. 

Export’s contribution has remained around 55-65% to Transpek’s top line. Slowdown in European market is a key risk to the company.  




Financial Analysis: 

Transpek has managed a healthy 16% CAGR in Sales over last 10 year period. Net profits has grown at healthier pace with CAGR of ~18%. 



Loss in FY2012: 

Transpek posted losses in FY2012 due to ban on Endosulfan which affected the sales of Thionyl Chloride. Export were lowers as well due to difficult market conditions prevailing in Europe.

Growth phase post FY2012: 

Sales was healthier in FY2013 with increase in sales of Acid Chloride Products. This was due to favourable foreign exchange rate & strategic shift from Thionyl Chloride to other acid chloride products. Exports increased by 58%, while domestic sale registered an increase of 8% in comparison

Power costs reduced significantly in FY2014 with installation of Agro Waste Boiler & implementation of Power Trading. However, profits reduced due to increased raw material cost and diminution in the value of investment. Transpek owned 50% equity in Sam Fine O Chem Limited. Management’s strategy was to leverage Sam Fine’s Europe presence to cater to local Pharma companies but the net worth completely eroded by end of FY2014 due to sustained losses. Transpek provided diminution for INR 2.5 cr in FY2013 and INR 4.5 cr in FY2014. 

Transpek posted an impressive performance in FY2016. Earning per share almost doubled to INR 36 per share. Receivable days decreased; corresponding reduction in debt level is visible.  Management attributes this significant improvement to aggressive marketing, sales efforts & quality of its products.  

Cash Flow | Operating Parameter Analysis:

Transpek has generated INR 64 cr of free cash flow which is 37% of the operating cash flows over 10 year period. However, Transpek hasn't be able to efficiently collect its dues from customers. Receivable days increased to 106 days in FY2015. This led to sustained level of debt to finance working capital gap.   



Transpek is a working capital intensive business. Inventory and receivables total to INR 84 cr (30% of the sales) at the end of FY2016. This ratio was ~42% in FY2015. Transpek has significantly improved its working capital management in FY2016 by reducing receivables to INR 46 cr from INR 82 cr in previous year.  



Management: 

Mr. Atulbhai Govindji Shroff has been the Managing Director at Transpek Industry Ltd. since 1981. He has served in many organisations at executive & non-executive level including Transmetal Limited, Excel Industries Limited, Benzo Petrochemicals, Banco Products and others. 

Shri Bimal V. Mehta is Executive Director at Transpek Industry Ltd. and is a qualified Chartered Accountant by profession. He has worked on senior level positions in several Indian and multi-national companies. His last appointment was as Managing Director of Nibbana Ltd., Mauritius, a joint venture between TML Industries Ltd., Vadodara and State Investment Corporation of the Govt. of Mauritius. 

Renumeration: 

The average increase in employees salary was 12.5% & managerial renumeration is 35.6% in FY2016. Around 17% increase in managerial renumeration was due to extra-ordinary performance of the company. 



Shares buyback:

Transpek posted subdued quarterly results in Q1-2017 with operating profits of INR 4.6 cr (excluding other income) compared to INR 8.9 cr in Q4-2016. Other income included INR 5 cr in the form of dividend which boosted the earnings. The dividend income seem to be contributed by its investments in various group companies, which include privately held Agrocel Industries & Transpek-Silox Pvt. Ltd. and publicly held Excel Industries. 

Management has proposed buy-back of 3.25 lakh equity shares at INR 475 per share for a maximum amount of INR 13.5 cr. This equals distribution of INR 23 per share (13.5 cr / 5.8 million outstanding shares) as dividend (excl. DDT for simplification purpose). 

Transpek distributed dividend of INR 7.5 per share in FY2016. Assuming Transpek pays dividend in one go & distributes the dividend income of INR 5 cr (INR 9 per share), which it received as other income, to shareholders, the dividend shouldn’t exceed INR 16.5 per share (7.5+9). This is far cry from the figure of INR 23 per share. 

The conversion of buy-back was for comparison purpose. Tax levied in the hands of shareholders with dividend income of INR 10.0 lakhs in a financial year motivates companies to buy back shares in place of giving out as dividend.

Transpek should consider first paying off its outstanding debt to lenders. As on Mar 31, 2016 the long term & short term debt outstanding was INR 26 cr & INR 30 cr respectively (INR 95 per share). Prima-facie the buy back proposal doesn’t make economic sense. 

Conclusion: 

Transpek is strategically positioned to develop new business lines & a sustained business model with support from its group companies. The existing portfolio hedges the risk of dependency of single product line. The operating parameters, however, highlight the challenges for the company. Transpek needs to continuously improve its receivable position and reduce the debt.

Disclaimer:

All data has been taken from public sources. I don't have any financial interest in Transpek Industries or any of its affiliate. I don’t own shares of Transpek Industries at the time of writing this article. I may or mayn't invest in Transpek or its affiliates in future. An investor should do her own analysis before making an investment decision. The views expressed are personal and doesn't represent that of my employer’s.

This article is just a collection of my thoughts about the company.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations.

Please refer to 'Disclaimer' page for further details. 





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