Dolly Khanna & Anil Kumar Goel Buy Specialty Chem Stock With “High Entry Barriers”

Surge in Panama Petrochem baffles punters

Today, when Panama Petro surged a magnificent 18% for no apparent rhyme or reason, the punters at Dalal Street were baffled.

However, I was not at all baffled.

I had pointed out as far back as in March 2017 that the aggressive increase of holding by the promoters coupled with the interest of eminent luminaries like Dolly Khanna, Anil Kumar Goel, Madhukar Sheth, Chetan Parikh (of Jeetay Investments) etc means that the stock has to surge towards the stratosphere sooner or later.

“The confluence of such elite investors in a micro-cap means that multibagger gains are waiting in the wings,” I had confidently predicted in my piece.

Nigel D’Souza of CNBC TV18 rightly claimed credit for having put the spotlight on Panama Petrochem in January 2017.

PANAMA PETROCHEM +15%
Stock trades ex bonus today
Stock +120% post #midcapmania https://t.co/6jd7ezYA1e@CNBCTV18Live https://t.co/x0ClG9ZCmC

— Nigel D'Souza (@Nigel__DSouza) October 3, 2017

The stock is up a staggering 120% since the brilliant coverage by Nigel D’Souza.

Latest stock pick of Dolly Khanna and Anil Kumar Goel: IG Petro

The dynamic duo of Dolly Khanna and Anil Kumar Goel has been scouting for more specialty chemical stocks from where they can milk more multibagger gains.

They seem to have found it in IG Petrochemicals, a small-cap with a market capitalisation of Rs. 1,892 crore.

As of 30th June 2017, Anil Kumar Goel lords over the list of shareholders with a massive holding of 5,77,000 shares.

Seema Goel, Anil Kumar Goel’s PAC, holds 1,07,004 shares as of 31st March 2017.

Dolly has been indulging in her trademark modus operandi of buying the stock in bits and pieces.

She came to Dalal Street on eighteen occasions. For some reason, she also indulged in periodic selling of the stock before buying it back again.

Dolly’s holding in IG Petro stands at 1,86,295 shares as of 31st March 2017. Her holding as of date is not known.

#BQSpotted by @shraddha_babla | IG Petrochemicals' five day surge. https://t.co/CQBWNzNid3 pic.twitter.com/PAK5LyAF5I

— BloombergQuint (@BloombergQuint) February 7, 2017

IG Petro’s business model

The best way to understand IG Petro’s business model is to read the management meet note issued by Nirmal Bang.

The note provides all the salient information in a succinct manner:

“IGPL is a leading manufacturer of pthalic anhydride (PA) and maleic anhydride (MA) in India. PA is a downstream product of orthoxylene (OX), a basic petrochemical. PA is used as an intermediate for production of plasticisers, unsaturated polyester resin, alkyd resin and polyol. PA is a widely used chemical used in consumer durables and non-consumer durables. As a part of strategic initiative, IGPL acquired maleic anhydride (MA) business from Mysore Petrochemicals (MPL) as a going concern on slump sales basis for a lumpsum consideration of Rs744.8mn payable over five years. MA is a chemical intermediary widely used in the production of unsaturated polyester resin, coating, pharmaceuticals and surfactants. MA is also a precursor to compounds for water treatment detergents, insecticides and fungicides. IGPL is a domestic leader in PA with a market share of 50%. The company is among the top five players globally with total capacity of 1,69,110tpa. With the acquisition of MA business from MPL, IGPL has become the only manufacturer of MA in India and is among the leading manufacturers of wash water, the raw material for producing MA.

The raw material used for manufacturing MA is en-butene (a gas derivative) which is not available in India. As a result, 100% of India’s consumption of MA (51,000tpa) is currently met through imports. IGPL acquired MA business of MPL as a going concern on slump basis for a consideration of ~Rs750mn on 1 April 2017. With the acquisition of MA business from MPL, IGPL has become the sole manufacturer of MA in India. IGPL uses wash water created from the manufacturing process of PA to recover MA and benzonic acid. Current capacity of MA is 4,500tpa. With less than 10% of market share in domestic market and being a sole manufacturer in India, IGPL believes there is enough opportunity to grow in MA business. Current MA capacity generates Rs350mn- Rs450mn of annual sales with EBITDA/PAT of Rs200mn/Rs120mn, respectively. The company intends to increase its MA capacity from 4,500tpa to 6,300tpa by 2019. Major applications of MA are in spandex (elastics), unsaturated polyester resin (UPR), food industry, insecticides, fungicides, water treatment, personal care products and lubricant oil additives.”

[*C] Consolidated     [*S] Standalone    

(Source: Business Standard)

IG Petro will have a “Sharp turnaround in fortunes”: PL

PL has recommended a buy of IG Petro on the assurance that it will witness a “sharp turnaround in fortunes” once the expansion plans go on stream.

The logic is succinct and quite convincing:

“Structural play: IGPL is world’s third largest Phthalic Anhydride (PAN) player with a capacity of 169,110MT. PAN is a versatile industrial chemical with diversified usage across plastics, paints, autos, pigments etc. Healthy downstream demand, along with muted capacity addition globally, has put IGPL in a sweet spot. Closure of Asian Paints’ 29,796MT plant capacity, benign raw material prices and tight D-S has pushed PAN gross margins to Rs25/kg in Q1FY18, double of last decade average. Structural tailwind of demand-supply mismatch is likely to sustain in the medium term; we have factored in FY18-20E gross margins of ~Rs20/kg.

– Multiple growth drivers: IGPL, with its market leading capacity, is well placed to capitalise on growth opportunities. Supported by healthy margin trend and increased capacities, we expect 26% earnings CAGR over FY17-20E. Well‐capitalised balance sheet and healthy ROEs of ~26% are other positives. We initiate coverage with a ‘BUY’ and PT of Rs709 based on 8x EV/E FY20E which translates to 13.3/10.8x P/E FY19/20E.”

IG Petro has “high entry barriers”, “strategic location” and is on a “steady path ahead”: BP Equities

BP Equities has also issued an initiating coverage report on IG Petro in which the entire nitty gritty about the working of the Company has been explained.

It is emphasized in the report that there are “high entry barriers for new players” and that the “strategic location” of the plant provides “compelling cost savings”.

BP Equities’ logic for recommending a buy is as follows:

“Well placed in domestic PAN Industry IG Petrochemicals is the largest manufacturer of phthalic anhydride (PAN), controlling 48% of India’s production capacity. PAN is a chemical compound, which finds its applications in flexible plastics. The advantages that the company has over its competitors are difficult for competitors to replicate and therefore, create high entry barriers for new players. The Company’s plant is strategically located which provides multiple advantages. On the supply side, the major source of raw material for manufacture of PAN comes from the same region, creating compelling cost savings in transportation. On the demand side, more than 70% PAN produced in India is used in western India. With 90% sales locally, the plant located at an ideal position enables the Company to be in close proximity to its customers. Complementing an ideal location is the judicious procurement strategy for Ortho-xylene (OX) – the singe raw material required for the manufacture of PAN. The Company has a tie-up with the largest petrochemicals company (Reliance Industries Ltd) in the country for almost 70% of its requirement of OX. These ensure steady and uninterrupted supply of raw material. We modeled 3% volume growth in PAN with 5% realization growth which will leads to 8.2% overall PAN growth over FY17-19E. Further, we expect incremental revenue from MA and DEP in FY18/19 respectively which will aid revenue CAGR of 12.4% over FY17-19E“.

IG Petro is in the “right business” at the “right time”

Jitendra Kumar Gupta of Moneycontrol Research has also conducted thorough research into the affairs of IGPL.

He has opined that the Company is in the “right business at the right time” and that despite the stellar run, the valuations are still reasonable. He has also pointed out that the Company’s growth and margins will improve and that the earnings will surge in a commensurate manner.

Investors’ presentation reveals secrets

The latest investors’ presentation provides important information relating to the business model, products manufactured, end-user industry and application, key customers, production facilities, expansion plans.

There is also an analysis about the key strengths and strategies, key competitive strengths, scope of demand for the products, financial performance etc.

(Click for larger image)

High promoter holding

The promoters, being members of the Madan Mohan Dhanuka family, hold 72.22% of the equity capital of the Company. This implies that their interests are aligned with that of the minority shareholders.

The illustrious shareholders, being Anil Kumar Goel, Dolly Khanna, Seema Goel, Ajay Upadhyaya, KLJ Plasticizers, Sudhir Chandulal Mehta, etc hold a couple of percentage points of the equity.

Conclusion: IG Petro is a stellar addition to portfolio

I have earlier pointed out that Dolly Khanna has a formidable arsenal of high-quality specialty chemical stocks in her portfolio. The names that come readily to mind include NOCIL, Thirumalai Chemicals, Dai-Ichi Karkaria, Panama Petro etc. Of these names, Anil Kumar Goel has Thirumalai Chemicals and Panama Petro in his portfolio. IG Petro is a worthwhile addition to the portfolios of the duo and is bound to bring cheer to the two stalwarts!