The harsh portfolio!

As of today, I have increased my position size in Punjab Chemicals to 4% from 2% earlier. This brings down cash to zero.

Brief thesis: Most Indian agchem cos are strong in insecticides, particularly in pyrethroids and organophosphates range of molecules. In past few years, a lot of capacity has come up in these molecules and I expect realizations to be impacted going forward. With this context, I find Punjab and IPL as differentiated as they are not reliant on pyrethroids or organophosphates. Instead, they are making niche molecules where they are the only major producers out of India. As a result, both IPL and Punjab have been able to get dominant global market shares in their core molecules.

For context, Punjab’s largest products are Metconazole, Metamitron and Diflufenican. Their exports shares in these products are shown below:
Metconazole: 40%
Metamitron: 65%
Diflufenican: 100%

Recently, Punjab launched prosulfocarb and thiocyclam. In prosulfocarb, the other significant Indian co is IPL and in thiocyclam, there is no one else from India.

If we were to look at margins, IPL’s margins are the highest in this industry, whereas Punjab’s margins are much lower. On a gross margin basis, Punjab’s margins are much higher than industry averages, however the same is not reflected at the EBITDA level. I feel with scale up, Punjab’s margins can go to 18-20% levels in next 3-years. If that happens, Punjab can make 150 cr.+ profits in next 2-3 years which makes for an interesting risk reward situation.

The reason for me choosing Punjab over IPL is both are trading at similar multiples, but there is a larger scope for margin expansion in Punjab vs IPL.

Core compounder (44%)

Cyclical (42%)

Slow grower (4%)

Turnaround (4%)

Deep value (6%)