Kalpesh’s Portfolio

Valiant Organics

Company is engaged in import substitution products who integrate forward or backward with its existing product line or aarti group product line

Why stock price gone down?
There are several reason,

1. Promoter selling
2. Textile (Dye & Pigment) demand is down
3. Agro demand from EU customer is down because they are affected by higher energy prices due to ongoing war
4. PAP plant execution issue and difficulties in scaling up
5. Blast at Sarigam plant
6. PAP price fall

Let’s see how long term or short term these issues are,

1. Promoter selling
   I don’t think this is a big issue, many people in public shareholding are related to promoters and I think their cumulative shareholding will be around 55-60%
   Promoters will start buying in the first instance they see positive demand scenario.

2. Textile (Dye & Pigment) demand is down
   This demand will come back once chines economy pickup, this is expected to happen in few months.
   This problem will go away soon.
   around 40-45% revenue comes from Dye & Pigment industry.

3. Agro demand from EU customer is down because they are affected by higher energy prices due to ongoing war
   This is a Chlorination business, which is high margin. my best guess is around 7% revenue come from EU.
   There are two possible scenarios,
   a) Energy prices reduce in EU and demand picks up, this looks unlikely scenario.
   b) Valiant find new customer, which is possible but I completely unaware how much time it will take,

anaway management has commented in earlier concall that Chlorination capacity utilization will increase in few quarters, but I’ll take their comment with pinch of salt

4. PAP plant execution issue and difficulties in scaling up
   I’m convinced that management is capable enough, PAP is difficult thing to manufacture so this was always a possibility,
   but management has not given up, they are able to run the plant in batch mode at 500MT/M, and trying hard for success in continuous mode.
   This plant is very important as around 220cr of assets are invested in it, lets see if it was a good capital allocation?
   PAP is a net import product in India, and their subsidiary manufacture paracetamol which use PAP as raw material, earlier they use to import hundred percent PAP requirement from China,
   it was a good opportunity to integrate forward with own subsidiary and cut costs, also reduce/eliminate dependability on china.
   So it was a good capital allocation at that time, but now things have changed,
   Sadhana is coming up with huge PAP capacity, and meghmani is coming up with big capacity, both of them got under PLI scheme, together their capacity will exceed total domestic requirement.
   So net import India will soon became net export India for PAP.
   I don’t think company can make great ROCE on this business even when they consume captively.
   at batch mode I don’t think they will even breakeven.
   so around half of total investment in assets is gone wrong.
   which now makes it bad capital allocation,
   now key is to see if they are able to successfully put plant in continuous mode, otherwise this investment is doomed.
   (even if they put the plant in continuous mode, my guess is they will not be able to make more than 14-15% EBIDTA)

5. Blast at Sarigam plant
   Management team is capable enough to solve this issue, they are already started production and scaling up in progress.

6. PAP price fall
   PAP prices in India are decided by prices in China, so we can consider it as a commodity product with no pricing control.

So for me only two issues are real,
3. Agro demand from EU customer is down because they are affected by higher energy prices due to ongoing war
4. PAP plant execution issue and difficulties in scaling up

even Q3 may get solved with time,
but Q4 is more important, if they solve it completely in continuous mode, even then I expect margins will never go back to previous 27-30% range,
so I consider 20-22% range is fair assumption going forward.

Does investing in this company at CMP makes sense?
after 5 years I see company making 2000cr revenue,
at 13% PAT should be 260cr
at present market cap of 1300cr its trading at future PE of approx. 5 or in other words I see it at approx. 3000cr mCap at 12 PE.
(only when they able to solve PAP plant issue, otherwise some 2000cr mCap can be expected)

So downside is protected and upside in open at CMP of 485,
I invested at 650 per share which is I now realised provides less margin of safety, so it was a mistake.
Currently I’m exploring other opportunities in market which may provide better risk rewards.

Disc.: Invested, may sell or buy more, not a chemical sector expert, valuations are rough work, do your own due diligence before investing.