Vidhi Dyestuff Management Meet

Hi Abhijit,

Thanks for the management meet updates. It is very useful. Especially, the answer to Sensient buying out VDSL was very interesting!!

If the management’s vision plays out, it looks like a very interesting bet. However, there is one big “If”. We, as an investor, must assess the odds of management’s vision turning into reality. I did some number crunching and few inferences base on the same

• Company is currently making a loss in its trading activities thus reduction in trading revenue as % of sales will improve margins. However, it is important to note that in the past, company made EBIDTA losses for manufactured product also.
• For the manufactured product, company’s margin have increased consistently over last 3 years from 7% to 10% and this year it has increased to 23%. Thus, it is possible to improve margins from here on if the manufacturing/trading ratio changes in future.
• Company’s working capital cycle has remained stable despite growing at 25% CAGR which indicates that company is managing it’s capital well.
• Realizations have improved at 7-8% CAGR over last 6 years from 3.44 lakhs/ton to 5.09 lakhs/ton . However, a part of realization improvement has come from rupee depreciation. Thus, in constant currency terms, the realization may have only increased marginally.
• Company has grown consistently over last 6 years(25% CAGR) with managing its balance sheet well thus there is a fair chance that in future, company will be able to grow without impacting the balance sheet quality.
• Sansient, makes around 20-22% EBIDTA margins in spite of operating in high cost countries, thus 20% EBIDTA margin seems achievable for Vidhi.
• It is an asset light business, and fixed asset turns are very high (due to high value product) thus any improvement in margin combined with asset light business, can fetch very decent ROCE. In fact, ROCE can increase beyond 25%, if company is able to achieve 20% EBIDTA margins.

After looking at competitors like ROHA and Sensient, I too come to same conclusion that it is a industry dominated by few large players and business is growing for companies like Roha and Vidhi as companies like Sensient are forced to look at natural colors due to their existing clients demanding the same. At the same time, I also got an impression that there exist a slow but sure shift from synthetic color to natural colors (even though, as management rightly pointed out, there is no evidence of synthetic color being harmful). Thus, it will be prudent to start developing products for natural colors market.

On whole, it remains interesting idea worth tracking to me

Disclosure: Hold small position @ Average price of 48.