Demerger happened in 1:1 ratio; for every 1 share of HHL 1 share of IML would have been allotted. However, I couldn’t find IML being listed.
Can someone please clarify this.

Inside NPCI: How Dilip Asbe, MD & CEO, NPCI built India’s most innovative fintech (youtube.com)

A recent interview…and way ahead for UPI …Interesting

More than 5,300 companies are listed on BSE. Every week, more companies are added to this list as they come out with their IPOs and get listed on the bourses.

If I could research 50 stocks in a year, it would take me more than a CENTURY to study all the stocks listed on the BSE. Its not practically possible to monitor all stocks and that’s where a screener comes into play.

A screener helps you to sort out stocks based on certain criteria + narrow down your search. I use a screener with the following parameters to find micro-caps worth reading about:

Parameter 1: Market capitalization < 1,000 Crore

Parameter 2: ROCE > 20%

Parameter 3: P/E ratio <40 times

The micro-cap that I’ll be covering today — is Kronox Lab Sciences Limited [ticker symbol KRONOX] .

Price chart of Kronox Lab Sciences [Source: Google Finance]

The company recently came out with its IPO and listed on the stock exchanges on 10th June 2024 with a decent listing gain of 21%. Since listing, the stock has been relatively flat and has been range bound.

Can it go further up? Can it become a future multibagger? Is there a margin of safety at the current valuation?

With a market cap of INR 650+ Cr, at a P/E of 30 times — there could be a lot of room for the stock to grow from here. So, without wasting any time, let’s deep dive into the business of Kronox.

The Business

Incorporated in 2008, Kronox is in the business of manufacturing high purity specialty fine chemicals which finds applications across various industries.

Chemicals being manufactured [Source: Freepik]

The products they make are used as:

• Reacting agents / raw materials in the manufacturing of APIs
• Excipients in pharmaceutical formulations
• Reagents for scientific research and lab testing
• Ingredients in nutraceutical formulations
• Process intermediaries + fermenting agents in biotech applications
• Ingredients in agrochemical formulations, animal health products, personal care products.

Some context:

APIs (also known as active pharmaceutical ingredient) are the active chemical compounds in drugs that produce the desired effects on the body. APIs cannot be directly consumed, which is why they are packaged into capsules, soft-gel capsules, tablets, injections etc. [known as delivery mechanisms].

Many chemicals (raw materials) are used in making the APIs. Excipients (like binders, fillers, bulking agents) are then used to enhance stability, bio-availability, integrity of the drug.

Kronox has a portfolio of 185 products, available in different grades and particle sizes ranging from 10 mesh to 100 mesh. It has 350+ customers and supplies to 20+ countries, however majority income is derived domestically.

The major segments contributing to revenue are:

1. Pharmaceutical formulations + API — 45% of topline
2. Scientific research + Lab testing — 26% of topline
3. Nutraceutical supplements — 23% of topline

Segment revenue of Kronox [Source: DRHP]

The primary raw materials used in the manufacture of high specialty chemicals are citric acid, phosphoric acid, potassium hydroxide, sodium hydroxide, soda ash, acetic acid among others. Material costs are in the range of 50-58% for the company.

At the face of it, this seems like a commodity business with not a lot of pricing power. And I could not find any management commentary which proved how their products were superior compared to competition.

The Tailwinds

One of the biggest advantages of the company — even though it is a commodity business — is the high entry barrier of the sector. The business is characterized by long customer approval cycles + strict product standards.

The manufacturing process involves multi-step production and purification processes to manufacture fine chemicals. Customer acquisition is a long process & product approvals take time.

Source: Kronox DRHP

Some of the other tailwinds are:

1. Customer relationships — the company has 350+ customers, with the top 10 customers contributing > 45% of the topline. Average relationship with the top 20 customers is 7 years.

Broad range of clientele {Source: FY24 AR]

a. The company doesn’t enter into long term agreements with customers, but operates on individual purchase orders — released as and when there is demand.
b. 23% of customers placed repeat orders with the company.
c. Exports constitute around 25% of the topline. 83% of the exports are to the US, which is the largest market for pharmaceuticals.

The company would want to increase the repeat order % + share of exports in the future. This is a metric to look out for. This is probably a reason why the company hasn’t been able to grow revenue YoY.

2. Growth drivers — the company has 122 products under various phases of R&D. The management wants to target applications in industries such as F&B, electronics, precision industrial products. New products are expected to increase penetration in existing applications + provide entry points into newer industries.

New products on the horizon + their expected market growth. [Source: Kronox DRHP]

Investors should note, that the company employs ONLY 16 people for R&D purposes. And the R&D expenditure was <1% of topline — which makes me question — is that sufficient to develop new products?

• The Indian pharmaceutical market was valued at $50B in 2023 and is expected to grow to $57B by 2025.
• The Indian API market is expected to grow at a CAGR of 13.7% over the next 4 years. India is the 3rd largest API producer manufacturing 500+ different APIs.

Can Kronox capture market share of this growing pie? We’ve very little info available, to answer that question at this point in time.

3. China + 1 strategy — supply chains are trying to de-risk themselves from an over reliance on China, which could benefit Indian chemical manufacturers including Kronox.

One other thing to note, is that although there has been a sales degrowth in FY24, operating profit margins have increased YoY. However, the management has not given out too much information regarding what the sustainable level of OPM % is going forward.

Also, companies in general reduce their fixed costs before coming out with an IPO — to show a favourable financial position to investors, for better listing gains. Investors should track the next few quarters to see what is a sustainable OPM % for Kronox.

YoY performance {Source: screener.in]

Points of concern

In a manufacturing business, capacity utilization is very important. It defines the success of your business. Signals operational efficiency. And can be one of the things that give you an edge over competition.

Under-utilization of capacity > less production > less sales > less profits > greater payback period to recover the cost of setting up the factories > slower creation of shareholder’s wealth.

Kronox has 3 strategically located manufacturing units with an installed capacity of 7,242 MTPA. The company is establishing a new plant at Dahej, Bharuch which will increase their manufacturing capacity — financed through a mix of equity / debt / internal profits.

Capacity utilization [Source : Kronox DRHP]

From the chart above, it is clearly evident that the company isn’t fully utilizing it’s capacity. So, why is it adding more capacity?

Well, because it received a notice from the Gujarat Pollution Control Board (GPCB) restricting expansion in the Padra region where the company’s Unit III is located. Due to this reason, it is not able to fully utilize the Unit III facility and hence is investing to set up a plant in Dahej, Bharuch.

Are they going to close Unit III? Or operate it at sub-par capacity? There’s no management commentary on this matter.

Other risks:

1. Concentration risk

• Product concentration — top 20 products contribute >60% of revenue. Any decrease in demand for such products would reduce sales.
• Sector concentration — pharmaceutical / scientific testing contribute >70% of topline. Decline in demand in these sectors would adversely affect Kronox.
• Customer concentration — top 10 customers contribute >45% of the topline. The company is tapping into new market / adding new customers to reduce this concentration.

2. Competition risk — Kronox is significantly small in comparison to competitors and has a negligible market share in the chemical industry. It might face a hard time clawing market share away from existing competition & growing revenue.

Peer comparison of Kronox

3. Other risks

• Revenue growth has been flat for the past two years. This means that despite adding new products & customers — the company has not been able to significantly move the revenue needle.
• Repeat customer sales is only 23% — which is a BIG cause of concern, because this means that they would have to continuously add new customers to grow revenue. Customer acquisition, is a lengthy process, which means the fastest way to grow revenue is to increase repeat sales.
• The company employs only 60+ employees. If it wants to significantly expand operations and grow market share, I believe it will need more people in key positions. Also, managerial remuneration > employee costs.

Conclusion

Kronox is trading at a P/E of 30 times, at a market capitalization of approx. INR 650 Cr. It has a healthy operating margin of 31%. ROCE of >40% despite not operating at full capacity. At this valuation, the stock doesn’t look very expensive IF it can grow profits in the future.

Also, there is operating leverage at play — whereby the company has unutilized capacity to tap into to increase revenue and in turn profits.

The most important question is — what sort of strategies can the company employ to increase it’s topline?

There are also certain unanswered questions that make it difficult for an investor to understand Kronox’s growth potential in the future:

1. Which product group generates the most revenue? The company has mentioned top 20 products contribute to > 60% of revenue, but which product group has the highest share? There are different growth rates for different product groups like phosphates, sulphates, chloride, acetate etc. Without the knowledge of the highest contributing product group, we don’t know how to predict future growth.
2. What is the revenue guidance? I couldn’t find any estimates for revenue for FY25, FY26 and beyond. Further, can it grow export revenues — since these are high margin revenues.
3. What is the base level operating margin? You can see that operating margins have shot up in FY24, but can the company sustain those levels of margins?
4. How are R&D expenses so low? Can new products be developed / tested with R&D expenses of as low as 45L?
5. What is it’s strategy to claw market share from competitors? Is the product of Kronox superior in any way?

The company has just listed on the bourses in June 2024 and is relatively new in the public markets. I’d give it some time and see how the next few quarters play out. If it can grow the business in a meaningful way.

It is operating in an industry which will grow at a brisk rate. Can it create wealth for it’s shareholders over the next 10 years?

We will keep tabs on the company to find out.

In my previous article on #InvestingBasics, I wrote about RoCE — a metric that can tell you a LOT about a company.

While writing the article, I came across Arkade Developers — a player in the real estate space which displayed some jaw dropping return ratios — especially for a player in the real estate space, which is characterized by high capex and low returns.

Peer comparison of construction companies [Source: screener.in]

If you look at the 5Y RoCE of Arkade, it is a staggering 36% — which is quite impressive for a real estate player — because this is a business which requires a LOT of upfront money and in some cases, projects get stalled or delayed, which affects the cash generating ability of companies in this sector.

One of the biggest listed players — Macrotech Developers (part of the Lodha Group) has a 5Y ROCE of [just] 8.69%. So, by looking at the chart above we can deduce that Arkade has a record of impeccable execution & deliveries.

It’s possible that because Arkade is undertaking only limited # of projects — it is able to maintain such stellar execution. Is it sustainable if Arkade scales up and finds its working capital spread thin? A more important question is, can Arkade scale up amid intense competition?

If it can grow at the same levels of RoCE, there’s a lot of shareholder wealth that it can create in the future. So, let’s understand how Arkade makes money .

The Business

Incorporated in 1986, Arkade Developers is a real estate company focused on development of premium lifestyle residential projects in Mumbai.

Some of the projects by Arkade Developers. [Source: Arkade’s website]

It’s business can be classified into two segments:

1. Development of residential premises on land acquired by the Company [New Projects] — which contributes around 67% of topline.
2. Redevelopment of existing premises [Redevelopment Projects] — which contributes around 33% of topline.

In this, Arkade enters into redevelopment contracts with housing societies.

Breakup of revenue by segment [Source: DRHP of Arkade]

Some other business statistics:

• Arkade has developed 2.20 million sqft of residential property as on June 30, 2024. Between 2017 to Q1FY24, the Company has launched 1,220 residential units and sold 1,045 units in Mumbai (MMR Region).
• In the last 10 years — completed redevelopment of 10 projects in western suburbs of Mumbai + 1 project in South-Central Mumbai.
• The residential projects it undertakes are generally 2BHK / 3BHK units and includes aspirational life-style amenities.
• It has developed projects at varying price points ranging from INR 1.03 Cr to INR 5.8 Cr.

Movement in price per unit over the years [Source: Arkade DRHP]

Buying a home in Mumbai, remains a dream for most of the people living in the city. You can see from the table above, that the minimum price per unit has been inching upwards — a STAGGERING 50% increase from Fiscal 2022.

The Business Cycle

For any real estate developer, the most crucial step is acquisition of land parcels on which to develop a residential / commercial property. This is extremely tough to do in a city like Mumbai, where space is VERY limited.

This is why, most developers also undertake redevelopment projects.

Cycle: Land acquisition > concept design > MCGM approval > RERA registration > Site development & construction > marketing & sales.

Construction costs towards procurement of raw materials like sand, cement, bricks, steel bars, doors, glass, fixtures & interior fittings form majority of the costs. Increase in inputs costs could negatively impact margins.

Construction costs of Arkade Developers [Source: Arkade DRHP]

The Tailwinds

Now that we have a grasp on the B-model of Arkade, let’s try to decode how it was able to generate such supernatural returns in the construction business.

1. Good execution of projects — in the last 20 years, the Company has completed 45 projects (inc. through joint development arrangements) aggregating > 4.5 million sqft catering to > 4,000 customers.

• The company’s average turn around time [TAT] is 3Y — from receiving possession of the land to delivery of possession to the first customer. Certain projects have been executed BEFORE TIME!

Certain projects completed before time [Source: Arkade DRHP]

• The residential projects are general financed through a mix of equity & internal accruals resulting in a low debt to equity ratio [0.22 times]. Again, impressive for a real estate player, which are generally laden with debt.
• Its in-house team is equipped to deal with all aspects of project development — land acquisition, legal, construction, marketing & sales. The company has empanelled various consultants like design architects, structural engineers etc.
• Arkade has low unsold inventory of units compared to the broader market.

Most projects have been completely sold by Arkade [Source: Arkade DRHP]

2. Projects in the pipeline — the company is currently developing 3.7 million sqft across 6 ongoing projects + 6 upcoming projects (for which development agreements have been executed and approval process is underway) .

• Out of the 6 ongoing projects — 3 are new projects & 3 are redevelopment projects.
• In addition to the 6 upcoming projects, the company has received letter of intent for 2 redevelopment projects for which contract execution is pending. This gives Arkade a good order book to grow the topline.

3. Potential to grow market share in select niches of Mumbai — Arkade derives majority of it’s business from micro-markets in Mumbai like Borivali (W), Goregaon (E), SantaCruz (W) and is amongst the top 10 developers in these niches. The company has been steadily growing market share in these micro markets.

• Borivali (W) micro market — 2% market share in the total supply of units.
• Goregaon (E) micro market — 8% market share in the total supply of units.
• SantaCruz (W) micro market — 4% market share in the total supply of units.

4. Future growth drivers :

• Expansion in the eastern region of MMR — it wants to target select eastern suburbs like BKC, Andheri, Powai, Vikhroli — which is seeing a growth in commercial activity.
• Developing premium / luxury residential projects — it wants to move up the value chain by catering to projects that are developed over a larger area to enable it to construct more premium properties. These could lead to higher revenue + margins in the future.
• Continue to focus on the blended b-model — entering into redevelopment projects enables the company to stay capital efficient (since they don’t have to spend money on land acquisitions). The abundance of such projects in housing societies in the western / eastern regions of MMR, Mumbai — means that the company can do good business without the need to acquire land parcels.

The Points of Concern

I couldn’t find a lot of concerns with Arkade [due to lack of information available], apart from the fact that I don’t know if they can significantly scale from here. Mumbai’s real estate market is extremely competitive with a lot of organized / unorganized builders & it will be challenging for Arkade to grab market share.

What would be interesting to watch, is whether they can maintain their execution / turn around time as they undertake more projects & capital gets allocated to more projects.

Some general concerns to note:

1. Limited availability of land parcels — even if Arkade wants to scale up its operations, the availability of new land parcels in the MMR Region is limited & expensive. Mumbai is the most expensive real estate market in India.
2. Increased competition could lead to shortage of land parcels & restrict it’s ability to expand faster.
3. Ongoing litigations — certain criminal / civil legal proceedings are going against the company which could have a negative financial + reputational impact on the company. However, the management believes that the chances of these litigations materializing against the company are quite remote. But, I wouldn’t believe everything that the management says.
4. Cyclical nature of the biz — real estate biz is cyclical in nature and sales are not evenly spread out throughout the year. It is intricately linked to the growth of the economy and if there are any economic shocks reducing per capita income, demand could go down for residential units. As things stand, it is already a herculean task for a normal person, to buy a house in Mumbai.

Conclusion

Arkade Developers got listed on the stock exchanges on 24th September 2024 — about a month back and has dropped around 8% from the listing day. At a PE of 23, at a market capitalization of INR 2,800 Cr, I think the company is fairly valued and can unlock a lot of shareholder wealth in the future IF it can scale up with the same level of execution.

There’s a lot to like about the company — good execution, low unsold inventory, good order pipeline and a growing market share in the MMR niche markets. Operating margins are on the rise.

FY wise performance of Arkade [Source: screener.in]

However, there are serious concerns regarding the scalability of the business. Competition is intense. Land parcels are scarce in Mumbai. Certain legal battles are ongoing.

Some unanswered questions that the management needs to address:

1. What is the FY25 revenue guidance for Arkade? What is the base level OPM?
2. Breakup of gross margins / operating margins from new projects & redevelopment projects — to get an understanding of which revenue segment would push margins higher.
3. Why is the company not targeting other areas of MMR? Why is the company not targeting South Mumbai? Is it because Macrotech Developers (Lodha) has a BIG presence there?
4. Does the management have the capability to branch out of Mumbai and look for other areas in Maharashtra? What is the strategy to unlock future growth substantially?

It is still early days for Arkade in the markets, and we will keep a close watch on the quarterly performance to see how the business shapes up.

Key is use book knowledge
Get good picks from Valuepicker forum
Understand business and invest

Do it in all small cap

You will succeed

Just you need to read and understand business and current scenario

Avoid those what don’t. Understand

Most important at the end of today business should go towards creating good business , going debt free , adding money to reserves, good profit oriented ( mainly companies should work being toward fundamentally strong) also capex or should healthy debt
Or
It should be like defence oriented or ev oriented , etc

This is only journey to 100x

Rest company story will tell ,
You will get to know 2 3 years

If you hold good stock ,then hold it for long term 10 15 years