Thanks Mukesh, That I am aware of of, But haven’t seen any research report yet, not even on research byte

Vidhi Dyestuff Management Meet Notes

Vidhi Dyestuffs Manufacturing Ltd. (VDML) is the third largest manufacturer of synthetic food colours globally with a capacity of 4200 MTPA. It is among the very few USFDA approved manufacturers of food grade colours in India. Over the last 20 years, the company has established strong relationships with global majors like Mars, Pedigree and Sanofi among others. The company has been able to grow its revenues substantially by 21% CAGR over the last five years, while the industry has witnessed a growth of 4-5%. Going forward, the company’s investments in capacity addition and reduction in its low margin trading business would help it achieve its targeted margins of 20% plus over the next 4-5 years. Following is Transcript of our Meet with the Management.

1. What are the entry barriers in our business? How strong is the customer stickiness for a seemingly commodity product?
   Ans: Switching suppliers is a big hassle for clients as colour component is very small (colour comprises of ~0.5% of the cost of the final product). We have spent 20 years carefully establishing relationship with clients and distributors across 80 countries.

2. Is our business a commodity business? Are there any risks to our business?
   Ans: ‘You may keep a halt on buying Ferrari during recession, but what about strawberry cream biscuits and flavoured chocolates?’ More than 95% of our manufacturing revenues are from exports thus exposing us to currency risks but apart from that none.

3. Who are our direct competitors?
   Ans: Due to a small overall market size of synthetic food colours, there are only four major players worldwide. Sensient Technologies (20,000 MTPA), Roha Dyechem (9000 MTPA), we are the third largest manufacturers with 4,200 MTPA, Emreld USA (2,200 MTPA). No competition from china as market size is too low for them (40k MTPA, growing at 5%).

4. Where is Sensient focusing given it is losing its market share in synthetic food colours? Sensient’s website suggests increased focus on natural food colours, how strong is the shift in trend? What is the natural vs synthetic dilemma all about?
   Ans: First it is a myth that Synthetic colours are harmful. Natural flavours have less variety in terms of colour and only premium products are using it. There is no apparent trend shift towards natural colours and it is just a propaganda. We are selling our product 25% cheaper than the world leader Sensient and thus gradually taking their market share.

5. What is our expansion plan and how are we planning to fund the upcoming expansion?
   Ans: We are aiming at capacity of around 8,400 MTPA by 2020, capturing around 20% of market share. We are just waiting for environmental clearance to start with the incremental capacity addition. Mix of internal accruals and debt will be used for the same, around 60:40 ratio.

6. Why the decision to stop trading and cause a de growth in the coming year as the new capacity will take time to ramp up?
   Ans: Trading is a high capital and a low return business and thus we will discontinue it from the next month onwards. Trading is ruining our balance sheet and we rather use that WC for manufacturing. We are running at almost full capacity and want to focus on high margin manufacturing business.

7. Is there any pricing differential in our product and Roha Dyechem? Will get any benefit in terms of lower raw material price with recent fall in crude oil price?
   Ans: There is none and we don’t touch their customers and nor they touch ours. Yes some of the benefit we will pass to the customer but some we will keep for us.

8. Can Sensient buy us out in coming years? Will we be open for it?
   Ans: Yes, if they have an ‘offer which we can’t refuse’ !

9. Are we looking to enter in the Naturals arena? Do we have any presence in that segment? Apart from that do we have any other opportunity to expand?
   Ans: Yes, we are developing one colour at a time in natural segment. So far we have developed couple of natural colours and we are the sole manufacturers for one of the colour. Apart from Natural we have the Pigment market of 15k Crore to explore in future. So market opportunity is there.

10. Where do we see ourselves in 2020? What is the vision?
    Ans: Over Rs. 500 Cr. in top line with 20% OPMs, Capacity of around 8,400 MTPA.

11. What dividend policy have we decided?
    Ans: As discussed in the last AGM, we will continue to distribute 20% of the Earnings.

For any queries email me: chokshiabhijit@gmail.com

Abhijit Chokshi
+91 9920245796

Nice article. Hope you move to a dry state for higher output

Its a nice small company, but no case for a concentrated bet. All other comparable companies mentioned make equal investment case. So spray and pray across the segment may be better approach.

Thanks.

It feel from a high of 100 in dec 2014 and reached a low of 39 in this year. Does any one know the reason for this huge fall?