Meharboon Irani, a highly respected stock picker from the house of Nirmal Bang, is shouting from the roof-top by stretching his vocal card. If still novice investors don’t pay heed to it, then we don’t deserve to be wealthy. In the last year, he has given us many gems like Edelweiss and Dilip Buildcon, that has generated stupendous return for shareholders. The same person has almost thrown a diamond free of cost, which needs to be lapped up immediately. This company can be a multibagger stock in 2018-19.
The company is Finotex Chemicals, which is the largest chemical manufacturer for textile companies. They have a list of all maquee clients. It has been awarded as a fastest growing chemical company by Bombay Stock Exchange.
Let’s understand the business and products. The Company manufactures chemicals for the entire value chain for the textile industry including pretreatment, dyeing, printing and finishing process. The company also manufactures other chemicals for various industries like agro, adhesives, construction, water treatment etc.
Here are some positives and advantages that it offers. These advantages make it a compelling buy:
1.Very Sticky Customer Base
High level of product customization gives it some kind of MOAT by preventing other players from entering into the sector. The products and services are highly specialized in nature that makes a high level of value addition on the end product.
That’s why customers hesitate to try new company. This also allows company to earn more pricing power. Top 10 clients’ accounts for 25% of the revenue, so the client concentration is quite low.
2.Completely debt free
The company is completely debt free. It has around 95 crore of Reserves and Surplus, which has consistently increased in the last five years. That means company has grown completely from its profit. The equity base has also remained constant in the last 5 years. This is a very good sign of an ethical and prudent company.
3.Consistent Dividend Payment
The company has continuously delivered dividend to their shareholders.
4.Fast Growth Rate
The company growth rate has been nothing less than spectacular in the last 4 years. EBITDA has increased at an annualized 35% CAGR and profit has grown at the rate of 29% CAGR.
The margin has continuously improved in the last four years from 10% to 24%. Company has expected to maintain its margin in spite of increase in the crude oil prices as most of its products depend on other raw materials.
5.Clean Balance Sheet
The balance sheet of the company has been quite clean and healthy. It recognizes revenues on the sale of products when the products are delivered to the customer or when delivered to the carrier for exports sales, which is when risks and rewards of ownership pass to the customer. Sales are net of taxes on sales and sales returns. This is the sign of conservative accounting practices.
It has more than 400 products catering to various industries. The list of clients includes Arvind, UCO Raymond, Grasim, Bombay Dyeing, Vimal, Vardhman, Banswara, the Nahar group, the Aditya Birla group and the Bhilwara group. Textile accounts for 90% of the revenue.
In the adhesives and fertilizers segment its clients’ include Clariant, Pidilite, Durian, IFFCO, Deepak Fertilisers, H B Fuller. This accounts for 10% of the total revenue.
Short working capital cycle of 27 days is another attraction. The company has zero debt as of now. They have local sourcing of raw materials. So, there is no need to maintain a huge inventory.
It just maintains 20-30 days of inventory. The capacity utilization is not 100% but it’s slated to increase. Company has bought a land parcel for establishing a new factory, which is to be commissioned by 2020.
The company has a shareholder friendly policy. It has consistently rewarded with dividends. It has done buyback of shares in 2017.
9.New Growth Triggers
‘Aqua Strike VCF’ –is the most revolutionary product of the company. It doesn’t just kill mosquitoes but also kills its larvae and pupae. This is environment friendly and completely non-toxic. It does not alter the properties of water hence leaving it suitable for drinking too. Currently, the company has applied for a patent and is awaiting approval from WHO as well as CIB. The product has been approved by Ministry of health Malaysia.
The current EPS is 1.80 Rs per share. This is expected to increase to 2.5 Rs per share by the end of this year easily. So, it can easily touch the price of 150-200 Rs by the end of 2018. Stock P/E and P/BV is at median but could be higher from the view of a microcap company. The stock is for patient investor who can at least hold it for 2-3 years.