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Killer Instinct

Sabero Organics has a global presence with key products in the crop-protection business

Sabero Organics Gujarat was established to manufacture specialty chemicals and intermediates for the crop-protection business. It started manufacturing crop chemicals afterwards. It has a presence in all the three sectors of crop chemicals—herbicides, fungicides and insecticides. The company has one or two key products in each sector: Acephate and Monocrotophos (insecticide), Glyphosohate (herbicide) and Mancozeb (fungicide). It is the largest manufacturer of two of its key products—Mancozeb and Glyphosate—in India and the second-largest in the world. Production of these two chemicals is backward-integrated as it produces yellow phosphorus for glyphosate and the entire range of formulations of Mancozeb-like granules, oil suspension, wettable powder, suspension concrete and blue-green Mancozeb. Sabero is manufacturing Chlorpyriphos, one of the largest-selling insecticides, since 2004. Since some of the older molecules have been discontinued, the demand for this molecule has increased, improving Sabero’s business. Another top-selling insecticide is acephate in which Sabero is a large player. In FY08-09, insecticide and fungicide segments contributed 34% and 39% of the revenue, respectively, while herbicide and specialty chemical sales accounted for 20% and 7%, respectively.  It sells products in 50 countries and has subsidiaries in Australia, Europe, Brazil, the Philippines and Argentina. In FY08-09, 65% of the revenue came from the international market. The geographical diversity de-risks the company from the vagaries of the market in any country and stabilises the revenue source.

Multinational companies are among the large customers of Sabero, contributing 35% of the revenue; 50% of sales comes from the domestic companies and 15% of sales are through its dealer distribution networks. Its strategy is to build formulations brands based on its technicals like Mancozeb (Emthane-45) and Glyphosate (Glyweed). India’s use of agro-chemicals is low and provides a huge opportunity. Sabero benefits from its presence in all the three sectors of agrochemicals with increased domestic use. However, only 20% of the market comprises patented products. Generic products constitute 35% of the market; 45% comprises off-patent products sold by innovators. There is a big opportunity for generic players like Sabero to grab a larger share from innovators. Branded products have been the company’s focus area recently. It has increased its dealer network. Registration is an important part of this business and it has tied up this year with a multinational firm to register as a source for its herbicide and fungicide products for all 24 European Union countries. The company introduced two new products in 2009—Propineb, a fungicide and Methamidophos, an insecticide—and aims to launch two new products every year. In FY10-11, capex is envisaged at Rs10 crore-Rs15 crore, indicating that there is no need for capacity expansion to increase sales. Business growth and the benefit of having a presence in multiple markets are reflected in its financials. Average sales and operating profit growth over the past five quarters were 46% and 72%, respectively. Sales and operating profit grew 25% and 115%, respectively, in the December 2009 quarter. Its operating margin is 17%. We first wrote about this stock in the Moneylife issue dated 16 July 2009, when it was trading at Rs29.50. Since then, it has gone up 181%. It is still cheap. Its market-cap is 0.64 times sales and 3.86 times the operating profit of the December 2009 quarter, respectively. Return on equity is a fantastic 30%.

Unquoted
Odyssey Corporation (Rs169)

Incorporated in 1995, Odyssey Corporation Ltd is engaged in providing services in areas like solar energy, property and financial management, fit-outs, interior design, project management and international property sales. Its fundamentals are terrible. The company reported an operating loss of Rs64 lakh in the March 2009 quarter on net sales of Rs3.72 crore. In the September 2009 and December 2009 quarters,  sales declined significantly to Rs11 lakh and Rs1.70 crore, respectively, while the operating profit was Rs4 lakh and Rs77 lakh, respectively. For unfathomable reasons, the stock has soared 590% between
27 November 2009 and 26 April 2010, from Rs20.50 to Rs141.40.

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Profitable Chemistry

With an RoE of 25%, Aarti Industries is a good long-term bet in the chemicals sector

We have talked about this stock before. It has not yet made the kind of move it should have but Aarti Industries (AIL), the flagship company of the Aarti group, is one of those solid small-cap stocks that are available cheap. Aarti manufactures organic and inorganic chemicals at its facilities at Vapi, Sarigam and Jhagadia in Gujarat. It has a presence in four different segments—agro-chemicals, basic chemicals, pharmaceuticals and specialty chemicals.  The company also manufactures rubber chemicals and surfactant intermediates. Aarti Healthcare, the bulk drugs division of AIL, manufactures active pharmaceutical ingredients (APIs) at its Tarapur and Dombivili units in Maharashtra. Its clients include large companies like Ranbaxy, Sun Pharma, Cipla, Astra-Zeneca, Maral Labs, Cadila, Dr Reddys Laboratory, etc.  AIL also undertakes contract manufacturing of products with applications in specialty segments. It is a dominant player in nitro-chloro-benzene (NCB)-based basic and specialty chemicals and benefits from strong operating efficiency. It has the largest NCB production capacity in India, of 60,000 tonnes per annum. The company caters to diverse end-user industries such as pharmaceuticals, dyes, pigments, rubber chemicals and agro-chemicals.

AIL is expanding its basic chemical range with nitro-toluene and derivatives. Its growth in the specialty chemicals segment depends on domestic demand as well as exports. Global specialty majors are establishing bases in high-growth Asian countries to participate in their growth and leverage their low-cost advantage.

Much of this investment until now has been in China, a trend likely to change in future as India establishes itself as a reliable and cost-effective supplier. The specialty chemicals business is the major revenue earner for the company, contributing 71% of the revenue in the December 2009 quarter. Agro-chemicals, basic chemicals and pharmaceuticals contributed 4%, 17% and 8%, respectively, in the same period. Its products are exported to USA, UK, Germany, Spain, Italy, Switzerland, Belgium, Japan, Korea, China and Russia. In 2007, it formed a joint venture with Sojitz Chemical Group, Japan, for manufacturing specialty chemicals in Gujarat for applications in high-end polymers, additives and high-purity electronic chemicals. Its operating margin is 16%. Its market-cap is just 0.3 times sales and 2.36 times its operating profit for the December 2009 quarter. The return on equity is a healthy 25%.  Buy now and hold patiently.

Unquoted
Neha International (Rs173)
Incorporated in 1993, Neha International Ltd (with its subsidiary Globeagro Holdings) is engaged in the floriculture business in India and Ethiopia. It exports its products to countries like the Netherlands, Japan, Greece, Canada, Switzerland, the United Kingdom and Oman. Its operating profit was just Rs30 lakh for the quarter ended December 2009 and net sales was Rs4.73 crore. For the March 2009 quarter, it reported net sales of Rs6.68 crore and operating profit of Rs1.06 crore. Despite such lacklustre financials, the stock price has skyrocketed 1509% between 30 January 2009 and 26 April 2010, from Rs12.30 to a whopping Rs197.95. There is no justifiable reason for such a steep run-up in just three months.

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