Safir Anand is betting on this stock's perfect formula for growth

Everything does not have to be pomp and show. Just because something is not in the limelight does not mean it is not worth respect. How else would this world find gems such as Irrfan Khan or Pankaj Tripathi? They were underrated despite being in the industry for long, but today, both have a cult following of hardcore film-watchers. Transpek Industry is one such stock. 

Established in 1965 by Shroff Group, Transpek has been exploring all kinds of compounds — from sulphur to chlorine — and has earned a name for itself as a quality supplier and manufacturer of chemicals. With more than five decades of experience, the company has evolved as a first-time manufacturer of several products in India and also built the market for these. They developed the process for chlorinated chemicals including thionyl chloride and various acid and alkyl chlorides that are used across industries such as agrochemicals, polymers, pharma, dyestuff, flavour and fragrance, and surfactants. 

If that exhaustive list of potential client sectors wasn’t enough to convince one, let’s turn to the overall outlook for Indian chemical companies. Demand continues to rise domestically and internationally, as companies are looking for sources outside of China due to high pollution levels and increasing cost. Not to mention the Novel Coronavirus outbreak that has jolted global markets into the realisation that heavy dependence on China will cost everyone dearly. According to the latest data compiled by India’s drug regulatory authority, 57 active pharmaceutical ingredients of crucial antibiotics, vitamins, and hormones or steroids could go out of stock in case of a prolonged lockdown in China. 

Moreover, western chemical companies are seeking strategic alliances and investment opportunities. In this aspect, they deem several Indian companies to be reliable, one of them being Transpek Industry. Besides the fact that the company delivers quality chemicals, it also counts some reputed pharma giants as its clients. Hence, in the foreseeable future, we expect the company to register solid growth for the Shroff Group. 

Unique standing
In 2017, Transpek struck a long term agreement with global giant DuPont to manufacture an existing product for the company for the next 10 years. The polymer chemicals are used to make Kevlar, a high performance heat resistant, strong synthetic fibre. In simple words, Kevlar is a super-strong plastic, a plastic so strong that it can stop bullets and knives and 5x stronger than steel. Yes, it’s Kevlar that is used to make bulletproof vests. It also has other applications, ranging from bicycle tires to racing sails. The deal is a big positive for Transpek since it ensures a stable client and revenue source for almost a decade. In fact, after signing this agreement, DuPont announced that it would be closing down its facility in the US to source from suppliers (read Transpek) who have “newer process technology”. The company also called Transpek’s technology “more productive” than its own. 

Even on the financial front, the company has performed well over the recent past. While net profit grew at CAGR of 31% from FY15 to FY19, sales grew at 19% CAGR (See: Formula for success). Even after the company had an accident at its plant in May 2019 and production was halted for two months, the company has managed to deliver steady growth over the past three quarters of FY20. The company also boasts healthy return ratio (See: Quiet underdog).

Though the products it manufactures are chemicals that are hazardous in nature and, thus, timely environmental approvals and expansions are necessary for value creation, one cannot overlook Transpek’s upper hand in terms of exclusivity when compared to its peers. This can be attributed to factors such as backward integration and on-site production of intermediaries, a unique recycling system with closed loop chemistry and R&D recognised by departments of the Indian government. It also boasts of 100 acres of land with a green belt of more than 30,000 trees, fully fledged effluent management system with a licensed discharge facility to the central effluent channel and a self-sustained water source.

Transpek’s focus on innovation is reflected in its pipeline of organic as well as inorganic products. Manufacturing technology for all of its existing products has been developed in-house. 

Poised for growth 
During a recent board meeting, Transpek sought approval to undertake a greenfield expansion project at an estimated cost of Rs.1.20 billion, funded by a mix of debt and equity. Even if it undertook the project, it will not hurt its books since its current fixed assets stand at Rs.2.70 billion. 

As more global players see a reliable partner in Transpek, it can further boost its growth and assure steady return for investors. The DuPont deal is testimony to the company’s capability and the upcoming expansion can unlock the runway for this mid-sized chemical player, taking it to the next level of growth.