Safir Anand spots a mid-sized company with the right chemistry and catalytic circumstances

What started as a small partnership firm with a single product — meta chloro aniline — in 1984, is today a company with  Rs 37 billion market cap. It has multiple products and domain expertise in many process chemistries, such as chlorination, ammonolysis, acetylation, hydrogenation, sulphonation and methoxylation. 

Founded as Valiant Chemical Corporation and incorporated as a private limited company in 2005, when it was renamed Valiant Organics, it is positioned for tremendous growth in the coming decades. Among its strengths are the legacy and patronage of the promoters of Aarti Industries, who are highly regarded in the industry for their deep domain knowledge and specialised business model.                                                       

Growth catalyst 

India prides itself as the world’s sixth largest chemical manufacturer. As per the numbers published by FICCI, Indian chemical industry had a market size of $178 billion in FY19. Despite its production capacity, the country’s annual chemical and polymer imports are substantially high, to the tune of $12 billion. By opting for locally made chemicals, India can cut down its import bill by nearly $3 billion, even after excluding specialised chemicals where we lack the manufacturing knowhow. Thankfully, both the government and industry are realising the potential of the inorganic chemical market and are forming policies to tap into this goldmine that we own and have nourished for decades (See: Growth potion).

Against this backdrop, Valiant holds great potential. It has other things going for it as well, such as equity participation and board level representation from Aarti Group, which has a phenomenal track record of identifying niche opportunities and scaling up business for the benefit of all stakeholders. Until 2016, Valiant was a small company; it got listed on the SME exchange at just Rs 1.7 billion market cap. But with increased attention from the promoters, the company has scaled up to a respectable size in just four years and has also been included in the BSE 500 Index.

Promoters hold 42.66% stake and therefore, have considerable skin in the game. If we dig deeper into the public shareholding, we can see a further 29% stake held by members close to the promoter families Gogri and Chheda (See: Skin in the game).

Other than that, many marquee investors and institutions such as Malabar and Nippon AMC have picked up meaningful stake in the company (See: Inspiring confidence). Several other institutions such as Goldman Sachs and Sundaram AMC have also shown interest in it.

Innovative portfolio

Valiant Organics is involved in manufacturing and marketing of different types of chlorophenol, which have several applications in agrochemical, pharmaceutical and dye industries, as well as in manufacturing of cosmetics and veterinary drugs. With their robust business model and unwavering focus on innovation, the company has become the market leader in India for chlorophenols, which contributes 62% of its revenue. Valiant is also a leading manufacturer of para nitro aniline (PNA), which makes up for the remaining 38% of revenue.

Their established market position and global competitiveness is evident from their healthy top-line growth over the past four years. It has a diversified business profile with agrochemicals accounting for 40% of its topline, dyes and pigments, 20%; specialty chemicals, 30%; and pharmaceuticals, 10%.

Between FY16 and FY20, the company’s revenue grew at CAGR of 83%. The key driver for this growth was an all-stock acquisition of Amarjyot Chemical, which is one of the leading manufacturers of specialty chemicals used in dye, pigment, rubber chemical and polymer industries. Through this merger Valiant was able to add three additional manufacturing units and a huge basket of value-added products, helping them position themselves better in the marketplace. Similarly, their move to amalgamate Abhilasha Tex-Chem in FY17 helped them add PNA to the product list. 

The management has been persistently expanding capacities, integrating manufacturing operations and processes, and delivering growth through both organic and inorganic route. Over the past few years, they have successfully consolidated unlisted, promoter-owned chemical companies with similar product profile and have, therefore, fostered resilience and strengthened their product offering and combined capability in the listed entity (See: High ‘valency’). In FY20, there was 3.7% de-growth in overall turnover because it was a year of consolidation; but the bottomline was a tad higher at  Rs 210 million from other income, such as gain made on sale of investments. 

The synergistic acquisition of Abhilasha and Amarjyot has made Valiant one of the world’s leading and most competitive producer and supplier of chemicals to marquee customers such as BASF, Lanxess, Bayer CropScience, Coromandel, Gujarat Insecticides and Anupam Rasayan. Further, with their focus on green chemistry and state-of-the-art infrastructure, wherein four out of five units are zero-liquid-discharge plants, Valiant should be increasing its share of exports sales to key global markets. Currently, 15% of its sales comes from exports and the company is seeing further traction on the global front.

Being among India’s leading specialty chemical manufacturers, Valiant is best positioned to capitalise on the emerging business opportunities such as ‘China plus one’ and ‘Make in India’. The company is confident of growing their market share, both in domestic as well as international markets, by leveraging its strong and niche product portfolio, expanding capacities, extensive domain knowledge and R&D capabilities.

Encouraged by growing product demand and strong industry tailwind, in FY20, Valiant increased its chlorophenol capacity to 18,000 MTPA at the Sarigam plant. It also added ortho nitro anisole and para nitro anisole to its portfolio. The company also undertook an expansion at the Jhagadia plant which it acquired in FY19 as part of the Amarjyot Chemical-merger and increased its capacity of hydrogenation products from the earlier 18,000 MTPA to 26,000 MTPA in FY20. Such backward integration capabilities will enable it to produce key raw materials in-house and drive home significant cost savings. Going forward, company has planned to increase the ammonolysis capacity at Tarapur and Vapi plants from 13,000 MTPA to 16,000 MTPA. 

In order to leverage the ‘Make in India’ drive, Valiant aims to commence operations of para amino phenol (PAP) and ortho amino phenol (OAP), which are import substitutes, in the coming quarters. It is worthwhile to note that PAP has been identified as key intermediate for pharma products by the government and will be incentivised under the recently announced Production-linked Incentive Scheme (PLIS). Additionally, the management is considering setting up a plant for paracetamol along with other drug intermediates and APIs.

Overall, the company’s financial performance appears to be quite attractive. Even during the difficult phase of COVID-19, Valiant fared very well and it would most likely close FY21 with strong operating financials. So far, in 9MFY21, it has clocked turnover of  Rs 5.21 billion and operating profit of  Rs 1.46 billion, versus  Rs 5.15 billion and  Rs 1.42 billion, respectively in 9MFY20. Further comfort can be drawn from the fact that Crisil, in its December 31, 2020 update, has reaffirmed its rating of 'CRISIL A-' with a positive outlook on an enhanced term loan amount of  Rs 2.17 billion, which was earlier  Rs 175 million.

Over the past five years, the company has maintained ROCE of around 50% and clocked respectable operating margin of 22-30%. Between FY19 and FY20, there was a significant fluctuation in ROCE — a sudden spike to 94% in FY19 and then a fall to 42% in FY20. But these were on the back of its acquisition of Amarjyot Chemical in FY19 and a huge capex across several divisions and units right after, and then spending around Rs 2.05 billion in purchasing fixed asset in FY20.

With efficient working capital management, it has generated more than Rs 1 billion in cash from operations for the past two years. Valiant seems capable enough to fund their organic and inorganic growth for the coming few years, along with keeping debt under check.

In short, the company looks set to be a dominant specialty chemicals player in India, since it has a strong parentage, niche product basket of import substitute products and well-integrated manufacturing units. It will continue to deliver sustainable growth. The stock currently trades at 33x but that is exaggerated because of the recent capex undergone.

Disclosure: The writer owns the stock and the view is personal. He is not a SEBI-registered advisor.