A Colourful Choice - Asahi Songwon Colors

There are few companies that maintain a low profile and quietly but steadily continue to put up a decent performance. Asahi Songwon Colors (ASCL) is one such company which has remained out of the news circuit but has all the elements of becoming our chosen low-priced scrip. The first and foremost element in its favour is its strong financial performance for the last four quarters. It also has a good dividend payment history. On a valuation basis, its CMP of Rs 60 discounts its FY10 earnings by 7.50x and its EV/EBITDA is only 4.57x.

In fact, after having an insightful discussion about the company’s business and expansion plans with Gokul Jaykrishna, Joint MD, ASCL, our recommendation is that investors should buy the scrip at its current price with a target price of Rs 80 in the next one year. ASCL manufactures green and blue pigments used in ink, paints and plastics. These are Copper Phthalocyanine Blue (CPC Blue), Copper Phthalocyanine Green (CPC green) and Phthalocyanine Beta Blue (Beta Blue). It earns 90 per cent of its revenues from exports to the US, Japan and Germany. Its three main clients are Clariant, BASF and DIC.

Company’s capacity for CPC Green is 1,200 TPA, for CPC Blue is 10,800 TPA and for Beta Blue it is 1,200 TPA. The management has stated that quality-wise they are the market leaders in Asia (excluding Japan) and quantity-wise they are only next to Clariant Chemicals. As regards the revenues, CPC Blue contributes around 50 per cent to the topline, while CPC Green and Beta Blue contribute 25 per cent each. In terms of realisation, currently CPC Blue is USD 4.25 per kg, CPC Green is USD 7 per kg and Beta Blue is USD 6.50 per kg. The management has stated that the realisation has improved by around 5-7 per cent.

Going ahead, the revenue contribution is expected to change. The company is carrying out expansion at its Beta Blue plant. ASCL will double its Beta Blue capacity to 2,400 TPA, which will be completed by November 2010 in order to start commercial production from January 2011. The total capital expenditure is estimated at Rs 13 crore. While Rs 8 crore is a long-term rupee loan, Rs 5 crore will be from internal accruals. The best part is that even after raising the long-term loan, the total long-term loans of the company will not be more than Rs 9 crore. The management also plans to increase its Beta Blue capacity to 4,800 TPA in the next year. But there is no clarity on the exact time frame for the same.

The company has paid consistent dividends and in FY09 the total dividend payout was Rs 1.70 per share (Re 1 final and Rs 0.70 interim). The final dividend is cum-dividend till July 20, 2010. The company’s financial performance has been very strong with consistent topline as well as bottomline growth for the last four quarters on a QoQ basis. Going ahead, the management expects to maintain its EBITDA at 15 per cent. Considering the growth prospects, its topline is estimated at Rs 155 crore and bottomline is expected to be Rs 12.30 crore. This translates into a P/E of 10x, thus providing a target price of Rs 80 in the next one year.