Stock Pick From Chemical Sector

It had a large tract of 10 acres of surplus land in Mumbai's western suburb Kandivali, which has been developed into a Mall - Growel’s 101, which is a highly valuable asset generating significant cash flows for the company. This will grow significantly over the next couple of years as they plan to utilise the balance for further development. Over the years, the company has paid most of the debt that was secured to develop the mall and now long-term debt stands at Rs 1.46 crore as on September 30, 2016 as against Rs 37 crore of debts in FY14. From this segment we expect at least additional revenue of Rs 5 crore each year in next two years due to renewal of old lease agreement would propel rental income from Growel's 101.

The company has higher expectations from thrust areas like paints, industrial lubricants and some niche chemical segments where it has been seeking to diversify into newer product and market segments. In the area of paints, the company’s bold steps in terms of setting up of a new manufacturing facility at Dadra, Vapi and Barotiwala and closure of the Chembur plant offer a leaner cost structure and enhanced production efficiencies to achieve greater market penetration. Its Chembur plant faced heavy octroi duty burden which increased the cost of materials. The labour charges are also high at Mumbai which adversely impacted the margins. This would help the company increase its profitability in the long run.

The company has now re-focused into oils and lubricants and poised for a significant push. The joint venture with SIDASA of Spain has converted into a technology licensing arrangement. This business segment offers an attractive long term opportunity.

On financial front, the company’s net profit grew by 15.54 per cent at Rs 28.84 crore in 9MFY16 and its revenue reported flat at Rs 289 crore. Operating profit reported flat at Rs 52.66 crore along with operating margin expanded by 39 bps at 18.22 per cent. With the change in the macro-economic situation, we expect decent growth in FY17 in its financial performance. On valuation front, it’s traded at a price to earnings ratio of 25 times with EPS of Rs 1.04 on TTM basis. We recommend BUY for the scrip with expectation of around 25-30 per cent from the current market price in the next one year.