Stock Pick From Chemical Sector

Acquired Dresen in Feb 2016 which will provide sales growth

Continued focus on cost control

This time we are focusing on a company whose products have applications in food processing industry; Aroma and flavours with application in food, feed and fragrance industry and performance chemicals with application in industrial, pharmacueticals and agricultural processes.

Camlin Fine Sciences is the second largest manufacturer and marketer of food grade antioxidants like TBHQ and BHA which is used to preserve food. The company has dominated this sphere and there is potential for immense growth with shift towards ready to eat foods and food processing across world. The company has acquired Dresen in February 2016, a medium-sized company, which is engaged in manufacturing and distributing speciality intermediate chemical solutions used by the feed, food and other industrial products to expand its reach in in the North, Central and South America. The consideration paid for the same is USD 7.8 million. On the group basis, the sale of Dressen was approx. Rs 108 crore in Dec FY15.

Camlin is also setting up its facility in Dahej SEZ, Gujarat to manufacture hydroquinone, catechol and Vanilin which will be commissioned by Sep 2017.Vanilin has wide application and most commonly used for flavouring. We see that there is potential for growth in this sector. We also believe in company management due to its continued focus on cost control while growing its presence in the industry.

The company has been currently seeing declining sales with competitors eating into the market. With this acquisition of Dresen, the company will be able to get further reach in markets and will provide sales growth. 

On the financial front, the company reported 10.3 per cent increase in sales on consolidated basis of Rs 570.58 crore in FY15. Operating profit expanded by 29.79 per cent to touch Rs 92.55 crore. The operating margin before depreciation and interest expanded by 325 bps to reach 14.75 per cent. However for the last nine months, the company's sales have declined by 13.9 per cent. The company has performed well on the cost front and its operating profit has increased by 10.5 per cent. The company might report a weak 4QFY16. We believe the company’s performance on sales front will be bolstered with acquisition of Dresssen and company will start reaping benefits from 1QFY17.

Company currently on the consolidated basis is trading at P/E of 20.6x at TTM EPS of 4.5 as against industry average of 7.78x. We see that the company will perform better in FY17 and has potential to give upside of 33 per cent.