Keeping A Good Pace - National Peroxide

[INSERT_1]

National Peroxide (NPL), one of the lesser-known small cap companies from the Wadia Group, has outperformed both the BSE Sensex and the BSE Small Cap in the last one year. We feel that despite this out-performance, there is still a lot of steam left in the counter. This is because of the better valuation at which the company is still available, good dividend yield and better financial performance going forward. NPL, after a huge run-up of 46 per cent year-till-date, is still available at 8.3 times of its last 12-month earning compared to 14 times the industry average.

The icing on the cake is the 3 percent of dividend yield. Even if we take its EV/EBIDTA into account, we find it reasonably priced at 4.7 times. As far as the company’s balance sheet is concerned, it is quite strong and virtually debt-free. When we consider the financials of the company, it can easily been seen that they have been picking up in the last few quarters after a marginal drop in FY10. The reason for such an improvement is the better demand from the end-users of the company’s product and a reduction in the cost structure of the company. Hydrogen Peroxide (a flagship product) is a chemical used as a bleaching agent primarily in paper and textiles. With a claim of 40 per cent of the domestic market share, any improvement in both the paper and textile industry will directly help the company to boost its sales. To support such a spurt in demand, the company has earmarked `46 crore to augment its production capacity of Hydrogen Peroxide from 68 tonnes per annum to 84 tonnes per annum.

The production is expected to go on stream from the start of the next fiscal. The company witnessed a sharp decrease in the cost of raw material, which has come down from 24 per cent of sales in Q1FY10 to 18 per cent of sales in the latest quarter. The explanation for this reduction can be attributed to a lesser cash outflow towards natural gas that constitutes 44 per cent of the company’s raw material. Nonetheless, we feel that the improvement in the condition of the end-users of hydrogen peroxide will help NPL to boost its revenues. For the quarter ended June 10, the company has posted sales of `37.24 crore which is higher by 38 per cent a year ago.

The growth in sales was primarily due to the higher realisation of hydrogen peroxide. The average realisation during the quarter was `26,000 per tonne during the quarter as against around `20,000 per tonne for the corresponding period previous year. However, the profit of the company increased by five times to `10.5 crore in the same period, primarily due to better realisation and reduction in the cost of raw materials. Going forward we feel that the company will maintain its momentum as the lower cost coupled with higher realisation and appropriate capex will help it to post better revenues and operating margins.

Even the promoters have increased their stake in the company by 2.46 per cent in the last six months. Therefore, our suggestion to investors is to invest in the counter with a time horizon of at least one year with a target of `450 from the present level of `374.