DHARAMSI MORARJI CHEMICALS COMPANY (DMCC)

July 2019
Alpha Ideas 20:20
DISCLAIMER

▪ The Presentation is meant for Information purposes only

▪ No part of this presentation should be considered as investment advice

▪ Please consult your Investment Advisor before acting in any manner

▪ Fair to assume that I am biased as my clients and I are invested in the scrip

▪ Please do your own due diligence before taking any action on the stock
 EXECUTIVE SUMMARY

• Transition from a fertilizer/commodity chemical company to a speciality chemicals company

• Focus on niche chemicals (low volumes, low competition) but globally relevant (#1/#2/#3)

• Business economics is attractive & strong – 29% ROCE in FY19

• Expanding into new products/chemistries with strong focus on profitability; incremental ROCE to be
better

• Ethical management/promoter ; Skin in the game for MD

• Risk-return profile is attractive; expect ~ 2.5-3x in 3 Years

 SPECIALTY CHEMICALS – WHAT ARE THEY?

• Niche chemicals, usually oligopolistic/monopolistic market

• Used in mainly improving performance of the end-use applications

• Low volume, high value products

• Cost to the end user is low as a % of the total cost; sticky clientele

• Tough to find substitutes of these chemicals

• Stable margins – Contracts have price pass through clauses, thus neutralizing commodity prices
volatility
 SPECIALTY CHEMICALS INDUSTRY

• India’s specialty chemicals industry is worth USD 25Bn. It grew by 13% annually over the last 10 years

• Increasingly global chemical manufacturers are looking to outsource manufacturing to countries like
India. Outsourcing driven by increased regulations and rising costs in the developed world

• China over the last decade or so has seen massive increase in chemical manufacturing, however with
the rise in regulatory uncertainty, compliance costs and wage bills, India is emerging as next best
alternative for chemical manufacturing

• Domestic specialty chemical demand is also expected to rise in-line with per capital GDP
DMCC: SHARE PERFORMANCE & KEY METRICS

Share price has moved from INR 60 to

INR 130 in 3 years, implying a CAGR
of 30%, while PAT CAGR 42%

SHP as on 31st March 2019

Category % Comments

Promoter Shareholding 53% Up by 4.67% points in

the last 5 years
DII/FII Holding 1%

ADTV for the last 1 year – 48.6 Lacs

 DMCC: THE STORY SO FAR
Business prior to turnaround (< 2011)
• 50% of the business coming from
loss making fertilizer business
• No major focus on niche chemicals
• Debt heavy balance sheet and
stretched working capital – net-
worth was eroded
• Operating margins were always in
low single digits
• Company overall was consistently
making losses since 2006
Turnaround Phase (2011-17)
• New CEO from the promoter family
inducted – Bimal Goculdas
• Exited the loss making fertilizer
business and started focusing on its
strength – Sulphur chemistry
• Backward integrated strategy - goal
to become globally relevant (in top
3) in chosen products
• Strong relationships with global
agrochem & chemical giants
• Sales , EBITDA increased by 24% and
72% respectively in this time
• Repaired the balance sheet- became
debt free and started to pay
dividends after ~ 2 decades.
Growth Phase (2018 onwards)
• Successfully merged & turned
around sister entity Borax Morarji-
to make a bigger chemical company
with presence in Boron & Sulphur
chemistry
• Portfolio of 35 products and
growing, catering to diverse
industries
• Entering sulfones product and
specialty products in boron segment
• Lined up a capex of 100 Crores
which can generate a sales of more
than 200 Crores
 THE SHIFT TO SPECIALTY CHEMICALS

Sales Mix, DMCC

300 Fertilizer Commodity Specialty % Contribution of Specialty (RHS) 60%

55%

250 51% 50%

43%
200 40%

150 29% 30%

100 20%

50 10%

- 0%
2007 2012 2017 2019

Exports, % 13% 23% 26% n/a

*Drop in Sales in FY12 owing to exit from fertilizer business

 SPECIALITY CHEMICAL STRATEGY: BE NICHE BUT GLOBAL

• Niche chemicals which are low in volumes – no/limited competition from China

• Products manufactured by very few players globally and also consumed by handful of players –
making the relationship symbiotic

• Products where DMCC has cost advantage globally owing to backward integration or process
innovation

• Incremental profit margins of 30%+ in all new launches and a payback of < 3 years for each product

• Longer term contracts with customers (~ 70% of the contracts are >1 year); getting entry into clients
is a lengthy process

• Quarterly pricing adjustments with customers for raw material (RM) fluctuations (major RM-
Sulphur, Benzene, Ethanol) – the company ensures it earns a fixed profit per ton
 STRATEGY IN PLAY- BENZENE SULPHONNYL CHLORIDE

• 4-5 year old product , now the largest contributing product with very high profit margins

• Global market size of ~ 10,000 tonnes- DMCC has ~ 50%+ market share in the world

• DMCC is the lowest cost producer of this product globally – on the back of complete backward
integration into sulphuric acid manufacturing

• While the end market for this product is growing in single digits, DMCC has rapidly taken away share
from others

• DMCC’s dominance is evidenced by the fact that erstwhile #2 player in this market- Proviron, now buys
from DMCC and has stopped producing on its own

• Existing competition includes small players from China; however they are unable to compete with
DMCC on costs
 STRATEGY LEADS TO STRONG ENTRY BARRIERS

• Small market size doesn’t attract bigger players

• Investments in backward integration and R&D may not be attractive given the opportunity size of niche
chemicals which could be as low as few tens of crores

• Entering a new customer is also a lengthy process – approvals take time

• Lowest cost advantage of DMCC is not easily replicable due to proprietary technology and inability to
backward integrate

• Strong relationships with customers, evidenced by longer term nature of contracts. Customers include
global majors such as BASF, Lanxess among others

• Environmental approvals getting difficult to come by

TRANSITION VISIBLE IN NUMBERS

Profit Margins, % Working Capital, # of days

Gross Margins EBITDA PAT Gross Working capital NWC
258
45% 47%
42% 40%
124
92 91
23% 49
20% 21
16% 6
13%
9% 7% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
3%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
-11% -180

Asset Turnover, # Return on Capital Employed, %

2.10 35%
1.9 29%
1.7
19%

0.73
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

-6%

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

 GROWTH DRIVERS – SULFONES & BORON

• Outlined a capex of INR 100 Crores over the next 3 years for new products

• One such new product category is sulfones – have spent last 3 years in development and obtaining
approvals from customers. Sales have started to ramp up in FY19. This has 4 products as of now, will
look to introduce more in the future

• Sulfones as a category is a low competition area with only a handful of players in India & globally.
DMCC’s way of manufacturing sulfones is unique which is both environmentally preferred and also
cost effective

• As a product line, management expects this category to contribute ~ 100-150 Crores in the ensuing
3-4 years

• Boron segment - FY19 saw company achieving break even, expect this segment to turn around and
contribute to profits in the next 1-2 years
 SOME SIGNS – CO GETTING READY FOR THE NEXT PHASE OF GROWTH

• Upped capex guidance from 50 Crores in Dec 17 to 100 Crores in Sep 18

• Hired a separate head for specialty chemicals and commodity chemicals

• R&D team size growing and R&D spend as a % of revenue increasing

• Company has seen strongest addition to its second level management; hiring from global majors
such as Clariant

• Started to pay dividends after 17 years

• Hired a new CFO from Fine Organics (INR 4,500 Crore Mcap co)
DMCC V/S OTHER SPEC CHEM PLAYERS

3 Year CAGR
1.7 FY 19 Asset Turnover
60% Revenue EBITDA PAT 1.4
1.3
42% 1.0
0.9
29%
23% 25%
18%20% 20% 20%22%19% 21%
16% 16% 17% 53%
47% 41% 48% 46%

DMCC Aarti Industries Atul Ltd. Alkyl Vinati Organics DMCC Aarti Industries Atul Ltd. Alkyl Vinati Organics
Ltd. Amines Ltd. Ltd. Amines Ltd.

FY 19 ROCE FY 19 ROE
FY 19 D/E
29%
0.8 28%
26% 25%
22% 24%
19% 20%
16%
0.4 13%
0.3

0.0 0.0

DMCC Aarti Industries Atul Ltd. Alkyl Vinati Organics DMCC Aarti Industries Atul Ltd. Alkyl Vinati Organics
Ltd. Amines Ltd. Ltd. Amines Ltd.
 COMPETENT CEO AND FAIR PROMOTER

• Interest free loan during troubled times

• Preferred interest waiver despite company turning around

• Conversion of preference shares into common equity only after successful turnaround

• Merger of two promoter owned companies to make a big solid speciality chemicals company

• Bimal, current CEO, has enough skin in the game

• Bimal has been consistent with his strategy for the last 4 + years – conservative and has walked the
talk- have met to him around 10 times during this time period

• Started rewarding shareholders through dividends after a gap of 17+ years

 DMCC: 3 YEARS HENCE?

Particulars Today 3 Years Hence

Sales EBITDA margins Sales EBITDA margins 3 Year CAGR
Commodity Chemicals in DMCC 80 7 9% 80 4 5% 0%
Speciality Chemicals in DMCC 105 37 35% 168 42 25% 17%
Boron Segment 50 0 80 10 12% 12%
New Products 100 25 25%
Total 235 44 19% 428 81 19% 22%

Sales CAGR - 3 Years 22%

EBITDA CAGR - 3 Years* 22%

• Incremental products launched with a benchmark of 30% + margins

• Project payback to be within 3 years

• Incremental ROCE ~ 50% +

* EBIDTA calculated after adjusting FY19 for one-time commodity gains
DMCC: RETURN ANALYSIS

Figures in Crores
Particulars FY 19 FY 22 CAGR
Sales 234 428 22%
Adjusted EBITDA 44 81 22%
Adjusted PAT 30 53 21%

Share Price in INR, Mcap in Crores

CMP 129
Current Market Cap 323
Current Mcap 322
Current Share Price 129
Exit Multiple 15
Exit Mcap 789
MOIC 2.5
IRR 35%
 PEER COMP -VALUATION

Company Name Market Cap P/E EV/EBITDA 3 Year Sales CAGR 3 Year EBITDA CAGR ROCE, %

DMCC* 322 11 8 16% 50% 29%

Aarti Ind 14,200 30 18 18% 20% 16%
Atul 3,661 23 13 16% 20% 19%
Alkyl Amines 1,559 19 10 21% 22% 25%
Vinati 9,561 34 21 21% 25% 28%
* P/E adjusted for one time commodity gains

**3 Year CAGR – FY16- FY19

** ROCE pertains to FY19
Market Cap in Crores
 RISKS AND CHALLENGES

• Execution risk

• High product concentration

• Forex volatility

• Commodity prices volatility

Checklist Driven Process To avoid mistakes

THANK YOU