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Tuesday, June 10, 2008

Ignored Sectors - Away from glamorous world of high-visibility sectors

They say, more than a tonne of dirt needs to be shifted to find every single carat of diamond. The same applies to the vast universe of small companies. It is a daunting proposition to sift through an endless list of obscure industries in the hope of hitting on some gems.

No wonder, most of the analysts stick to companies in the more glamorous sectors such as IT, pharmaceuticals, FMCG, capital goods and infrastructure among others. ETIG undertook this difficult task long ago. We have so far covered small industries such as solvent extraction, food processing, chemicals and sugar.
This week, we thought of researching a few more small and obscure industries just to check on the kind of action taking place there. We find that away from the limelight, quite a few companies in these sectors are thriving and waiting for their time to come.

However, there is a caveat: most of the companies operating in these sectors are small-caps and, as such, may be subjected to erratic price movements from time to time. So, due caution must be exercised while investing in them.

DYES & PIGMENTS

The dyes and pigments industry provides colourants to textiles, paper and leather industries. Besides, pigments are also used in paints and printing inks. This industry exports a chunk of its products and has long been suffering due to Chinese competition. However, the worst may be over for this industry.
 
Chinese competition has receded as the Chinese government has cut back on fiscal benefits to its exporters, while tightening of environmental norms weeded out many marginal players. With energy costs going up substantially, the industry is now finding that global customers are ready to accept higher prices.

In India, a number of large players are operating in this industry such as Clariant India, Atul Industries and Sudarshan Chemical, among others. Hardly any capital expenditure is taking place in the industry currently, due to global oversupply in some of the major types of dyes.

As a result, domestic players are investing in backward integration. Recently, Kiri Dyes & Chemicals raised funds from the primary market to build capacities for raw materials. Similarly, Atul completed the expansion of its facilities for key dye intermediates in September '07.
Diversification into related chemical businesses has proved to be another way out for dye manufacturers. Companies such as Meghmani Organics and Atul derive a chunk of their revenues from agrochemicals. The pigments industry has witnessed some capacity expansions over the past couple of years. Asahi Songwon Colors and Shreyas Intermediates have expanded their capacities of blue and green pigments.

A number of these companies have been paying dividends consistently and are currently trading at attractive dividend yields. Companies like Ultramarine & Pigments, Atul, Bhageria Dye Chem, Bodal Chemicals and Metrochem Industries witnessed higher dividend yields.

PESTICIDES

The pesticides or agrochemicals industry continues to remain an obscure one, as its dependence on several factors makes it almost impossible for anyone to predict its growth. The companies in the sector are directly dependent on the agriculture industry.
However, a number of factors such as the pattern of the monsoon and pest attacks affect the industry directly. A change in the area under cultivation for crops that require maximum pest protection, such as cotton, will also affect the industry performance.
 
Apart from all these, agrochemical companies require a wide distribution network, strong brands, and a comprehensive product portfolio backed by extensive market research to sustain in this highly competitive industry.

United Phosphorous has emerged as an Indian MNC in this space through major acquisitions over the past 2-3 years. It now figures among the top three global generic agrochemical companies and has a wide range of products, besides subsidiaries expanding in the seeds business.

The other leading players such as Excel Crop Care, Punjab Chemicals & Crop Protection and Rallis India are also taking various steps to sustain their growth. Rallis has performed particularly well by restructuring its business by selling off extra assets and focusing on its core business.

The companies are diversifying their portfolios by adding other farm inputs such as seeds, nutrients and bio-pesticides to their agrochemicals portfolio. Punjab Chemicals & Crop Protection, which was hitherto predominantly a bulk manufacturer, is now moving into selling formulations in the retail segment. It further plans to grow inorganically and is looking for suitable opportunities.  
The monsoon this year is predicted to be better compared to the previous couple of years. Similarly, strong agri-commodity prices and the farm loan waiver scheme announced by the government are expected to improve the liquidity situation of small farmers, all of which augur well for the agrochemicals industry in general.

INDUSTRIAL GASES

A variety of industrial gases such as oxygen, carbon dioxide, argon and nitrogen are required in a host of industries such as steel, fertilisers, glass, automobiles and healthcare. The industrial gases industry is slated for a strong growth over the next few years, thanks to a number of expansion projects in user industries.

New capacities are planned in industries such as petrochemicals, steel, glass and food processing, which augurs well for the industrial gases industry. Additionally, gas application in the electronic sector has opened up new growth possibilities.

BOC India is the largest industrial gas manufacturer in India, which is currently investing in building storage and transport infrastructure for liquid and compressed gases. Gujarat Fluorochemicals is India's largest manufacturer of refrigerant gases.

However, a major chunk of the company's revenues come from the sale of carbon credits, other chemicals and power. Refex Refrigerants is a new entrant in this space dealing in non-ozone-depleting refrigerant gases. Bhagawati Gases, which was so far totally dependent on Hindustan Copper for selling oxygen, has now relocated one of its plants to supply oxygen to a steel manufacturer in Maharashtra.

INDUSTRIAL EXPLOSIVES

Industrial explosives are required in industries such as mining and infrastructure. Solar Explosives, Premiere Explosives and Keltech Energies are the leading players in this industry. Pune-based Deepak Fertilisers is also trying to give a strong push to its ammonium nitrate business, which is used as a commercial explosive.

Increased investments in coal mining by Coal India, as well as private mines for power, steel and cement industries and road and other infrastructure projects, are driving demand for explosives.
CERAMICS

The ceramics industry mainly comprises floor and wall tiles and sanitary ware. The growth in this industry is being driven by the boom witnessed in India's real estate sector.

India's real estate sector has been growing at over 30% per annum over the past few years, which has resulted in the booming demand growth for the ceramics industry. The growth in the hospitality industry and new commercial complexes, malls and multiplexes coming up in India also lend support to the growth prospects of this industry.
Despite the current lull in the housing industry, there are a number of real estate projects, particularly integrated township projects, under implementation, which are expected to keep the demand for ceramics industry strong in the months to come.

Several expansion projects are being executed by most players. Euro Ceramics had raised around Rs 92 crore through its IPO last year and has commissioned a plant for manufacturing calcarious tiles. Now, the company has embarked upon the next phase of investments with plans to spend Rs 575 crore. Hindustan Sanitaryware is setting up a container glass plant and has entered the retail business through its wholly-owned subsidiary.

SPECIALTY CAPITAL GOODS

Among capital goods companies, there are several which cater to a specific industry or have their own niche area. For example, Kabra Extrusion and Rajoo Engineers manufacture machines used by plastic product manufacturers. Manugraph Industries makes machinery for printing presses and Lokesh Machines specialises in CNC machines required in all the manufacturing plants.
Lokesh Machines had come out with an IPO in early '06 to fund its expansion. Some of its expansion plans got pushed to the first half of '08. Hence, the real benefits of this expansion will accrue over the coming quarters.

Kabra Extrusion Technik has been a major beneficiary of the booming demand for plastic pipes in India. The company manufactures extrusion machinery needed in manufacturing pipes, sheets and films from various polymers such as polyethylene (PE), polyvinyl chloride (PVC) or polypropylene (PP). The company, which is expanding its product portfolio, is trading at an attractive dividend yield.

Manugraph Industries, which manufactures printing machinery, has emerged almost a debt-free company with healthy return on capital employed. Despite being fundamentally strong, lack of substantial growth opportunities have made the company languish with a price-to-earnings (P/E) multiple of 5.4. The dividend yield is attractive at 3.3%.

To wrap up things, there are interesting companies operating in highly niche areas, which are not too well-known in the market. Some of these industries have the tendency to fall out of fashion for long periods. However, a keen researcher may still hit upon a multi-bagger, if he acts in time.

Source: ETIG

1 comment:

  1. I take the opportunity to compliment you for providing quality Indian stock signals for readers consumption.

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