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You are here : IndiaNotes >> Research & Analysis >> Companies >> Vikas Ecotech Ltd. >> Research

Vikas Ecotech - Get 'Vikas' for your Investments

Punit Jain | 25 Apr, 2017  | Follow Author | Add to my Favourites 
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  • Overview: VikasEcotech is engaged in mfg. and trading of specialty chemicals. It has factories in Shahjahanpur (Raj.) and J&K. The FY'16 revenues and profits were Rs 312 cr. and26 cr. and they have grown 21% & 29% CAGR over 6 years. Products are niche, high value and eco-friendly, many are import substitutes. Exports are growing and are 49% of revenues. Current operations are lean.
  • Why buy now: VET is commissioning new plants in Noida SEZ, Kandla SEZ and Dahej (Guj) as well as extensions at Shahjahanpur (Raj). It expects a revenue growth of 35% CAGR in the next few years as demand outlook is strong.
  • Key risks: 1) AsVET is a small firm, competition from larger players or Chinese firms can affect business. 2) The raw materials are crude derivatives and any rise in crude oil prices will increase input costs. 3) VET has been free cash flow negative for 5 of the last 6 years. This has raised debt.
  • The Target Price is Rs. 52.7 by May 2019, a growth of 143% over 25 months. This is a High Risk but High Gain opportunity for aggressive investors.

Here is a note on Vikas Ecotech Ltd. (VET).

Vikas Ecotech– Description and Profile                       

  • VikasEcotech manufactures and trades in specialty polymer compounds and additives. The main products are Polymer compounds, Organot in stabilizers, Plasticizers and Flame retardants. 
  • The FY'16 revenues were Rs 312cr., profits Rs 26 cr. and market cap today is Rs 610cr.
  • VET is located in New Delhi and has 2 factories located in Shahjahanpur (Raj.) and Samba (J&K).
  • VET started as a trader/ agency for petroleum and petchem products, then expanded into mfg.
  • VET has 250+ work force and products are exported to 20 countries, like B’desh, Pakistan, Sri Lanka, China, UAE, Turkey, Spain, S’pore, Germany, Vietnam, Turkmenistan, Egypt, Tunisia, Ukraine and USA.
  • VET makes and sells chemical products used in Agricultural Pipes, Auto Parts, Wires & Cables, Artificial Leather, Footwear, Organic Chemicals, Polymers, Pharma and Packaging while acting as distributor of MNCs in specialty chemicals and polymers. The company is mainly into 3 product categories:
  • Specialty Additives – toxin free high perf. additives for mfg. applications.
  • Plastic Compounds –polymer compounds like Thermoplastic Rubber (TPR), Thermoplastic Elastomer (TPE) and Specialty compounds of PVC, PET and EVA.
  • Recycling- VETuses recycled raw material to create virgin-grade PVC compounds of good quality.
  • Clients include RR Kabel, RelaxoF’wear, Liberty Shoe Escorts, KEI, Havells, Action Intl., Apollo Pipe, SRF.
  • In FY15, VET sold stake (and exited) from a wholly owned subsidiary, MoonliteTechnochem Pvt. Ltd. The firm also acquired the balance 25% stake of Sigma Plastic Industries thereby having100%stake. Thus by Q4FY15, VET became a standalone firm without any Subsidiary, JV or Associate.
  • In 2015 the company rebranded itself from VikasGlobalone Ltd to VikasEcotech Ltd.
  • Leadership team isVikas Garg (MD), Vivek Garg (Dir.), AshutoshVerma (CEO), and Pankaj Gupta (CFO).Vikas Garg has been with VET (and the group) for 18 years and provides strong hands on leadership.
  • Shareholding % is: Promoter and Group-41.6%, Institutions-29.25, individuals-8.9, others-20.25%.

Fig 1 – VET Segment and Geographic Segment Revenue

Recent Events, Business Plans and Strategies

  • VET commenced construction of its mfg. plant and R&D center at Dahej, Gujarat. It is will provide import substitution for additives and stabilizers across industries. The plant will add capacity and produce 6,000 MT of organotin stabilizers (methyl tin mercaptide or MTM) and 5,000 MT of specialty polymer compounds annually. The plant cost is Rs. 30 cr.Production was to start by Apr2017, but issues in environmental clearances may delay it by 6 months.
  • VET is instead setting up plants at Noida SEZ and well as extensions at Shahjahanpur (Raj.) to handle higher volumes. There will be exports benefits too at SEZs.

Fig 2 – Capacity Growth

  • Prince Pipes and Fittings PvtLtd's CMD, Jayant Chheda, and his associates have acquired, in their individual capacity, 2.63 crore shares of VET or over 8%. Prince Pipes and Fittings is a long term and strategic customer of VET. The funds received of Rs 34 cr. are to be utilised for expansion of R&D facilities, setting up new mfg. plants and strengthening marketing for both domestic and exports.
  • VET formed a strategic tie up with Prince Pipes and Fittings, India’s third largest PVC pipes mfg. firm for supply of a range of specialty chemicals to replace the harmful chemicals with eco-friendly variants.
  • VET produces Organotin Stabilizers which are required to produce Lead free non-toxic, safe and eco-friendly PVC pipes. It’s a valuable technology available with only few producers worldwide.
  • VET aims to produce bio plastic by using waste cooking oil through a technology called Wastol-P, and with this make itself one of India’s leading eco-friendly company.VET had entered into a contract with Haldiram, India’s largest and reputed snack manufacturers for supply of waste cooking oil.
  • VET is expecting revenue of Rs.400 Cr. and PAT of Rs.40-45 cr. for FY17. Exports may grow around 30-40% for FY17. VET expects revenues to grow 35% CAGR for a few years.
  • VET’s mfg. plant in Rajasthan was affected by a fire in Apr2017. But damage was limited to only one building that housed the polypropylene section and a material warehouse; four other units in the same factory are safe and fully operational. This unit contributes 3% to sales. It may take 4 months to restore full production. According to estimates, damages could be Rs. 15-20 cr. but the factory is fully insured.
  • During the current year VET’s market share in India for Organotin Stabilizers was 10%. Their vision is to attain 25% share of the expanded market in the near future.
  • VET allotted 2.56 cr. equity shares of Re 1/- each at a premium of Rs. 16/- in Mar2017 to non-promoters on preferential basis. Promoter holding fell 4% in the Company.
  • Crisil has rated VET a BBB for long Term Borrowings and A3+ for Short Term Borrowings in Feb 2017.
  • In Feb2016 Merrill Lynch Capital Markets bought 19,00,000 shares of VET.
  • Employee strength has grown rapidly recently from 63 (FY15) to 81 (FY16) and 250+ today.

Industry Outlook:

  • The Indian Specialty Chemical Industry is experiencing a force multiplier effect in India and is fast emerging as global specialty chemicals manufacturing hub.Total production of Indian chemicals Industry was 2.1 crore tons during FY’16.The Industry delivered 13% growth over the past five years led by domestic consumption. The industry delivered growth of 30% CAGR over FY13-15 to $2.67 bn.
  • India is 3rdafter China and Japan in terms of chemical production (Asia) &6thglobally in volume terms.
  • The Industry is expected to grow at CAGR of 15% for next 5 years.
  • Indian specialty chemicals firms will gain over China due to strict implementation of environmental norms and safety standards in China which lead to closure of many small unorganized firms. China’s clampdown on the polluting chemical industry has already led to a slowdown in its chemical exports.Chinese export slowdown seems the key exports booster for India.
  • Make in India initiative will facilitate growth in the industry and consequent flow of FDI to this sector.
  • The India demand for OrganotinStabilizers at 6,000 MT p.a. (growth 20%) and PVC heat stabilizer (60,000 MT p.a.) and global PVC heat stabilizer market demand are growing continuously, and their expansion plans are in line with domestic and international demand.
  • Indian specialty chemical players will contribute 6-7% of the global demand by 2023, which is almost double the current market share.During the current year VET’s market share in India for Organotin Stabilizers was 10%. Their vision is to attain 25% share of the expanded market in the near future.

Fig 3 – Price History

  • VET’s 5 year price history is detailed in Fig 3. Investors in VET over 5 years got a return of 51.4% CAGR.
  • The share price shot up sharply in 2015. The recent one year low is Rs. 10.85 in Jun2016, and the high was Rs 23.3 in Mar2017. The share price is currently trading 9% below its recent high.
  • Dividends have been consistent for over 4 years at 5% or Rs.0.05/share giving 0.24% yield. This is low.
  • The Revenues, EBITDA and Profits of VET have grown 21%, 35% and 29% CAGR over 6 years.
  • VET posted Q3 FY17 results with a revenue of Rs. 84.8 cr. with growth of 0.3%/1.5% YoY/QoQ resp. to due to demonetization and fall in trading segment. But the mfg. revenue grew 17% YoY. See Fig 4.
  • DE ratio is 1.41 which is high. VET mgt. plans to fund expansion plans through internal accruals.
  • Note: The VET data in Fig 4 is consolidated until Mar2015 and standalone thereafter.

Fig 4 –Quarterly Financials

Fig 5– VET’s Cash Flow

  • VET has weak cash flow position. It has been FCF positive only in 1 of last 6 years. This is a negative. See Fig 5. However the reason is investments in R&D and mfg. capacities. The firm raised funds through preferential stock issue and promoter holding dilution. As a result the debt position is still moderate.
  • In Fig 6a, the 6 year PE chart for VET has a historic average PE of 15. Current P/E is 15.74 times (of TTM earnings), while the P/B is 8.8 times. In Fig 6b we see that EPS TTM had an upward trend in last 2 years in a channel. But in Q3FY17 there was a drop due to business challenges like demonetization.
  • The DE ratio reduced in Mar’16,Fig 7. Interest coverage ratio improved. The inventory turnover ratio rose, operating & profit margins are higher, ROCE doubled to 32%. Similarly RoNW. These are positive.
  • Beta of the stock is 0.93 (Reuters) which is indicates low volatility.

Fig 6–a) Price and PE Chart

Fig 6–b) Price and EPS Chart

Fig 7 – Financial Metrics

Benchmarking and Financial Estimates

Exhibit 8- Financial Benchmarking

  • In a benchmarking exercise we compare VET with listed peers in similar businesses.
  • In terms of valuations, VET has a low PE ratio in spite of a recent rise in the share price. However P/B is high at 8.25 times.VET has the lowest dividend yield, however this is OK for a high growth company.
  • VET’s 3 year CAGR PAT has grown at 86.8%. This is excellent, however on a very small base.
  • Debt equity ratio is the worst amongst its peers, however the ratio is not too high, manageable.
  • VET has excellent return ratios over 35%. This is a positive and likely to sustain in the medium term.
  • The numbers are consistent with a firm that is now moving to a high growth / high profit phase.

Exhibit 9 –Projections

Note: The financial projections have been made based on following assumptions.

1.    Commercial production starts at Dahej plant by Q2FY18 and ramps up to full capacity in 2 years.

2.    Noida and Bhuj Gujarat plants too start contributing to revenues this year.

3.    Exports and domestic demand continue to grow at a combined 30-35%.

4.    R&D continues to develop new products; demand for lead free chemicals continues to grow; eco-friendly mfg. processes for PVC compounds from recycled materials gains visibility and demand.

5.    Analyst judgement.

Strengths of VikasEcotech

  • Good R&D that works with prospects and current customers to develop new products and solutions.
  • We believe that the recent revenue upswing is the successful result of several years of solid R&D.
  • Massive capacity addition from Dahej, Bhuj and Noida plants is coming on streamin FY18.
  • A good domestic focus on substitution for expensive imported niche chemicals.
  • Exports focus is high potential with a massive target market and good success already with 49% share.
  • There exists a good synergy between trading/ importing/ chemicals agency business and mfg.
  • Remarkable cost consciousness in the firm including salaries for promoters and employees.
  • Current customer base is derisked across a large number of firms and industries providing stability.

Weaknesses and Risks

  • The raw materials used by VET are crude oil derivatives. Any rise in crude oil prices will significantly increase the input cost and subsequently the margins. However we feel crude is in a 45-55 $ range.
  • VET has weak cash flow position. It has been FCF positive only in 1 of last 6 years. The D/E ratio at 1.4 times is moderate currently; however any further capital raise can push D/E to excessive levels.
  • Promoter shareholding is low at 42%. However the promoter has sacrificed holdings to raise funds for expansion. He may be in a position to raise this in a few years. He still has sufficient holdings today that provide him a good incentive to grow and develop the firm VET.
  • In terms of valuation, the P/B ratio looks expensive.
  • VET’s mfg. plant in Raj.suffered in a fire in April 2017. The damage could be Rs. 15-20 cr. But these assets were insured.One plant in J&K is in a sensitive area, there have been terrorist attacks recently.
  • Chinese chemical producers can be competitive on price and volume. The other massive player in the sector is Reliance Industries. VET has potential as a niche chemicals player as long as other larger players do not enter these segments. However these segment volumes may not be attractive for RIL.
  • VET can, after good success, be a takeover target for a player like RIL. But this can benefit investors.
  • VET sales are B2B, and used as raw material, so it’s difficult for JM analysts to verify & validate output.

Opinion, Outlook and Recommendation

  • The chemicals sector is a massive market, and specialty chemicals can be a valuable and large niche within this. India offers comparative and competitive advantages for this sector.
  • VET has taken this strategy and we feel that there is ample room to grow in this niche.
  • VET is rated highly on lean business operations, aggressive growth– both mfg. capacities and workforce, good R&D team, eco-friendly products and growth in both domestic and exports markets.
  • Valuations are reasonable as VET is a largely undiscovered firm. With a turnover of Rs 312 cr., VET has ample room to grow in domestic and exports markets.
  • Key risks are: 1) As VET is a small firm, competition from larger players or Chinese firms can affect business. 2) The raw materials are crude derivatives and any rise in crude oil prices will increase input costs. 3) VET has been free cash flow negative for 5 of the last 6 years. This has raised debt.
  • The target price is Rs. 52.7 by May 2019, a growth of 143% over 25 months.

Disclaimer and Additional Details

The target price basis is 1) Financial projections – Exhibit 9, 2) A target P/E of 20 times, higher than current 15.74 times 3) Analyst judgement. This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain and JM have no current shareholding, and no known financial interests in VikasEcotech& Co or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. Equity investments are subject to market risks. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, we recommend that investors looking to invest in equity should take advice from a Registered Investment Adviser. Punit Jain is certified and registered under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at [email protected]


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About Punit Jain

The author is a SEBI-registed Research Analyst (SEBI Registration No. INH200002747), and has a firm called JainMatrix Investments ( which offers an Investment Advisory Service. He can be contacted at [email protected]

For more information please write in to [email protected]

Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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