Thanks

 

National Peroxide
Description
National Peroxide is a small cap stock which is into the the manufacture of hydrogen peroxide from its Kalyan based factory near Mumbai
Hydrogen peroxide is a chemical used as a bleaching agent primarily in textiles and the paper industry, it is used primarily as a substitue of chlorine based bleaches and is supposed to be milder yet effective

 

THE CATALYST
Company is very reasonably priced at EV/EBIDTA of about 4.5 with ROCE of nearly 40% this year, a d/e ratio of .35 and operational cycle of < 60 days, in addition operational cash flow has increased 4 years in a row 06-09
About 44% of the company's raw material cost is Natural gas, the firm used 211448 mbtu at a cost of Rs 17.93 cr, this works out to about Rs 850 per mbtu and with USD / INR 45 it is 18.85 $ per mbtu (from annual report data on websites)
By comparision Reliance after winning the case will supply gas in the country at $4.2  per mbtu
Even if we assume that middlemen will triple the cost to $12.5 per mbtu , it will be a 33% reduction in the gas bill to about Rs 13 cr
So even if everything including sales and prices remain flat, the company will improve ROE and margins dramatically
even more .
While sectors such as Ceramics, Power and Fertiilzers are getting re-rated on basis of Gas supply, this company seems to have been missed

In addition please find some interesting points about the company

 

Strengths
-Company is a Wadia group company, that gives some level of comfort on management quality. Also in last 6 months they increased stake form 28% to about 31.5%
-The firm has a tieup with Solvay (the same fellows in Solvay pharma) which has a 24% stake in it and is a global leader in hydrogen peroxide technology
-Management is active and energetic in attacking problems - three years ago they initiatied dual usage of naptha and natural gas to cut costs, last year they used the excess cash to pay down debt
-4 years of continuously increasing operational cash flows and decent operating cycle of under 60 days and a negative working cycle
-Totally domestic firm 100% of sales in India, 85% of raw material sourced locally, though their customers may be exporters, so no Greek chakkar vakkar , atleast not directly

 

Weaknesses
-Further capex may be needed only 1 Kalyan plant that was operating last year at 115% capacity, now expansion of 30% is planned by management
-Need help on the competition to this company from other firms in Hydrogen Peroxide business, are there any other companies in it
-Is a side business for the Wadia's compared to Bombay Dyeing, Britannia and Go Air and may be ignored
-Company is old fashioned and unionized from what I heard

 

-Even though the electronic media is growing , the domestic newsprint especially rural and textile units continue to grow at a good pace
-The reduction in natural gas price will dramatically alter the economics of the business

 

Threats
-Technological -if substitute for hydrogen peroxide is found, it could damage the stock,though I am not aware of any such efforts, in the 3-5 year period such things happen in the chemical world
-Overseas competiton-Overseas imports of hydrogen peroxide proved competitive and the company had to request for anti-dumping duty to be imposed, so the firm might not be cost competitive, though it should become competitive with cheaper gas.If China slows down, Thai companies may dump hydrogen peroxide in India
-Poor relations with Ambani's due to 1980's fights and they are main gas suppliers, however gas sourced from GAIL and GSPC should help

 

Additional Risks
-Need to check for 2nd order effects whether activities in paper and textile business could affect demand
-Annual report not available on company website , looks unprofessional , unable to check for extent of related party transactions, if it high then stock might not be worth it

 

Mohit you are bang on about the oversupply

also the demand is likely to go down even more due to further newsprint prices collapse with devices like Kindle and I-Pad in West

however in India this impact is at least a few years away (check out the performance of Dainik Bhaskar and Jagran Prakashan) in newspapers

so as the oversupply is directed here , currently NatPer cannot compete

however with cheaper natural gas - it can compete

also it could be an attractive buyout target as it is a side biz for the Wadias

net net this is not a ten bagger or a compounder but if it reaches fair value at about Rs 300-350 also i guess its pretty good

in addition the demand from medicine and textiles is also strong unless people stop wearing clothes

 

Hi checked the holdings that however it's adding meagre amount to other income, so helps from a balance sheet point of view only

They have a gas contract, with GAIL starting 1 Jan 2010 already and an expansion to about 85000 metric tonnes planned. I am assuming the gas is for that only. GAIL might not supply KG gas directly to them, but it will have a little surplus as its current and upcoming KG supplies will meet the needs of the plants and fertilizers. This surplus is being directed to firms like Nat Per and Kajaria

More worryingly, for Natper their sales declined by 10% for FY 10.

So need to see at least 2 quarters worth of positive results from GAIL supply and capex expansion before taking a position.

As of now it's on my interesting watchlist.

Thanks