Asahi Songwon Colors (IPO at 95 during 2007). CMP 45. Market Cap 50 Cr. EV 75 Cr

Its an unglamorous business, but then I would think that at a price, every business becomes a buy. Here’s my outline:

Asahi mainly manufacturers CPC Blue Crude which is an ingredient that goes into printing inks, paints , plastics etc. Their main customers are DIC of Japan (largest printing ink mfr in the world) and Clariant Korea. With these 2 customers they have a toll manufacturing arrangement (cost plus), hence RM risks are mitigated.

Industry Dynamics (taken from their RHP):

Structural change happening with capacities shutting down in the developed world due to environmental concerns and high labour costs. Much of the capacity in the developed world is expected to shut down over the next few years. Almost 80% of production is expected from China & India. There might be supply constraints over the next few years as this rejig happens. Good time for the manufacturers !

Worldwide demand for CPC Blue Crude was 112,000 tonnes in 2005. Expected supply worldwide (manufacturing capacity)in 2006-07 was 102,000 tonnes. Demand for CPC Blue Crude is expected to grow at a steady pace since it’s a key ingredient in paints, lubricants, plastics etc.

Main customers are key stake holders:

DIC of Japan holds 7.05% stake bought at Rs 122

Clariant Korea holds 5.86% (not sure what price they bought at)

Projections:

Mgmt had projected a 500 Cr turnover with OPM of 18% by FY 10. This would mean operating profits of 90 Cr by FY 10 and an EPS of 50. Compare that with current EV of 75 Cr and CMP of 45.

If mgmt achieves 50% projections, you are still looking at a steal.

Risks:

In 2006, 56% of supply was to 3 largest customers. Clariant Korea itself was 26%. The toll manufacturing agreement with Clariant was expected to expire Dec 2007. I did read that that this was extended, but have been unable to confirm. However, stake owned by them lends some comfort .

Is the expansion project on schedule ?

Will the global slowdown affect supply demand dynamics which look favourable right now ?

Disclosure: I own the stock.