Wow!! That’s the word that came out when I first saw National Peroxide’s Q2’FY19 result. The Profit before tax(PBT) margin was at 66.8% compared to 62.1% QoQ & 44.1% YoY. Just to make comparison, other chemical manufacturing companies have PBT margins of just 10-15%.
In the recent times, it’s only the graphite electrode manufacturers (HEG & Graphite India) that are having similar margins.
National Peroxide: Q2’FY19 Result Analysis- Number Analysis
National Peroxide: Q2’FY19 Result Analysis- Number Analysis
Hydrogen Peroxide : About the Industry!!!
National peroxide manufactures only one product which is Hydrogen peroxide.
There are only 3-4 players in the country manufacturing hydrogen peroxide, making the market an oligopoly.
The total production capacity of Hydrogen peroxide in India is about 2,00,000 MT but the total demand stands at around 2,50,000 MT. The rest of the demand is met by imports. And the demand is continuously growing with the expected growth of 6% in the current year.
The industry was facing margin erosion due to cheaper imports. To counter that National Peroxide & one more company filed petition with government. Based on the petition & investigation results, the finance ministry in 2017, imposed Anti-dumping duty on imports of Hydrogen Peroxide for five years on six countries. Anti-dumping duty provides the sector the ability to increase prices with demand as well as pass on any increase in cost.
Coming to National peroxide, they are the pioneer in the country with a market share of 39-40%. The current capacity stands at 95,000 MT , operating at more than 100% utilization leaving hardly any room for further volume growth. With the robust future demand in sight, the company is in the process of expanding the capacity from 95,000 MT to 1,50,000 MT.
The other major player in this space is Gujarat Alkalies & Chemicals which has a capacity of 39,000 MT which also is running at more than 100% capacity utilization. In the process to additional capacity of 15,000 MT.
The raw material required to manufacture Hydrogen peroxide is derived from Natural gas. National peroxide has a long term contract for the supply of natural gas from Gail India. That not only secures supply but to certain extent enable the company to have better control of its costs.
Hydrogen Peroxide : What is driving the change?
It’s important to understand what’s driving the surge in margins. Hydrogen peroxide finds usage as a bleaching agent in Paper & Textile industry.
As mentioned in my earlier blog of the factors helping the growth of Indian Paper industry. Almost all paper companies are running at more than 95% capacity utilization and they are not able to meet the robust demand. That’s why the remaining demand is met by imports.
Most of these paper manufacturer in the recent past have invested heavily in greener technologies to be used in Paper manufacturing process where Hydrogen Peroxide finds its use. Hydrogen peroxide finds it’s usage while manufacturing paper from both Wood Pulp as well as waste paper.
It is used to lighten the color & whiten the pulp and deinking of the waste paper.
Along with the strong demand from the paper industry driving the sales as well as anti dumping duty shielding its margins are together putting the company’s performance on higher plateau.
Is the growth at National Peroxide Sustainable?
To add to all these, there are anticipation of government levying anti dumping duty on import of papers, thus enabling domestic paper manufacturer of further increasing prices of their products. Implying that National peroxide will be able to charge further premium to it’s product. Add to it that almost all the Paper manufacturers in India uses Hydrogen Peroxide.
Because of all these factors:
Anti dumping duty on import of hydrogen peroxide
Robust demand from domestic paper manufacturers
Increasing margins of paper manufacturers
Anticipated anti dumping duty on the imports of paper
Product is Used by almost all paper manufacturers in India
Finds usage in making paper via wood pulp and waste paper
I would believe that the margins and growth are here to stay.
National Peroxide: Q2’FY19 Result Analysis
Valuations
National Peroxide- Valuation metrix
Even after factoring the excellent prospects about the company, the valuation looks expensive. The current negative sentiments prevailing in the market may provide better price to purchase. And the lower one buy, the higher is the expected returns.
Risks
The risks being new players setting up capacities, existing players expanding capacities and removal of anti dumping duty. There is already an company(Indian Peroxide Limited) which have setup 125 TPD of Hydrogen Peroxide capacity in Gujarat. But it will take sometime for it to make an impact to the already established players.
Further reading:
By,
Shekhar Yadav