An unknown company by the name of “Tanfac Industries” have caught the frenzy of investors trying very hard to get a pie of the company. And why wouldn’t they. The company has given a return of more than 150+% within a period of 1 month i.e. 30 days only.
Tanfac Industries analysis: Q1FY19 margins
The surge in the share price started around the announcement of Q1 FY19 results. The results came on 9th of August & I must agree that it was spectacular. Net sales grew by 42% whereas Profit after tax soared upwards by 462% i.e. 5.6x. The EBITDA for this quarter came at 27.5% vs 12.66% YoY 10% QoQ. Similar was PAT margins.
Tanfac Industries- Brief Introduction
Tanfac Industries is a Joint Venture company set up in 1972 between Tamil Nadu Industrial Development Corporation (TIDCO=26.02%) & Aditya Birla Group through its 2 holding companies which are Pilani Investment (4.99%) & TGS investment (19.96%). The company started commercial production in 1985.
The company is one of the largest producers of Fluorine based chemicals.
Tanfac Industries-Key Products
Tanfac Industries: Segmental sales percentage
Aluminium Fluoride:
The company has been reducing its production due to lower contribution to sales. Used as electrolyte of the Aluminium reduction cell and in the electrolytic process for refining Aluminium.
Sulphuric Acid: Very important commodity chemical. Finds usage in a number of end industries which are Fertilizers, Detergents, Dyestuffs, Pharma, Insecticides, Anti Freeze.
End industries: Agri, Chemicals, Metallurgy, Petroleum, Textiles, Water treatment
Anhydrous Hydrofluoric Acid: Finds application in a number of industries which include refrigerants (HVAC, AC etc), a catalyst in Petrochemical industry for alkylation
It is a precursor to most of the fluorine-based compound which include Pharma, Teflon, Petrochemicals etc
Fluorochemical Industry
Fluorine-based chemicals are derived from Flurospar & Sulfur. For Tanfac Fluorspar’s contribution to raw material, the cost was 45+% while that of Sulphur varies and averages close of 30% of raw material cost. Between 2000 and 2005, China increased fluorochemical production capacity seven-fold and has been the global leader since then. Also, they have the largest reserves of fluorspar, while India has to import the same. This gives China a huge cost advantage in terms of both economies of scale coupled with low raw material cost. This explains the dominance of cheap Chinese imports in the Indian market.
Tanfac Industries- Problems faced in the past
Because of the inability of Tanfac’s products to compete with Chinese goods on a pricing basis, the company has been incurring losses since 2010(exception of 2011) till 2015 and a marginal profit in 2016.
At bad times, everyone is your enemy. With losses, the credit rating agencies downgrade Tanfac’s rating leading to increase in borrowing cost. The only benefit is that they can carry forward the losses & will not have to pay taxes for a few years going forward.
The continuous losses also lead to erosion of Net worth. According to Sick industries act of 1985, if any company’s Net worth has depleted by more than 50% due to the losses in the last 4 years needs to be admitted to Board for Industrial and Financial Reconstruction (BIFR). In order to avoid that as well as meet the working capital requirement, the company issued Redeemable Cumulative Non-Convertible preference shares to Aditya Birla Chemicals Ltd that increased the Net worth by ₹5cr in 2015. You get some advantages belonging to a strong business group. It also had got an Inter corporate debt of ₹ 35.5 cr from Aditya Birla Epoxy Ltd.
Reason for the massive increase in margins of Tanfac Industries?
It’s very difficult to analyze smaller companies given the very small amount of available information. There wasn’t a single analyst report on Tanfac.
After putting in a lot of effort on trying to understand the mind-blowing increase in margins, the answer lies with the shutdown of one particular company: Sterlite Copper in Tuticorin (Thoothukudi)
Sterlite’s copper smelting unit in Tuticorin is one of the largest in the world.
You must be wondering what Sterlite copper has to do with the increase in margins of Tanfac.
Let me explain that. Sulphuric Acid & Phosphoric acid are the 2 by-products produced during the smelting of Copper. Sterlite copper is the only producer of Phosphoric acid in India & one of the largest producer of Sulphuric acid. Because of the closure of the plant of such a scale since March 27th, 2018 & the final nail in the coffin coming on May 28th via the order of the state government to permanently close the plant. Since end, march prices of Sulphuric acid has grown by almost 3.5-4 times. This was towards the end of the month of May. I assume the prices would have increased further for the month of June.
To validate my theory, I looked at the margins of Tanfac when Sterlite’s unit was shut for 3 months starting in April 2013. And there was a similar shift in margins. The margins started to normalize post the restarting of the plant. But today along with Sterlite, Chinese close down of chemical companies & growing domestic demand are other factors helping in the margins of Tanfac Industries.
Tanfac Industries: Result analysis FY13-14
Given that Sulphuric acid contributes to only about 20% of sales, is the profit growth driven only by one single product?
The answer is No. The key contributor of sales which are Fluorine based products(70% of revenue) is also witnessing price increase. This is evident for the increasing EBITDA & Gross margins for key Fluorochemical competitors: Navin Fluorine, Gujarat Fluorochemicals & SRF Ltd.
Is the rise in Sulphuric acid prices sustainable?
I don’t think so. The key end users of the product which are Fertilisers, Detergents, Textiles have very limited ability to increase the product prices in my opinion.
Also, given the size of Sterlite’s plant, tax payments, large employee base & the political clout, I doubt the shutdown will last long as seen in the past as well.
Coming to the conclusion, Tanfac is helped by a sudden increase in Sulphuric acid prices & steady but not extraordinary rise in Fluorochemical prices. I don’t think Sterlite’s copper plant will stay close for long & once the news comes, the prices are set to see a downward spiral. One needs to be very careful while taking short term position in the company.
Further reading:
By,
Shekhar Yadav