Following up on my last blog on India Glycols Ltd in which I mostly covered about the company’s products and capacities, I wanted to see how things have improved in terms of the financial performance of the company. I will discuss on Q1FY20 as well FY19 results in the blog “India Glycols Ltd- Q1FY20 Result Analysis”.
India Glycols Ltd- Q1FY20 Result Analysis
Let me first give you a brief about any chemical/commodity business.
Since it is quite difficult for chemical or commodity product manufacturer to differentiate in terms of product, the differentiation in terms of financial performance can be brought about by:
1. Bringing efficiency in manufacturing i.e becoming the lower-cost producer
2. Low to almost no debt
3. Captive power generation
4. Higher asset turnover
Let me first start with the annual performance i.e. how did they do in FY19.
India Glycols Ltd- FY19 Result Analysis
India Glycols Ltd- Improving efficiency
Fig 1. India Glycols Ltd- Improving efficiency
If you observe from Fig1, the management through consistent effort has improved the performance of the company for the last 6 years.
All the return ratios have shown consistent improvement. Asset and Inventory turnover has showed continuous optimization for these years. So, has cash conversion period.
Although these numbers are still at a very low level when compared to other listed chemical companies in India, I must say that there is a remarkable improvement in all the metrics.
India Glycols Ltd- FY19 Result Analysis
India Glycols Ltd- Production & Realization data
Fig 2. India Glycols Ltd- Production & Realization data
In the last year i.e. in FY19, there was a good improvement in the realization of their 2 core products Glycols(MEG) by 9% and Ethylene Oxide derivatives by almost 7%.
The India Glycols Ltd management in their annual report mentioned that they were impacted by the China-US trade war, else the performance would have been better.
India Glycols Ltd- Q1FY20 Result Analysis
India Glycols Ltd- Quarterly Performance trend
Fig 3. India Glycols Ltd- Quarterly Performance trend
Coming to the quarterly result analysis, it is quite evident from Fig 3. that the operational efficiency has improved in terms of reducing other expenses, Power & employee cost as a percentage of net sales over the years.
India Glycols Ltd has been able to maintain the Gross margins YoY and improved it on a QoQ basis for Q1FY20 despite the slowdown. Not only that it has been able to grow in terms of both revenue and margins.
The company ventured into liquor business in recent times and that can be gauged from the high amount of excise duty being paid by the company and the liquor business have been a key factor pushing the sales growth figure. The company sells mostly country liquor. Liquor segment revenue has grown from ₹657cr in 2014 to ₹2125 cr in 2019 & a 54% growth in FY19. The growth momentum still continues in Q1FY20.
But the higher excise duty paid & the lower margins due to the liquor business act as a drag (EBIT less than 5%) which has been compensated by better margins in its chemical business as of now.
In terms of other factors, one of the big factor that eats away the operating profit is interest expenses. The total debt level stands at around ₹870 cr as of March 2019. Interest expenses reduce operating profit by almost 30-35%.
Although, the debt has reduced by a bit but still remains at an elevated level.
The current environment of falling interest rate will soon start helping them reduce the interest cost given that their debts have a high credit rating.
On the other hand, the company is constantly investing in fixed asset leading to debt remaining at similar levels. Because of which the return ratios are usually at subdued levels.
India Glycols Ltd- Q1FY20 Result Analysis
One can question, why have the stock prices crashed? If you are following markets, you will find that the same is true for all the small and mid-cap stocks. The prices had moved up quite a bit and quite fast in Fy19. One should be aware of how market cycles work. Read more on market cycles here
Another point maybe although things might be improving but margins are still at a very low level compared to other listed entities. But when the margins are at a low level and the management is trying hard, the possibilities of further improving performance increases.
The company has set up 200KLPD ethanol capacity to take advantage of govt’s ethanol procurement policy. Will start sourcing to Oil Marketing companies from FY20.
Also, the company plans to expand its IMFL business(Very small now) but time will tell how successful it is.
Overall the company’s business was impacted due to US-China trade war for the year FY19.
One caution would be the country liquor business which is now the largest contributor of revenue, has a very thin margin and if it continues to grow larger, there will be some further margin shrinkage.
In terms of management quality, I could not find anything negative. No shares are pledged, management seems to be sincere & honest based on their youtube interviews, conference calls and going through the annual reports, no tinkering with share capital, auditor fee is reasonable at ₹15lakhs, reasonable salary to management team and related party transactions are small in size with promoter shareholding of 61%.
Just one point that came to my notice was the waiving off of interest income (₹19.41 cr) from IGL Finance Limited, a wholly owned subsidiary that used to invest funds in short term commodity financing contracts of the National Spot Exchange Ltd. (NSEL). NSEL has defaulted on settling the dues because of which India Glycols ltd have created a loss allowance of ₹117cr. I think because of the stressed situation of the subsidiary they have waived off the interest payment on the ICD(Inter corporate deposit of around₹140cr).
Every business has some positives and negatives, one must weigh those before taking any decision.
Further reading:
India Glycols Ltd- Q1FY20 Result Analysis