Company Name – Apcotex Industries Limited (Apcotex) Current Share Price – INR 489 (May 12, 2023) Market Cap – INR 2,537 cr |
1. What is interesting about the stock?
The COVID-19 epidemic has had a significant global impact, and India is no exception. The scarcity of latex gloves has been one of the most noticeable consequences of the pandemic.
Healthcare personnel use latex gloves to protect themselves against infection. They are also used by others who may be at risk of germ exposure, such as food handlers and childcare workers.
During the pandemic, the demand for latex gloves has surged. This is due to the fact that healthcare staff are now compelled to wear gloves at all times when treating patients. Furthermore, many people who would not typically wear gloves are doing so to protect themselves from infection.
The scarcity of latex gloves has also resulted in some amusing situations. People were seen wearing gloves on their feet, heads, and even their pets, according to news reports.
Companies manufacturing these gloves got a tailwind from the pandemic. One such manufacturer in India is Apcotex Industries Limited. The Company started as a division of Asian Paints Limited in 1980 and was later spun off in 1991 as a separate entity under the leadership of Mr. Atul Choksey, former MD of Asian Paints.
Apcotex is a synthetic latex (XSB latex, VP latex, styrene acrylics, and nitrile latex) and synthetic rubber (nitrile rubber, high styrene rubber, nitrile polyblends, and nitrile powder) manufacturer. Synthetic rubber is used in the footwear, vehicle, and rice roll sectors, whereas synthetic latex is used in the paper and paperboard, textile, carpet, construction, and tire cord industries.
Nitrile rubber (NBR) and high styrene rubber are only produced in India by Apcotex. Currently, imports satisfy 70–75% of the entire local demand for NBR, with the Company filling the remaining 25%–30% of the gap.
The clientele of the Company has remained diverse, with the top ten customers providing 20-25% of revenues in the last two years. The customer base includes companies like ITC, JK Paper, Pidilite Industries, MRF, SRF, Century Enka, BILT, Paragon, Ajanta, Footwear, Relaxo, Jayshree Polymers, and others. Exports (Southeast Asia, South Asia, and the Middle East, North Africa) contribute to ~25% of revenues.
The company has two manufacturing plants, one in Maharashtra (Taloja) and one in Gujarat (Valia). The Taloja facility has a synthetic latex capacity of 65,000 MTPA and a high styrene rubber capacity of 7,000 MTPA, with an additional 35,000 MTPA constructed following capex. The Valia production facility has a capacity of 21,000 MTPA for nitrile rubber and related products, with an additional 50,000 MTPA for XNBR latex installed after capex.
Recent capex can add revenue of ~ INR 600-700 cr in the next 2-3 years with INR 200-250 cr in FY24.
Apcotex has recently ventured into Construction Chemicals. The business provides services in the western Indian construction chemicals market and has a considerable presence in Mumbai thanks to large waterproofing contractors and a network of distributors. It provides goods such as waterproofing polymer products, waterproofing coatings, admixtures, bonding agents, repair goods, grouts, and tile fixing goods, among others.
Raw material consumption accounts for ~70% of revenue, exposing Company’s profitability to price fluctuation risks. Styrene, butadiene, and acrylonitrile, three of its primary raw material, have historically had severe price fluctuations.
Why invest in Apcotex?
Diverse product variety: Apcotex Industries offers a wide range of synthetic rubber goods, including SBR, NBR, and PBR, to a number of markets, including adhesives, footwear, and automobiles. This enables the business to serve a larger spectrum of clients and lessen its reliance on a single product.
Strong R&D Capabilities: Apcotex Industries has a reputable research and development (R&D) facility that is dedicated to creating new goods and technology. As a result, the business has been able to launch cutting-edge items and maintain an advantage over its rivals.
Strong Distribution Network: Apcotex Industries is able to serve a wide range of consumers and successfully meet their needs thanks to its strong distribution network, which spans multiple regions in India and other nations.
Focus on quality: Every step of the production process at Apcotex Industries is subject to stringent quality control checks to guarantee that the company's goods are up to par with global standards. Due to this, the business has been able to gain a solid reputation for producing high-quality goods and drawing clients from all over the world.
Experienced Management Team: Mr. Abhiraj Choksey, the company's current managing director, and other management employees with expertise in chemicals contribute significant experience to the organization. Asian Paints has been known for its strong promoter and management team and the Company being spun off from Asian Paints carries that goodwill.
2. Key Historical Financials
Company revenue and net profit have grown at a CAGR of 15% and 22% respectively in the last 5 years
Revenue growth slowed down in FY23 after a bump up from COVID-19 and Company has de-growth in Q4FY23 on a YoY basis
EBITDA margin contracted in Q4FY23 due to overall pressure on demand in Nitrile latex (gloves - which are in excess at the end-market inventory level after COVID-19 receded in India), while NBR Margins returned to normalcy due to a fall in import freight. Management expects the EBITDA margin to be 17-18% in the long run once things normalize with Nitrile latex
Cash flow conversion (CFO/EBITDA) was 76% in FY23 which is quite healthy
ROCE and ROE were 28% and 25% respectively in FY23 – I would expect ROCE to be ~25% in the long term
3. What is my view on company valuation?
Share price has jumped ~5x over the last 3 years which has been duly supported by an increase in net profit.
Company trades at EV/EBITDA (TTM) at 16x and a P/E (TTM) ratio of 23.5x. Long term P/E (5 year average) is ~24x.
Valuation seems to be slightly expensive as I expect the Company to grow earnings by ~20% in the next 3 years.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Intense competition from domestic and international players - In all of its categories, including synthetic latex, Apcotex is up against domestic rivals and import competitors. In response to declining demand, the company's top line and profitability suffered in the second part of FY2023.
Profitability is susceptible to swings in raw material prices and foreign exchange rates – high dependence on oil prices.
About the Author
I have over 17 years of experience in venture capital, private equity, and investment banking across various sectors in India and the Middle East. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.