Fundamental Analysis of Himadri Specialty Chemical: From a plant or a pencil to a diamond or even the human body, Carbon is found everywhere. It’s one of the reasons why Carbon is known as the VIP of the Periodic Table. It is the most important element known to man. The importance of this element cannot be underestimated, especially considering its important role in our entire ecosystem.
In this Fundamental Analysis of Himadri Specialty Chemical, we look at the company’s operations, its financials, future plans and more…
Today we will learn about one such Company that utilizes this essential element to build industrial products for a better tomorrow. The Company has a diversified chain of products, mainly revolving around the use of carbon as its main element.
Today, we will learn about when the Company was founded and what it is doing currently. We will learn more about its business segments and move forward to thoroughly analyze the Company and finally reach a conclusion.
Company Overview
Himadri was founded in 1990 by commissioning a coal tar distillation plant in Howrah, West Bengal. The business was later headed by the Choudhary family in Kolkata. It is currently headed under the leadership of Anurag Choudhary, who serves as the Managing Director & CEO of the Company.
The Company has transformed its coal tar business into one of the most comprehensive value chains across the coal segment. It has also diversified into Carbon Black, Construction chemicals, and Lithium Ion Batteries.
Himadri has 4 factories set up in the state of West Bengal, 1 factory each in Chattisgarh, Andhra Pradesh, Gujarat, and Odisha. The Company also has a plant located in Shandong, China. These plants are exported to more than 49 countries around the world.
Business Segments
Himadri is primarily a producer of Coal Tar Pitch (CTP), with over 70% market share in the space. The coal tar is used as a binder in the manufacture of Aluminum Anode and graphite electrodes. The Company is the preferred supplier of a special grade of coal tar pitch for the DRDO.
The Company also produces high-quality anode material for the Li-ion Battery, which is used to power Electric Vehicles, smartphones and other Energy Storage Solutions. Himadri is currently the only producer of Anode material in India, in both natural and synthetic varieties of Graphite.
Himadri is also a producer of Refined Industrial grade Naphthalene. This naphthalene finds application in the construction industry as a concrete mixture, which is explained briefly in the Industry Overview.
The Company is also a manufacturer of special process oils, a by-product of the coal tar distillation process. Himadri also generates electricity from the low-calorie waste gas emitted from the carbon black process.
Industry Overview
The Coal Tar Pitch manufactured by Himadri finds its applications in the Aluminum & Other Metals Industry. The production of steel and other non-ferrous metals requires the use of graphite electrodes in the Electric Arc Furnace (EAF) and Laddle Furnace (LF) processes.
The demand for graphite electrodes is strongly influenced by the steel industry, which is experiencing an increase in demand due to government infrastructure projects. As a result, steel producers are creating a greater demand for graphite electrodes in EAFs and these electrodes are made from binder-graded coal tar pitch.
The Carbon Black sector derives most of its demand from the automotive sector. The Tire industry is the largest consumer accounting for 70% of the demand. Mechanical rubber goods are the 2n.d largest consumer of carbon black accounts for 20% of demand.
India expects a significant increase in the annual demand for lithium-ion batteries (LIBs) over the coming years. Under the baseline scenario, this demand is projected to grow to 162 kilotons (KT) by 2030, while under the promising scenario, it is projected to reach 260 KT.
The refined naphthalene finds applications in the production of pesticides as well as concrete mix in the construction industry. The use of Naphthalene as a concrete mixture reduces the demand for cement thus being more environmentally friendly. In addition to being ecological, the use of Naphthalene also increases the strength of the concrete.
India’s real estate sector will reach a market size of USD 1 trillion by 2030, which will contribute 18-20% to India’s GDP. Indian Government is putting strong emphasis on sustainable and eco-friendly construction practices which should boost demand for Naphthalene content in the concrete mix.
Himadri Special Chemical – Finances
Revenue & Net Profit
Himadri reported a 50% increase in revenue, from Rs. 2799 Cr in FY22 to Rs. 4200 Cr in FY23 on a consolidated level. Revenue growth has been really strong in the last two years, but the Company has remained lagging from FY20-21. In a long-term perspective, the Company has managed to grow at 14.66% on a 5-year CAGR.
Net Profits of the Company exploded from Rs. 39 Cr to Rs. 216 Cr, a surprising growth of 4.53x. This growth was the result of a significant jump in sales, along with a marginal decrease in Material costs. However, the Company is yet to beat its 5-year high of Rs. 324 Cr in FY19.
Profit Margins
Operating Margins of the Company increased significantly growing by ~400 Basis Points, from 5.79% in FY22 to 9.78% in FY23. This shows that the Company has been able to reduce its operating costs, while not passing these benefits on to its consumers.
Net Profit Margins increased by over 265 basis points, from 2.33% in FY22 to 4.98% in FY23. Although these figures look good every year, in the long run the Company has definitely done better. It is still below its 5-Year Average of 6.97%.
Return Ratios
Return on Capital Employed improved significantly growing from 5.57% in FY22 to 15.48% in FY23. The growth in RoCE came as a result of 1.56x growth in EBIT, compared to 43% & 17% growth in Reserves and loans respectively. The company’s 5 Year Average is at 13.41%
Return on Equity also saw greater growth, growing by over 663 Bps, from 3.71% in FY22 to 10.34% in FY23. RoE figures were only marginally ahead of its 5-Year Average of 9.68%. Himadri needs to increase this ratio to at least 15% to be a strong enough stock to invest.
Debt Analysis
The Company’s Debt to Equity (D2E) in FY23 comes in around 0.09x, a 5-year low for the Company. D2E reduced even as the Company raised funds through debt, due to a greater increase in Equity. Himadri’s debt level is quite low giving it more leverage to use leverage to fuel its future ambitions.
The interest coverage ratio (ICR) came to around 8.39x, the highest in the past 5 years. A steady increase in ICR has given the Company a strong cushion to service its interest-bearing obligations. ICR greater than 1.5x is a good measure for any Company.
Fundamental Analysis of Himadri Specialty Chemical – Key Metrics
The Key Metrics of Himadri Specialty Chemical (HSCL) are given below.
Future Prospect
- Himadri is currently exploring the Lithium Ion Battery (LiB) segment in India. It will focus its R&D capabilities on the creation of new products in the segment.
- It is working on the creation of a Silicon-based Anode that can store ~9x more lithium ions compared to graphite, enabling higher density energy storage.
- The R&D lab is currently researching a Next Gen Iron-based Cathode, with a higher capacity. Upon commercialization, this would help reduce reliance on Lithium and other precious metals.
- A rapid increase in global demand for aluminum has led the Company to expand its production of Coal Tar Pitch to meet the needs of its customers.
Conclusion
As we conclude our article on Fundamental Analysis of Himadri Special Chemical, Himadri Special Chemical is a pioneer in the carbon segment as it produces a wide range of products from processing coal tar to making anodes for lithium-ion batteries. It is currently shifting focus to the electric vehicle market. However, it is primarily a producer of coal tar, with a majority market share.
Reading the Annual Report of the Company, we could not find a clear breakdown of each segment, based on revenues or Net Profits. That would have helped us understand segments more deeply.
The business seems quite cyclical with margins highly dependent on crude prices. In FY23, 78% of its revenue is spent as material cost leading to single digit margins. An improvement in these costs can translate into a significant increase in returns to shareholders.
The future outlook looks quite promising, the business is bound to benefit from the Electric Vehicle segments. However, it seems to be in the earliest stages at the moment.