Long Term Investment - Chembond Chemicals Ltd.


Vijith Pujari
We expect Chembond Chemicals' APAT to grow by 35% & 31% in FY06 & FY07 respectively. We recommend the stock with a Buy rating for long term with a price target of Rs 195. (CMP: 122)

(Chembond) was established in 1975 by Dr. Vinod Shah in Mumbai for manufacturing speciality chemicals for Metal treatment. The company since then diversified into manufacturing Water treatment chemicals, chemicals for the Construction sector and anticorrosive paints & coatings for various industries and Biotech products. Promoters group hold 68.3% in the company and are actively managing the affairs of the company.

Two prestigious joint ventures with Henkel (Germany) & Ashland (USA) Chembond also has two prestigious joint ventures for marketing; Henkel Chembond Surface Technologies Ltd. a 49:51 joint venture with Henkel Group of Germany and Chembond Drewtreat Ltd., a 55:45 joint venture with Ashland Group of USA. Management's vision to form such joint ventures with world leaders demonstrates their credibility and capabilities in terms project feasibility & implementation and manufacturing, amongst others. Henkel Chembond markets Metal pre-treatment Chemicals, whereas Chembond Drewtreat markets Water & Fuel treatment chemicals for cooling water and boiler water. Products for both joint ventures are manufactured by Chembond on toll manufacturing basis. Both the JVs are profitable having huge growth potentiality and we believe, will contribute significantly to its business in future.

Construction Chemicals business poised to report strong growth

Chembond is one of the leading players in the speciality construction chemicals industry. There is a huge demand for its construction chemicals from large infrastructure projects & construction segment. It is also targeting direct retailing to tap the huge retail market, where buyers were hitherto buying just on impulse or through the mediators in the construction segment. With large scale investments in infrastructure projects and planned investments in industrial modernization & up-gradation, we expect huge demand for its products going forward.

Outlook & Valuation

With excellent growth prospects in all the segments that Chembond operates, we believe, Chembond is poised to report strong growth in the years to come. In FY2005, Chembond's consolidated revenues grew by 18% to Rs.684.9 mn, EBIDTA margin grew by 125 bps to 9.4%, its EBT (before other income) increased by 49% to Rs.53.6 mn. It's APAT (after adjusting dividend income from subsidiary & joint venture) increased by 40% to Rs.36.9 mn. Going forward, we expect the company to continue its current trend of strong performance. On a consolidated basis, we expect its revenues to grow by 20% & 25% in FY06 & FY07, EBIDTA margins to grow by 65bps to 10.1% in FY06 & 58bps to 10.7 % in FY07 and its APAT to grow by 35% & 31% in FY06 & FY07 respectively. . At the current price of Rs.125, the stock is available at 7.6x & 5.8x its FY06E & FY07E earnings of Rs.16.5 & Rs.21.7 respectively. We are initiating our coverage on the stock with a Buy rating & a price target of Rs.195, at which the stock would quote at PER of 9x and EV/Cash Profit of 9x based on its FY07E numbers.

credits: India Infoline