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05-Jul-2017 : Dai-ichi Karkaria is one of the less known specialty chemical manufacturers in India. Dai-ichi Karkaria has started its commercial production in 1963, in collaboration with Dai-ichi Kogyo Seiyaku Co. Ltd., Japan. Their products are manufactured from two plants in India, i.e. Pune and Kurkumbh. Dai-ichi is currently in the process of expanding its production base through a new under construction plant in Dahej. Its products cater to different industries; however around 48% of its products are supplied to the oil industry.

Dai-ichi has grown its revenue at a CAGR of 16% for the last six years. Net profit has grown at the rate of 30.14% for the same period. Though, in the financial year 2017, the revenue has seen a de-growth of 9.6% (Rs 1790 million) and net profit has come down by 27.7% (Rs 158 million). This is owing to multiple reasons a) Demonetization in the month of November, 2016 b) De-growth in the revenue from textile segment as the company lost some business with a key Rayon customer. c) Substantial reduction of contribution in profit from the company’s joint venture partner Nalco Champion. In the financial year 2016, where the joint venture company contributed 51.88% of the consolidated profit, in 2017, the contribution came down to 26.29%.

In spite of demonetization, we haven’t seen any major drawback. And it is expected that India will soon achieve double digit growth in terms of GDP. India has emerged as a manufacturer and supplier of speciality chemicals. In the past five years, the Indian speciality chemical industry, valued at $25 billion, grew at CAGR of 13%.
In this current economic backdrop, we think that Dai-ichi has good prospect and available at attractive valuation. The production from the under construction project in Dahej is expected to start from November 2017 and full capacity would be achieved by April, 2018. The total investment for the project is Rs 168 crores. Once the Dahej facility starts contributing, we can see substantial increase in revenue.

Dai-ichi’s debt\equity ratio is quite low (0.03). And its operating performance is also robust. Though its RoE has come down to 11.21 in FY 2017, in the last few years it has constantly increased. It recorded a RoE of 17.29% in the financial year 2016. In the financial year 2017, it has recorded a EPS of 21.22. At the current price of Rs 420, it translates into a PE of 19.79, where as the speciality chemical company such as Vinati Organic is hovering around a PE of 35. Dai-ichi is also a constant dividend payer. For the financial year 2017, it has declared a dividend of Rs 3 (30%).

Where as Dai-ichi didn’t show a good performance, its Dahej facility will contribute significantly to its top-line and bottom-line going forward. As per management commentary, the contribution from the oil field sector will be maintained or improved in FY 2018. The timeline and target price both are heavily dependent on the completion of the project and subsequent capacity utilisation. Though, we can set a target of Rs 1000 in the next 24 months providing the Dahej expansion would complete in time.

NSE Code : DAICHIKARK

BSE Code : 526821

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