Summary of Analysis

Subdued sentiments, flat revenue projection, and high PE ratio compared to industry have made Clariant chemicals an expensive stock at this point. It is trading at a PE of 14.6. While the PE is not expensive as such, its future prospect of low growth makes it so. Investors would do well to observe the stock for few quarters and enter when the price goes below Rs 500 which seems reasonable price for this stock.

Clariant chemical may see flat growth in revenue compared to last year. Net profit was high for CY2012 because of high "other income" component which stands at 270 crore (about 25% of its total revenue). Hence the net profit in CY2013 will not be as great. We expect the net profit to go down by 50% if there is no other income impacting it.

Profit margin of Clariant chemical is about 11% which is quite good. It will maintain the same profit margin in next year too.

Note: We have taken standalone data.

Stock Summary:

Clariant chemical is available at the PE (TTM) of 14.58. This valuation is little over the fair price. When the industry PE is below 10, paying almost 15 times for Clariant doesn’t sound like a good idea.

The Firm & Its Business

Clariant Chemical is a multinational Chemical company. Its majority of stock is owned by its parent Swiss/German Company. The company makes chemicals for leathers, paints and textiles. It has good prospect because the Swiss company might make its Indian operation, Clariant Chemical, sourcing hub for its global operation.

The Sector

Chemical sector has seen subdued performance for last few quarters and there doesn't seem to be any triggering event to propel this sector to the growth path.

Financials of last 5 years:

Commentary on financials:

Comments on FY2011 data

• The revenue in CY2011 grew by 25% over last year and the net profit grew by 170% over last year. However, this large growth happened on the account of "other income" which was a significant part of total income. If we look at the operating profit growth over last year, it has gone down by 15%.
• Dividend paid in CY2012 was Rs 60 per share. Going by today's price of Rs 610, the dividend yield is about 10%. This is a very good dividend yield, even better than bank fixed deposit.
• The company has managed its raw material cost very well in CY2011. The raw material cost has come down to 48% of the revenue.

Positive points on financial trends

• The net profit margin at 11% looks fairly good for chemical companies. With stiff competition in the market, Clariant has been able to consistently deliver this margin over the years. We are ignoring the profit margin of CY2011 which is skewed by the extraordinary income.
• ROA and ROE have shown dramatic improvement over last 5 years. They have gone from 10% to 60%+ in the same period.
• The company has comfortable current and quick ratio. It is able to manage its working capital fairly well.
• The company has no debt in its balance sheet.
• Receivable days have come down which is a good sign. It has seen major improvement from 56 days to 38 days in last 5 years.
• The most important point is history of dividend. Clariant chemical has given consistent dividends over time. The dividend payout ratio is almost 50%. From dividend only, investors can earn a return of above 7% which is what banks give you.
• Raw material cost has come down to 48% from its typical value of 55%+ of the revenue in last 4 years. This will certainly benefit the company improve its earnings. In fact the net profit margin has seen improvement already by 150 basis points.
• Cash flow has been positive for last 5 years. However, the cash flow in CY2011 declined by more than 90%. This looks like a result of capital expenditure in the year CY2011 where the net fixed asset has gone up.

Concern areas of financial trends

• Revenue and net profit has seen subdued growth in last 5 years. The revenue CAGR stands at 9.21%. While the net profit CAGR is at an impressive 76%, this happened because of extraordinary income in CY2011. We should not consider any non-recurrent income in our analysis and hence the net profit CAGR is about 25%.
• PEG ratio of 1.59 shows little scope of appreciation. The short term prospect of the firm is average with revenues and profits slated to grow at negligible pace.

Note: One concern areas which may misguide investors is the other income component in profit and loss statement. This is a big number and it has skewed all ratios such as ROE, NPM, ROA, and CAGR of revenue & profit. Investors must keep this mind before they dig deeper into the company.

Financials for recent quarters

The growth revenue in Mar, 2012 quarter is negative 1.30% QoQ. However, it grew at the rate of 5.11% YoY. The net profit margin for the first quarter of FY2013 is over 12.5%.

Short term view

The short term view is not encouraging. Revenue and profit growth in CY2012 will not see much traction. As per our estimate, the revenue and net profit will see no growth.

Long Term View

The long term prospect of the company is average. This is based on the current growth projection and economic sentiments.

Disclaimer

The data is taken from publicly available sources such as NSE, company website, and few finance portal such as moneycontrol, HDFC securities, ICICI direct etc. Investors are requested to go by their own judgement.