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Chemcrux Enterprises Ltd – A Specialty Chemical Company Worth Exploring : Stock Analysis for December 2023

 Disclaimer:

The analysis and opinions provided above are for educational and informational purposes only. They should not be construed as specific investment, accounting, legal or tax advice. Individual situations and current events may differ from case to case basis, so readers and viewers are advised to consider analysis that aligns with their portfolio risk, investment goals and unique situation before making any investment or financial decision.

Chemcrux Enterprises Ltd - A Specialty Chemical Company Worth Exploring : Stock Analysis for December 2023

Company Introduction

Chemcrux Enterprises Ltd, incorporated in 1996, manufactures specialty chemical intermediates like Para Chloro Benzoic Acid, Ortho Benzoic Acid, and Lasamide used in making bulk drugs (APIs), dyes, and pigments. Many of their products are import substitutes made for the first time in India. It started commercial operations in 2000-01.

Chemcrux has a market cap of ₹429 cr, current market price of ₹290 per share and P/E ratio of 30.5. Its book value per share is ₹44.8 and it has return on equity of 23.2%. The debt to equity ratio is low at 0.25x. The company has demonstrated sales growth over the last 5 years and profitability is improving as seen in rising operating margins of 22.6%.

Chemcrux Enterprises Ltd, established in 1996, is a prominent player in the manufacturing of Bulk Drug Intermediates, including Para Chloro Benzoic, Ortho Benzoic Acid, and Lasamide. With a focus on High Pressure Oxidation, Nitration, Acetylation, and Chlorosulfonation Chemistry, the company produces intermediates for Bulk Drugs (API), Dyes & pigment industries, contributing to import substitution in India.

Should We Buy, Sell or Hold?

Looking at the financial performance and growth prospects, Chemcrux stock looks attractive for long term investment. The company has consistently increased sales and profits over the years. The operating margin has kept improving indicating efficient operations. The debt level is low and return on capital employed is high at 27.2% making it efficient in utilizing resources.

However, last 1 year returns are negative owing to some decline in stock valuations. With the specialty chemicals industry projected to grow at 12% CAGR, and import substitution & environment compliance driving domestic demand, the long term growth outlook looks positive. Hence, Chemcrux stock can be accumulated on declines for long term gains.

Key Financial Ratios

Some key financial ratios for Chemcrux are – debt to equity of 0.25x highlights its strong balance sheet, operating profit margin of 22.6% shows improving profitability and return on equity of 23.2% indicates efficient use of shareholder’s funds.

With book value per share of ₹44.8, the current market price at ₹290 does look a bit expensive. However, the valuations can be justified based on its earnings growth prospects. The company has also started paying dividends which should appeal to income seeking investors.

  • Market Cap: ₹429 Cr.
  • Current Price: ₹290
  • Debt to Equity Ratio: 0.25
  • OPM (Operating Profit Margin): 22.6%
  • Dividend Yield: 0.69%
  • Promoter Holding: 72.9%
  • Pledged Percentage: 0.00%
  • EPS (Earnings Per Share): ₹9.70
  • Cash Equivalents: ₹7.14 Cr.

Based on the parameters provided, Chemcrux Enterprises appears to be a potential buy candidate. It has a low debt-to-equity ratio (0.25), indicating a strong financial position. The promoter holding is substantial and consistent at 72.9%, a positive sign of promoter confidence.

The OPM stands at 22.6%, showcasing efficient operations, and the EPS of ₹9.70 is relatively high. Additionally, the difference between the current stock price (CMP) and book value is relatively low, suggesting the stock may not be significantly overvalued.

However, it’s essential to consider the company’s industry PE of 32.8 and the fact that its sales growth over the past five years is relatively modest at 5%. While the dividend yield is not high, it does provide some return to investors.

  • Debt to Equity Ratio: This ratio indicates the company’s debt level relative to its equity. Chemcrux has a low debt-to-equity ratio of 0.25, signifying a conservative capital structure and lower financial risk.
  • Operating Profit Margin (OPM): OPM represents the percentage of revenue that remains as operating profit after deducting operating expenses. Chemcrux’s OPM of 22.6% indicates efficient cost management.
  • Promoter Holding: With a constant and high promoter holding of 72.9%, it shows the promoter’s commitment and alignment with shareholders’ interests.
  • Earnings Per Share (EPS): EPS is the portion of the company’s profit allocated to each outstanding share of common stock. A high EPS of ₹9.70 is a positive sign of profitability.
  • Dividend Yield: Although the dividend yield is relatively low at 0.69%, it provides some income to shareholders.

Competitive Comparison

In comparison to industry peers, Chemcrux has demonstrated superior profitability margins and return ratios. Its balance sheet is also stronger with lower debt to equity ratio. The 5 year sales growth rate and median valuations are in line with sector benchmarks. Hence, Chemcrux does fare better than competitors on some key metrics.

Comparing Chemcrux Enterprises to its peers in the chemical industry, we can gain insights into its performance:

  • Pidilite Industries has a much higher P/E ratio of 86.54, indicating a premium valuation compared to Chemcrux.
  • SRF has a similar P/E ratio of 41.44 but has a negative profit growth rate.
  • Linde India and Solar Industries have substantially higher P/E ratios but lower debt-to-equity ratios.
  • Gujarat Fluoroch and Deepak Nitrite have lower P/E ratios, but Deepak Nitrite has a more robust profit growth rate.
  • Tata Chemicals has a lower P/E ratio but a high debt-to-equity ratio.

Chemcrux Enterprises appears to have a moderate valuation compared to its peers, with a balanced debt-to-equity ratio and a relatively stable P/E ratio. However, it’s essential to consider the growth prospects and industry dynamics when making an investment decision.

Valuation Analysis

The current market price of ₹290 translates to a P/E ratio of 30.5x which does seem high compared to its book value of ₹44.8 per share. However, it is in line with the industry average valuations.

Given its niche product profile, leadership in the domestic market, strong financial performance, and growth prospects, the current valuations can be justified. On an intrinsic basis, the stock price does provide an adequate margin of safety considering future earnings potential.

Based on the P/E ratio of 30.48 and the industry P/E of 32.8, Chemcrux Enterprises seems to be reasonably valued. It’s not significantly overvalued compared to its industry peers. However, it’s crucial to consider other factors like growth potential, market conditions, and the company’s competitive position before concluding if it’s overvalued or undervalued.

Should We Buy?

In summary, Chemcrux Enterprises offers an attractive investment opportunity given its strong position in specialty chemicals, consistent growth, and reasonable valuations. The company is poised to benefit from import substitution and rising domestic demand. Therefore, the stock can be considered a good buy for the long run with an investment horizon of 3-5 years.

Considering the low debt-to-equity ratio, consistent promoter holding, efficient OPM, and decent EPS, Chemcrux Enterprises appears to be a buy candidate. The stock seems reasonably valued compared to its industry peers, making it an attractive choice for potential investors. However, it’s essential to conduct further research and consider the long-term growth prospects and industry trends before making an investment decision.

Industry Outlook

The specialty chemicals industry in India is projected to grow at a 12% CAGR over the next 5 years driven by rising demand and tighter environmental compliance boosting domestic production. Chemcrux is well placed to capitalize on this potential with its import substitutes model.

The chemical industry is diverse and driven by various factors, including global demand, technological advancements, and regulatory changes. Chemcrux Enterprises operates in the field of Bulk Drug Intermediates, catering to the pharmaceutical and chemical sectors.

While the company has shown a sales growth rate of 5% over the past five years, it’s essential to consider the broader industry trends. The pharmaceutical sector, in particular, has witnessed growth due to increased healthcare spending and the development of new drugs.

However, competition in the chemical industry is intense, and companies need to continually innovate and adapt to changing market dynamics. Investors should monitor industry trends, regulatory developments, and the company’s ability to stay competitive to assess its long-term growth potential.

Long Term Prospects

Given its market leadership, proven business model, and growth opportunities, Chemcrux is well positioned for long term growth. Expanding scale should drive profitability while financial prudence and focus on working capital ensure stability of operations. Market leadership will also enable pricing power over time.

The long-term performance of Chemcrux Enterprises will depend on several factors, including its ability to:

  • Capitalize on the growth opportunities in the chemical and pharmaceutical industries.
  • Maintain its low debt-to-equity ratio and strong financial position.
  • Innovate and develop new products to stay competitive.
  • Expand its customer base and geographical presence.
  • Adapt to changing regulatory requirements and environmental standards.

While the company currently demonstrates favorable financial indicators, long-term success will hinge on its strategic decisions and its ability to navigate industry challenges. Investors should keep a close eye on the company’s performance, industry trends, and competitive landscape for a comprehensive assessment of its long-term prospects.

Short Term Momentum

In the near term, the stock price may remain rangebound owing to some correction in valuations and volatility in broader markets. However, as financial performance keeps improving, the stock could regain positive momentum. Any major decline can be seen as an opportunity for long term investors to accumulate the stock.

In the short term, Chemcrux Enterprises may experience fluctuations in its stock price due to market sentiment, quarterly results, and economic conditions. Factors such as demand for bulk drug intermediates, raw material prices, and global economic events can impact the company’s short-term performance.

Investors should consider the following short-term factors:

  • Quarterly earnings reports: Monitor the company’s financial results for any surprises or deviations from expectations.
  • Market sentiment: Short-term price movements can be influenced by market sentiment and investor sentiment.
  • Economic indicators: Keep an eye on economic indicators that may affect the chemical and pharmaceutical industries.

While the company’s strong financial position and consistent promoter holding provide a degree of stability, short-term performance can be influenced by a range of external factors. It’s advisable for investors to have a diversified portfolio and a long-term investment strategy while considering short-term fluctuations in stock prices.

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