Stock Pick From The Chemical Sector

Here Is Why:

• It has been a consistent dividend-paying company for the past 10 years.
• It is available at an attractive TTM PE of 8.01x.
• Exports constitute around 69 per cent of the topline.

Investors may be curious as to why we are recommending Asahi Songwon, as this company had seen more than 50 per cent decline in its bottomline for FY13. Despite this, however, we believe that there are various reasons that make the stock perfect for investment.

Asahi Songwon is a well-known name in the business of pigments, with around seven per cent market share globally as of FY13. The company also has some renowned names in its list of clientele like DIC (Japan), Sun Chemicals (USA), Clariant Chemicals India and BASF (Korea). More importantly, exports accounts for around 69 per cent of its topline. This is an advantage for the company, as the INR is still trading above the 60 mark against the USD.

The company incurred capex of Rs 29.70 crore for FY13, of which Rs 13.93 crore was deployed in environment treatment assets and infrastructure. This expenditure incurred is seen by the company as a long-term one, as going forward it is becoming compliant with the environmental norms set by the government of Gujarat. This is likely to reap benefits for the company going forward, and will give them a first-mover advantage as many companies are yet to take these steps towards compliance.

On the financial front, the company has been able to post better results during H1FY14 as compared to those in H2FY13. In the aforesaid period, its topline has gone up by 26 per cent to stand at Rs 140 crore. The bottomline for the period stands at Rs 7.91 crore as against Rs 2.69 crore reported during H2FY13. The company is on track for cost optimisation, as raw material prices as a percentage of sales stand at 61 per cent for H1FY14, down 31 basis points from H2FY13. The EBITDA margins stand at a healthy 13.09 per cent for the first half of the present fiscal as against 8.12 per cent reported during H2FY13. The debt-to-equity for the period stands at 0.56x compared to 0.60x in FY13.

On the valuations front, the stock trades at a TTM PE of 8.01x, which is much cheaper as compared to other listed peers. Going forward, we believe that the capex incurred and cost optimisation will augur well for the company, which makes a convincing case for having this stock in one’s portfolio. The icing on the cake is that the company has consistently been paying dividends for the past 10 years.

We recommend a ‘buy’ on the stock with a one-year time horizon, for a price target of Rs 82.