Clariant Chemicals (India) Limited is an subsidiary of German company. It is publicly traded on Indian equity markets. The company operates in two segments, viz., (1) Intermediates and Colors which contribution 43% of the revenue; and (2) Specialty chemicals which contributes 57% of the revenues. The purpose here is to understand how it is growing, how it is sustaining high dividends, and does it meet my objectives.
The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is from 2001 onwards.
- Revenue: Overall a slow but increasing trend since 2001 with average y-o-y growth of 17% (SDev. 42%). But flat in last few years. Neutral observation.
- Earnings per share: Overall an increasing trend, but very high volatility. Neutral observation.
- Net cash flow from operations: Overall an increasing trend but volatility exists. In general, has been above net profit. Good observation.
- Profit/Loss from operations: Overall increasing trends in profits from its operations. Good observation.
- Reported net profit: Overall an increasing trend, but volatility exists. Good observation.
- Gross margins: Current GM of 18% is higher than historical average of 9.6%. Good observation.
- Operating margins: Current OM of 20% is higher than historical average of 11%. Good observation.
Quality of Dividends
In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. It is also an indirect way to gauging management’s policy vis-à-vis sharing of profits with common shareholders.
- Dividend per share: Chart 3 shows dividend growth from 2001 onwards.
- Payout factor: This has been higher than 60%. Neutral observation.
- Dividend growth rate: 22% average growth rate. Good observation.
- Ratio of cash from operations to reported net profit: It has been more than 1.0. Good observation.
- Ratio of profits from operations to reported net profit: This ratio is more than one. Good observation.
- Ratio of Cash from operations to total debt: It has been more than 1.0. Good observation. Practically, it is debt free company.
Dividend Cash Flow vs. Risk Free Savings Cash Flow
Why should I take risk if I can get a same or more cash flow by putting my capital into any risk free savings, fixed deposits, or any such risk free accounts? Therefore, I try to understand how dividends will affect my cash flow in 10 years of time period. The baseline assumptions are (1) the stock’s dividend yield is 3.9% at current price of Rs. 645; and (2) savings interest rate is 7%.
- Best case scenario: considering historical average dividend growth rate of 22% for last nine years, the dividend cash flow will be 1.80 times the cash flow from savings interest.
- Worst case scenario: considering my expected low end of the dividend growth of 15%, the dividend cash follow will be only 1.06 times the cash flow from savings interest.
- Even at today’s high price, my expectation is the dividend cash flow will exceed than saving interest income in 10 year time period. Buying at my fair valuations (which includes margin of safety) will provide much higher dividend returns.
Expected Beta-based Volatility
I measured Beta for this stock’s risk (or price movement) relative to the S&P CNX NIFTY (or index movement). Here, I am trying to understand how a stock price behaves relative to the market.
- The stocks three year Beta value is -0.13. This means this stock has low volatility and/or no co-relation with S&P CNX NIFTY index.
- If I buy this stock, I should expect relatively lower degree of volatility when compared to NIFTY index.
Fair Value Calculation
The next step is to estimate the fair value so that we can understand return characteristics for this investment.
- NPV price based on 15 year DCF: Rs 597
- Average high yield price calculated based on past 10 years: Rs 553
- Pricing relative to 9 year average PE ratio: Rs 426
- Pricing based on PE ratio of 12: Rs 311
- Graham number: Rs 275
The range of fair value is calculated as Rs 361 to Rs 432.
- Clariant is a typical foreign subsidiary that shares high percentage of its income with is shareholders. The dividends payout is greater than 60%.
- It has good cash flow and earnings from operations.
- It is a debt free company.
- It primary focus is on specialty chemicals in three or four difference industry segments. This is good in a sense that it works on a pull system where their customers create the demand (rather than push where the company produces and attempts to sell in the market place).
- Few past annual reports (and management discussions) show that inclination to increase production in India to support Asian market. This is good indicator.
- In last few years, it seems the growth is coming from two aspects (1) improved operating cost; and (2) slow revenue increase
- It has a low liquidity.
Clariant is a company that fits into my long term buy and hold portfolio. It generates significant cash flow and hence can sustain its high dividend payout. This also enables it to remain debt free. It is a typical foreign subsidiary that has been very well managed from the viewpoint of capital usage and sharing profits with shareholders. In addition, I also like its business model on specialty chemicals. One concern I have is low liquidity. The volume of trade is very small, in the order of only 10,000 shares or less.
At this point, the shares are trading at 45% premium to my fair valuations. I will continue to follow this company and wait until it falls in my buy range.
Disclosures: No position at the time of this writing. Please read TIPBlog disclaimer.
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