Friday 21 March 2008

IPO Analysis - Kiri Dyes and Chemicals



Kiri Dyes and Chemicals manufactures reactive dyes and dye intermediates. Promoted by Pravin A. Kiri and incorporated on 14 May 1998, the company’s production plant is located in Gujarat: three units in Ahmedabad and one unit in Vadodara.

The product range comprises more than 120 dyestuffs used by textiles, leather, paints and printing-ink industries. Production capacity totals10,800 tonnes per annum. Integrating backward, Kiri Dyes and Chemicals commenced manufacturing vinyl sulphone (VS) in April 2006, with a capacity of 3,600 tonnes, and H-acid from March 2007, with capacity of 3,600 tonnes, giving it a presence in the dye intermediate business.

With plans for further backward integration, the IPO is to fund capital expenditure to set up a plant to manufacture sulphuric acid, oleum and chloro sulphonic acid, with a combined capacity of 1,80,000 tonnes, and a dyes and intermediates unit. A 2.9-MW power plant that can run from the steam generated by the sulphuric acid plant is also on the anvil. The electricity generated will be sufficient not only to run the sulphuric acid plant but also the intermediate plants of VS and H-Acid.

Following the expansion, the capacity to manufacture sulphuric acid will be 1, 00,000 tonnes, oleum 43,200 tonnes and chlorosulphonoic acid 36,000. The plant to manufacture sulphuric acid and its sub-products is to be completed by December 2008. Around 25% of the capacity of sulphuric acid, oleum and chlorosulphonic acid will be used to produce dye-intermediates: H-Acid and V.S. The remaining produce will be marketed directly to bulk end-users in the detergent and chemical industry and other large consumers.

The capacity to produce dyestuff will be increased 3,000 tonnes to 15,000 tonnes by the fiscal ending March 2010 (FY 2010). The capacity to manufacture dyes intermediates VS will become 4,200 tonnes in FY 2009 and then further increase to 4,800 tonnes in FY 2010. The capacity to produce H-acid will increase to 4,200 tonnes in FY 2010.

Kiri Dyes and Chemicals entered into a memorandum of understanding with the Zhejiang Lonsen Group on 1 November 2007 to establish a manufacturing facility in India to produce reactive dyes. Both the parties have agreed to start with a production capacity of 20,000 tonnes of reactive dyes and to increase it further to 50,000 tonnes when the opportunity arises after successfully implementation and operations of the initial production capacity. The new plant is to be set up by end 2008. The initial capital investment would be US $ 10 million. Of this, Lonsen is to invest US $ 6 million and Kiri Dyes and Chemicals US $ 4 million to establish a new manufacturing plant in India.

Strengths:

  1. Stringent environmental laws in the western countries have led to discontinuance of production of certain dyes for textiles and leather. This has led to shift in manufacturing capacity from the US and the European Union to South East Asia. Climatic conditions in India are favourable for the manufacture of such products. Also, the new usage of dyestuffs in electronic, high-tech printing, and bio medical applications augurs well for the high-valued dyestuff products.
  2. Backward integration and JV with global giants will help to save cost and strengthen research and development facility.

Weaknesses:

  1. Operates in a highly competitive and unorganised business environment with many big and small players exporting and manufacturing dye and dyestuff. The increased competitive pressure may adversely affect margin.
  2. Had negative cash flows of Rs. 4.88 crore and Rs.9.42 crore from operating income in FY 2007 and FY 2006.
  3. Currently paying MAT (minimum alternate tax) on account of benefits of exemption received under Section 10 B of the Income-Tax Act, 1961, as it is a 100% export-oriented unit (EOU). This status will expire in March 2010. The withdrawal of tax incentives would increase the tax liability and adversely impact profitability.

Valuation

At a price band of Rs 125-Rs 150, the P/E works out to 10.5-12.6 times on half-yearly annualised EPS of Rs 11.9 on post-issue equity of Rs 15 crore, The average TTM P/E for dyes and pigment industry is around 6.