Issue Details

FIrst of all, we are not quite sure why Ambani Organics is called Ambani Organics
considering its promoters are Mr. Rakesh and Mrs. Apooni Shah. But they have
decided to call it that and we must say it has indeed got a nice ring to it.

Ambani Organics Limited is a manufacturer, processor, importer, supplier and exporter

of water based speciality chemicals used in Paper Industry, Paint Industry, Textile
Industry, Carpet Industry, Adhesive Industry, etc. Now, what are specialty chemicals?
Well, these are special chemicals used in paints, papers and adhesives. They started
operations back in 1987 and have been in business for quite some time.

SO, WHAT'S NEW?

But today, the company admits that there is intense competition from both the
organized and the unorganized sector. What this means is that, the company cannot
dictate terms to its customers and suppliers and as such will have to offer better credit
periods to its customers to get more business.

This in turn puts pressure on meeting its working capital requirement and the
company will have to raise more money to scale up their business. This is where your
money will go if you were to invest in the IPO. The company will use most of the
proceeds to fund its working capital for the next year.

HERE IS THE PLAN

The company currently takes about 102 days to collect payment from their customers
and about 119 days to pay their suppliers. They now want to start paying their
suppliers sooner and give more time to their customers to pay up.

Holding Levels (FY 17- Estimated Holding Levels (FY

Particulars ↑↓ 18) ↑↓ 17-18) ↑↓
Inventories 70 days 79 days

Trade Receivables 102 days 112 days

Trade Payabales 119 days 105 days

IS THIS SUSTAINABLE?
Well hopefully the company decides to bring down their receivables and their holding
periods soon. While they can meet the working capital requirements for the next year
using IPO proceeds they can’t do the same every year. They will have to rely on
banks to meet future requirements and these funds don’t come cheap. Currently their
interest expense is reasonable but it can quickly spiral out of control if they don’t pay
attention to their receivables .

The reason why we are stressing on said elements is because the company’s
receivables and inventory levels have seen disproportionate increases over the past
few years. Now this could be due to any number of reasons. But companies mostly do
it to pursue growth and in this pursuit of growth, they sometimes pay very little
attention towards piling inventory and their ability to collect payments. Hopefully,
Ambani Organics can keep their receivables under control can find other avenues to
boost growth.

Particulars (In lacs) FY 17-18 FY 16-17 FY 15-16 FY 14-15 FY 13-14

Total Revenues 6,558 5,290 3,291 3,765 3,420

Inventories 1,038 629 327 41 667

Trade Receivables 1,820 1,610 1,199 772 1,075

Company Financials

Since we have already spoken about the company’s pursuit for top line growth, let us
talk about their financials. The company’s top line has in fact been growing for the
past few years. Their profits too have followed the same path although margins have
largely remained very slim. They did make losses in the financial year ending 2015
and 2016. This, the company says was due to a fire in the facility that affected
business operations and hence, a one-off phenomenon.

Particulars (In lacs) FY 17-18 FY 16-17 FY 15-16 FY 14-15 FY 13-14

Total Revenues 6,558 5,290 3,291 3,765 3,420

Profits 182 83 -39 -244 32

Profit Margins 2.8% 1.6% -1.2% -6.5% 0.9%

The DRHP doesn’t provide us with details on how the promoter expects to improve
margins except asserting that the company has started to focus on high margin low
volume products off late. This, they say is also the reason why the company hasn’t
been able to utilize their capacity fully. Here is a chart describing the company’s
capacity utilization, it continues to hover around 50%, and the promoters expect it to
stay that way.

Actuals Proposed
Particulars FY 15-16 FY 16-17 FY 17-18 FY 18-19 FY 19-20 FY 20-21

Installed Capacity (MT) 700 2000 2000 2,500 3,000 3,000

Proposed Utilised Capacity (MT) 450 800 800 1,045 1,500 2,000

Proposed Utilised Capacity (%) 64% 40% 47.5% 41.8% 50.0% 66.7%
 IS THERE A COMPETITIVE ADVANTAGE IN
RESEARCH?
The company says it does. Considering it’s a manufacturer of specialty chemicals, the
company can charge a premium if it offers a better alternative to existing options. The
only way to achieve this is however is through research or collaborations that will yield
similar results.

Now we poured through the DRHP and we couldn’t find how much money they had
allocated to research. We checked if research was clubbed together with Other
Expenses and the DRHP explicitly states that other expenses include fuel charges,
electricity expense, Terminal Handling & Vassal Charges, packing expenses, carriage
inward etc. No mention of research again. So, even if the company is spending on
research we can’t really say how much.

IMPORTS & EXPORTS

Also, the company does some importing and exporting as well. In FY 2018 on a
restated standalone financial statements basis, the imported raw materials accounted
for approximately 14.01% of their raw material cost and export of specialty chemicals
accounted for approximately 14.86% of our total revenue from operations. Not a lot,
but enough to mention that currency fluctuations will have a bearing on the company’s
financials.

ISSUE DETAILS
With a PE of 18 (post issue) the company isn’t cheap either. Hopefully the company
can put their recent troubles behind them and continue with their new found formula
for growth. We here at Finception wish the company all the best.

Analyst Certification

DISCLAIMER
No content on this blog should be construed to be investment advice.
You should consult a qualified financial advisor prior to making any
actual investment or trading decisions. All information is a point of
view, and is for educational and informational use only. The author
accepts no liability for any interpretation of articles or comments on
this blog being used for actual investments.

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