Pondy Oxides & Chemicals Ltd.: Strong business risk profile and balance sheet liquidity should lend some support

Pondy Oxides & Chemicals Ltd. has a well-diversified supplier and procurement base, with more than 270 suppliers and procurement from more than 90 countries. Import of lead scrap in India is subject to licensing from Ministry of Environment and Forest, while establishment of lead recycling plants need permissions from central and state pollution boards, resulting in entry barriers for new entrants. The company continues to focus on aluminum and plastic verticals, which enables diversification. It has started commercial production for aluminum. It is exploring scaling up of copper vertical. Diversification and revenue contribution from such verticals should be beneficial for the company.

Pondy Oxides & Chemicals Ltd.

Company profile:

Pondy Oxides & Chemicals Ltd. is India's leading Lead, Lead alloys and plastic additives producer. The company was incorporated in March 1995 as public limited company by dynamic entrepreneurs. Since its very inception, the company has grown on year-on-year basis and it has an established brand image in domestic and international markets. Currently, the company plans to expand its capacity in Lead and Lead Alloys by establishing yet another state of art smelter in South India. It plans to add value to each and every stakeholder by offering value with help of its continuous improvement process.

The company’s forte is recycling and it plans to achieve its desired operational excellence with support of constant technology adoption, upgradation and process transformation.

Business model of Pondy Oxides & Chemicals Ltd.

The company produces highest quality lead and lead alloys and PVC additives that are supplied to its customers. The company’s customer base includes mainly battery manufacturers, chemical manufacturers and PVC extruded and moulded products. Approximately 50% of the company’s production is exported to its numerous international customers mainly to Asian regions such as South Korea, Japan, Indonesia and to Middle – East. Over course of time, the company has built unmatched brand image within lead sector for its quality, higher efficiency, reliability, technical support and service.

Track record of management

Mr. Anil Kumar Bansal, Chairman & Whole-time Director of Pondy Oxides & Chemicals Ltd., expanded product base of the company from Metallic Oxides to Plastic Additives. Mr. Bansal was responsible for commencement of Lead Metals and Alloys manufacturing facility in Tamil Nadu. He was given position of Chairman in June 2015, and before that he was Managing Director from date of inception of the company.

Mr. Ashish Bansal is the company’s Managing Director after graduating in Management Studies from University of Wales, United Kingdom. He led the company into new frontiers and was backbone behind establishing new plant in Andhra Pradesh and explored international market for the company’s product. Further, he was responsible for achieving highest turnover, profitability, EPS and net worth in entire history of the company.

Mr. K. Kumaravel is Director (Finance & Company Secretary) of Pondy Oxides & Chemicals Ltd. Mr. Kumaravel’s experience spans over 30 years in Finance, Accounts and Secretarial Departments of Public Sector Undertaking and Public Limited Companies.

Financial performance of Pondy Oxides & Chemicals Ltd.

The company was able to deliver historical annual result as it saw growth rate of 45% year-over-year and 33% on a quarter to previous year’s quarter basis on revenue, and it has delivered EBITDA of INR81.79 crore for FY22 as compared to INR26.68 crore from previous year, showcasing a growth rate of 207% year-over-year.

Pondy Oxides & Chemicals Ltd. achieved all-time highest top line of INR1,455 crore as compared to INR1,004 crore in previous year. It crossed a turnover of USD 100 Million in exports in FY22. Future outlook of this industry is relatively positive as the company is bullish about recycling and its future. The company is confident that India will continue to be an emerging market. For entire financial year, earnings before tax saw growth of 367%. The company saw phenomenal growth in EPS by 348% i.e. from INR18.54 to INR83.01. It has incurred incremental operating costs in FY22 because of higher cost of smelting additives such as coal, soda ash, cast iron, and furnace oil.

Profitability of the company registered a strong growth in FY22 where it stood at INR48.25 crore while it was INR10.78 crore in FY21. Overall, financial figures of the company remained very positive in last fiscal year. Pondy Oxides & Chemicals Ltd. has seen good momentum and financial stability to further accelerate journey with newly defined verticals. Therefore, the company expects to report better figures in future as well.

In FY23, the company saw total income of INR1,48,045.37 lakhs as it benefitted from increase in economic activities throughout sectors as well as favourable economic environment. In FY23, revenue share from exports business was higher than domestic business.

Industry analysis

Outlook for global recycling industry seems to be quite optimistic as world continues to rapidly adopt more strict recycling policies. Growth is expected to be supported by expansion of building and construction industry. Rapid industrialisation and urbanisation are supporting growth of metal market. There is an increase in environmental concerns over negative impact of mining. Globally, governments continue to undertake such initiatives to lower dependency on mining procurements and promote recycled products for efficient utilisation of raw materials.

Lead market is principally supported by construction industry because of its high corrosive characteristic and is highly utilised for renovation purposes. Meanwhile, automobile sector continues to generate high demand for this. Lead acid batteries are commonly utilised in conventional and electric vehicles (EV). Given that EVs might dominate market in future, demand for lead acid-based batteries should eventually go up. This should act as a huge intensifier for global lead market.

According to International Lead Association, ~50% of global lead demand is sourced from recycled lead. Procuring recycled lead is considered simpler, more cost-effective and energy-efficient. Disposal of lead poses a significant health-related threat for humans. Governments continue to undertake strict measures to recycle lead and they are encouraging its usage to other industries. Such measures should help recycled lead market, and enable this market to grow by USD 19.35 billion in 2027.

More than 1 billion vehicles in world are dependent on lead-based batteries (to start engines), and power on-board electronics. Lead batteries offer for 70% of all rechargeable battery energy storage capacity worldwide.

Risks

Pondy Oxides & Chemicals Ltd. is subject to risk that fluctuations in foreign currency values could impact the company’s export revenues and import of raw materials. Pricing and ongoing market volatility are some major challenges faced by the company. Exposure to commodity and commodity risks are faced by the company. The company’s operations and business activities might get impacted due to its exposure of hazardous/toxic materials. Significant competition from both unorganised and organised players and susceptibility to fluctuations in raw material prices are some risks which can impact its profits.

The companies operating in lead metal industry are required to adhere to rigorous pollution control norms. If norms get tightened and environmental activism takes centre stage, the company might get exposed to risks on grounds of environmental concerns.

Future prospects of Pondy Oxides & Chemicals Ltd.

Pondy Oxides & Chemicals Ltd. has established POCL Future Tech Private Limited as subsidiary of business in FY23. It will carry out operations in industries like plastics (both domestic and industrial), e-waste, lithium-ion recycling, rubber, oil, glass, paper, and some other value-added products. This will handle mergers and acquisitions for the company and establish an R&D lab for commercialisation.

Outlook, in terms of recycling industry, seems to be quite positive for India and world. One industry which guarantees ongoing prospects for corporate growth is recycling. The company considers recycling as futuristic term for traditional mining.

The company looks to increase business’ wallet share from new and existing customer base, while it has been planning to tap into new regions of businesses and capture more of overseas markets. Focus will be on consistently growing its abilities through opportunities which add to its stability as the company hops that coming years will bode well for the company. Moreover, its special attention is to grow its business sustainability while adopting sustainable ways of manufacturing. This testifies the company’s unshakeable commitment in supporting environment.

The company is well equipped to mitigate risks to a larger extent. Further, the company’s competitive advantage in procurement, logistics, and widespread network of suppliers and customers support the company to balance out risk of geographical concentration.

Shareholding pattern of Pondy Oxides & Chemicals Ltd.

Promoters of Pondy Oxides & Chemicals Ltd. make up ~48.88% of the company’s total shareholding by end of March 2023. Mr. Ashish Bansal held ~14.78% and Mr. Anil Kumar Bansal holds ~10.78% of total shareholding. General public continues to hold ~51.12% of total shareholding of the company. Promoters of the company have increased their stake as compared to December 2022.

Therefore, this shows that the company’s promoters are quite optimistic about prospects of business.

Valuation and investment rationale

Stock of Pondy Oxides & Chemicals Ltd. trades at ~5.96x of FY23 EPS as compared to sectoral average of ~15.67x. Therefore, the company’s stock price trades at a deep discount which hints that investors should consider going long on this stock. Growth is stock price is expected to be supported by strong business risk profile, comfortable financial risk profile, favourable industrial dynamics, and focus on maintaining balance sheet liquidity.

The company’s strong business risk profile is supported by its well-entrenched relationships with important customers, diversified procurement and supply base, moderate entry barriers and well-established manufacturing capabilities. Client base of the company comprises renowned players like Amara Raja Batteries Ltd, Sebang Global Battery Company Ltd and Glencore International AG. The company’s relations with such customers span over 10-15 years. Therefore, this ensures steady inflow of orders for Pondy Oxides & Chemicals Ltd.

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