About
Ultramarine is a chemical company with three divisions.

Pigments division – This is the oldest division which makes ultramarine blue pigment which is as a colorant, optical whitener and in paint finishes. The same division also makes LAB which is used in detergents. This division had a revenue of around 45 Crs and a pre – tax margin of around 18 % in 2006

IT enabled services – This is a small division of the company engaged in BPO and engineering services. This division had a revenue of around 15 Crs and margins of 50% in 2006

Packaging products – This division had a revenue of around 9 Crs and a margin of just 7 %. This division had a turnaround in the performance in 2006

The company level margins have marked a sudden rise from 2003 , due to the turnaround in the IT services division and positive contribution of the packaging division

Financials
The company had a turnover of 63 Crs last year and may close the year at 65-70 Crs. The net profit was 15.6 crs last year and may come to 18-19 Crs for the current year.
The company has a 20% holding in thirumalai chemicals on its books which is valued at almost 42 Crs and there are cash equivalents of around 10 Crs
The company has high margins of around 20% + and ROC has been in 25%+ range. In addition the company is debt (the debt on books is interest free sales tax loan)

Positives
The company is shareholder friendly. It has a good dividend payout of almost 50% of net profit (2007 dividend was Rs 3 per share). In addition the company has given bonus issue and has split the stock in the past.
The management seems to be allocating capital rationally and not blowing it away. In addition the IT services division does not require a very high amount of capital.

Risks
This is a very small company. With a 15 Cr revenue from IT services and lack visibility of clients, the revenue stream may not be very stable.
The pigments business is a commodity business and may not offer very high margins and returns. The valuation upside for the company depends on the IT services business continuing its performance as it contributes to almost 50% of the net profits.

Valuation
The company has almost 52 Crs on it balance sheet. However this is unlikely to be realised by shareholders as it is mainly investment in a sister concern – thirumalai chemicals. With a net profit of almost 18-19 Crs, the company can be valued at around 210-220 Crs which is almost 70% higher than the current price.

Conclusion
This is a deep value stock. The company is a small cap company, shareholder friendly with very low competitive advantages. The stock can be purchased as a graham type stock as a part of a portfolio and should be liquidated at 90% of the intrinsic value

4 Comments

  1. Anonymous says:

    Hi Rohit

    Ultramarine fundamentals look good as mentioned by you and positives are as follows:–

    – Good divident policy
    – Management seems to be transparent and shareholder friendly
    – Thirumalai Chem is doing well and also seems to be undervalued
    – Financials are strong– Good ROCE and RONW. Also almost a zero debt company.

    The negatives are
    – Lower June quater earnings
    – IT/BPO business is too small and could get wiped away due to tough competition from big players.
    – Rs has appreciated and would affect these earnings from IT arm

    All said and done a good dividend yield and a good history of profits to make you believe of the potential. Am not sure of the growth potential in Pigment business as this would remain their bread and butter.
    Also who are their main competitors and do they have any competitive advantage in the market.

    Alok

  2. Rohit Chauhan says:

    Hi alok
    the pigment business has low growth and around 18-20% margin. I do not think they strong competitive advantage and the pigment business is characterised by several small and medium scale companies.
    At the current price , you are paying for the pigment business and investment holding and getting the IT business for free.
    i checked the June results and although the net margins are down, the topline and PBT has grown.
    i agree that the IT/BPO business is very small and cannot be valued the same as other IT/BPO companies. As a result i agree that the IT business could be more risky.
    This is definitely not a slam dunk idea and has a certain amount of downside. however it is a company worth following and if there is more clarity on the IT business then worth investing

  3. amber says:

    Hi

    I could not understand how you arrived at figure of 210-220 Crs as value . It would be helpful if you could tell about calculations. I am new to value investing and no formal finace knowledge

    Amber

  4. Rohit Chauhan says:

    amber
    the above valuation is a back of the envelope calculation.
    the company has 18-19 crs of free cash flow. i have used a PE of around 10 (which is conservative for this business) to come up with 180-190 Crs value. I have taken the value of investment / cash at 50% discount to come up with the final no.
    as i said, not very scientfic , very crude approximation of value to decide if the above stock is worth analysing more.

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