Chemcon Specialty Chemicals
Chemcon is a niche specialty-chemicals player that manufactures pharmaceutical chemicals (HMDS and CMIC) and oil-well completion chemicals across its seven plants having a 21,600 MTPA capacity. Along with catering to domestic pharma companies such as Aurobindo, Laurus Labs, etc., it also exports to various countries, which make for around 40 per cent of its revenue.
The company is the only domestic manufacturer of the chemical HMDS (over 10 per cent of global market share), while it is the largest domestic manufacturer of the chemical CMIC (over 17 per cent). Its products are in a sweet spot as they are too big for a small-scale industry and too small for a large one. Complex chemistry, a long client gestation period and niche product segmentation provide Chemcon with a moderate degree of competitive advantages.
However, the company directly competes with imports from China - the largest player for HMDS and CMIC - which accounts for 40-60 per cent of India's imports of such chemicals. Though Chemcon can benefit from the supply-chain shifts away from China, it still remains vulnerable to Chinese price fluctuations. Poor free-cash generation due to high working-capital needs also remains a key monitorable for the company.
Though the company had a bumper listing, the stock is down almost 25 per cent since and currently trades at a P/E of around 31. In a market where speciality-chemical companies are commanding the valuations of FMCG companies (Vinati Organics 65.8, Fine Organics 66.7, SRF 38), Chemcon valuations aren't out of line. However, earnings growth needs to be closely watched for long-term wealth creation.
Stock-broking is one of the few industries that have actually benefitted from the pandemic. While the world was closed, the markets were still open. Over one crore demat accounts were opened in 2020 alone. Angel Broking, the fourth largest broking firm in India as per active client accounts on the NSE, listed in October last year. Broking is the bread and butter for this company, contributing around 75 per cent of its revenue, while the rest comes from margin funding and providing loan against shares. Like other discount brokers, the company follows a flat-fee-based model. During the first nine months of FY21, its profits have risen by more than 260 per cent. But the rosy profit story is hiding the disruption in the broking industry. In just the past five to six years, Zerodha has disrupted the discount-brokerage industry and become the leader, with over 26 lakh active clients currently. Other nimble players like Upstox, Groww have also gained substantial ground and competition from the likes of Paytm Money is increasing.
Contemporary players like ICICI Securities have thus been forced to change their business models and rely more on their business segments other than broking. Angel Broking, with its high dependence on the broking business, looks especially vulnerable. In the ongoing bull market, when every other stock is commanding rich valuations, Angel Broking is up by 23 per cent from its issue price. Trading at a P/E of 11 based on annualised earnings, the stock might look undervalued (P/E of ICICI Securities is 14 but the future of the broking industry is anyone's guess.
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