Analysis of National Peroxide Limited (By Gurjeev Anand)

Dated:- 8-10-2019
About the Business

National Peroxide is an establishment which got listed on the BSE in 1954 a company which
belongs to Wadia Group (having interest in several business from Airlines to FMCG) of
companies. NPL is in the business of Peroxide chemicals and is the largest manufacturer of
Hydrogen Peroxide in India. Besides Hydrogen Peroxide they also manufacture Compressed
Hydrogen Gas, and Per Acetic Acid. Hydrogen Peroxide is used in several industries which
are Non – Edible Oil Refining, Water and Effluent Treatment, Paper – Pulp Bleaching,
Chemical Synthesis, Textile Bleaching Industry, Sugar Belching Industry, Metallurgy Industry.

The Single most active constituent of Hydrogen Peroxide is “Active Oxygen” which is
obtained by controlling the de composition of Hydrogen Peroxide with water. Hence it is a
clean process which does not generate harmful or environmental unsafe products while
Bleaching or chemical synthesis.

(Source:- http://www.naperol.com/about.php)

Company History / Overview

National Peroxide limited (NPL) was started and jointly promoted by The Bombay
Dyeing & Manufacturing Company and Laporte Industries, UK. The peroxygens
division of the company manufactures hydrogen peroxide and persalts. The first plant,
manufacturing hydrogen peroxide using the electrolytic process, was set up in 1956.
In 1972, NPL adopted the latest auto oxidation technology. A captive hydrogen gas
plant was set up in 1987. After a series of expansions, the capacity of the hydrogen
peroxide plant increased to 15,000 TPA. In 1970, Laporte joined hands with Solvay,
Belgium, and formed a joint venture known as Interox Coordination. In 1992, Solvay
took over Interox Coordination and became a shareholder of NPL with a 25.10% stake.
It established an integrated R&D centre in Kalyan in 1979 to promote the applications
of Hydrogen Peroxide and Persalts in various industries and to carry out process
development. The Company manufactures hydrogen peroxide with current installed
capacity of 95,000 metric tons per annum (MTPA) on 50% weight per weight (w/w)
basis. NPL’s integrated manufacturing site for hydrogen peroxide is located at Kalyan
in Maharashtra (India). The Company manufactures hydrogen peroxide in
approximately four different forms, which include 50% w/w (Concentrated), 60% w/w
(Concentrated), 35% w/w (Concentrated) and 70% w/w (Distillate).

Uses of Hydrogen Peroxide

Hydrogen peroxide is a pale blue clear liquid slightly more viscous than water.
Hydrogen Peroxide is mainly used as a non-polluting oxidizing agent and is used as
an oxidizer, bleaching agent and disinfectant. It is used for refining non-edible oil,
water and effluent treatment, paper pulp bleaching, chemical synthesis, textile
bleaching industry, sugar bleaching industry and metallurgy industry. Hydrogen
peroxide is the simplest form of peroxide constitute only hydrogen and oxygen in the
world which has application in almost all the types of food and beverages. Hydrogen
peroxide is used to make sodium perborate and sodium percarbonate, which are
further utilized as a bleaching agent in detergents.
Industrial Hydrogen Peroxide market is expected to witness an escalating demand
among the consumers because of its broad use and increasing presence paper and
pulp industry throughout the world. Industrial Hydrogen Peroxide market is driven by
the growing adaptation in paper and pulp industry. Companies all around the world
are getting attracted towards Industrial Hydrogen Peroxide because of easy to use
features and great usage which is driving the market. Use in making detergent
bleaches, textile bleaching and purification of water are giving a push to Industrial
Hydrogen Peroxide market. Countries like India and China are the manufacturing
hub for Industrial Hydrogen Peroxide and thus a promising market for Industrial
Hydrogen Peroxide.

(Source: HDFC Retail Research)

Another good resource to understand and know more about the uses of Hydrogen
Peroxide.
https://home.howstuffworks.com/home-improvement/household-hints-tips/cleaning-
organizing/hydrogen-peroxide-uses.htm

Financial Analysis of NPL (National Peroxide Limited)

Sales

Sales: - NPL sales have grown from 122 Cr in 2010 to 402 Cr in 2019. That is an
CAGR growth of 14%. But NPL does not have a smooth trend of growth in its topline.
Sales has shown a fluctuating trend. After approx. every 2 years there has been a
sales drop. NPL gets 100% of its revenue contribution from domestic sales where
98.5% revenue is generated by selling of Hydrogen Peroxide.

Profitability

The operating margins have shown similar kind of fluctuating trend as the sales over
the years. The OPM margins from 27% in 2010 were to fall to 9% in 2015 to again rise
to 56% in 2019. Which is a wild swing. The high volatility in the operating margins
shows that the business is a commodity business where the changes in prices of raw
material costs effects the profitability to a major extent.

The management has stated the reason for the swings in the operating margins in
their reports.
 (2015 Annual Report)

The company has long term contract with GAIL India for the supply of GAS (which is
their RM) which is based on average of 60 Months crude oil price. The agreement is
valid till 30th April, 2028. The sudden price decline in crude prices did not help
them due to the average price clause in their contract. Thereby the companies cost
was higher than the prevalent spot prices during that time which caused the
reduction in operating profit margins.

(2016 Annual Report)

The management has again and again articulated their raw material linkages to crude
oil prices and the effects it might have on the operating margins of the business.

Even after the drastic fall in crude oil prices the Operating margins in 2015 have
dropped drastically. This is explained by the management in their average price of 60
Months clause with GAIL India.

In 2019 the business has shown excellent operating margins which might not sustain
going forward as if crude prices rise drastically and stay on elevated levels that will hit
the margins for NPL. Another risk is if the long term contract with GAIL comes to an
end and is not renewed (in such a scenario the management will have to look for other
sources for their supply which might also hurt the profitability) or the same contract
with GAIL is renewed on new terms which might prove adverse for NPL in future.

The management has again and again articulated their raw material linkages to crude
oil prices and the effects it might have on the operating margins of the business.
The Net profit margins have shown a similar trend as the Operating Profit margins.
This is because there is hardly any Interest cost / depreciation which the company has
paid in the last 10 years. NPL is a net cash positive company.

Interest Costs / Coverage

NPL has FCCB loans to the tune of 70 Cr which is pay bell in 16 equal installments
starting 6th June 2020 of 6.25 lac USD each. They also have a term loan of 10 Cr from
the bank which is short term in nature. The interest rate for this short term loan is 9.5%.
Since the nature of the loans are FCCB the interest cost is minor where the company
does not face issues to pay the same on time because of its strong liquidity position.
Both types of loans are secured in nature. NPL has used negligible amount of limits
sanctioned to it thus showing good liquidity strength in the business.

Value Creation

The management has shown track of creating more than 1 rupee for every rupee they
have retained in the business over the years.

Taxes

The company pays taxes in line with the standard tax rates in India Prevalent during
the time. The Current reduction in taxes by Honorable Finance Minister to net of
25.17% for all corporates (22% + surcharge) will help the growth in bottom line as the
savings from taxes will be added to bottom line directly.

Conversion of profits to Cash

NPL has earned Rs 495 Cr profits cumulative in last 10 years where as the Cumulative
cash flow from operation is Rs 535/- Cr which shows that the company has been able
to convert its profits to cash.

Credit Rating Reports

While going through the credit rating reports it comes to light that the capacity
utilization levels of NPL plant’s (Previously 95000 MTPA 50%w/w) was above 100%
in many months. NPL Term loans were utilized within group companies (as NPL is
one of the company of Wadia Group) which is quiet evident from the related party
transactions over the years. But with the strong cash flows and good liquidity positon
of the business the management has been able to pay off the term loans and working
capital loans in due course of time.

Before CY 2016 NPL was largely exposed to RM risks. To mitigate the risks of RM
price volatility the company entered into such contracts which had a floor and a cap
price protection. Natural gas prices dropped significantly below the floor prices (as
drastic drop in crude oil prices during that time) and NPL had to procure Natural Gas
at the contractual floor price hence giving hit to their margins.

Thereby in Jan 2016 the company changed its contractual terms for the natural gas
prices to be in line with the spot prices. This helped the company reduce volatility in
its raw material prices to great extent and helped them to improve / recover their lost
margins.
After the imposition of anti-dumping duty in 2017 the realizations of Hydrogen Peroxide
increased hence. The price of natural gas remained stable during that period hence
giving good profits to the business. The expansion from 95000 MTA to 150000 MTA
is currently undergoing. Which should enhance the profitability going forward
(subjected to volatility of natural gas (crude oil) prices. For which the company has
contract with GAIL which has exclusive clause for price discovery at the average of 60
Months).

Operating Efficiency

Receivables (Terms of Trade)

The receivables days of the company were 45 days in 2011 which dropped to 65 days
in 2015 there by slowly improve year over year to 38 days in 2019. It seems that the
company has been able to get good controls over it receivables.

Net Fixed Asset Turnover (NFAT)

The fixed asset turnover from 2.32 has dropped to 1.27 in 2016 again to rise to 2.4 in
2019. This was because form 2010 the assets / net block of the business was
increased from 75-80 crore to 187 cr. After which the company has not done any major
expansion till 2019. All though in 2019 the capital work in progress is 75 Cr.

The company is undergoing expansion of its capacity from 95000 tons per annum to
150000 per annum for 50% w/w basis. As per the companies BSE filing the company
has taken a temporary shutdown of its plant for expansion.

https://www.bseindia.com/xml-data/corpfiling/AttachHis/ce263f23-d198-4e90-9081-
eb4df0dc9ff6.pdf

The company will be spending Rs 200 Cr for the said expansion. Two other companies
in same line of business are also expanding their facilities to the tune of 32000 MT.
Inventory Turn

NPL has high inventory turns (although fluctuating) in last 10 years. The same have
been in the 12.7 down to 9.8 in 2015 and again rising to 17.3 in 2019. 2015 was the
year when crude prices dropped significantly but the company did not got the benefits
due to an average price of 60 months clause with their long term contract with GAIL.
On the contrary this clause will also protect the margins (only for few months though)
if the crude oil prices rise suddenly and remain at elevated levels.

The addition of new capacity should give growth to the business going forward as the
management has shown good capabilities to sell their inventory and collect their
receivables on quickly.

Free / Cash Flows

The business has generated 495 Cr as Cumulative Profits in the last 10 years where
as the Cumulative Cash Flows are 535 Cr. This gives one the sense that the company
has been able to manage its finances / working capital well. This also coincides with
the improvement in the trend of the receivable days in last 4 years where the company
has been able to collect faster.

The management had to spend Rs 240 Cr as capex to increase the business from 120
Cr topline to 400 Cr topline. This has helped them to generate 296 Free Cash Flow.
Out of this 296 Cr of free cash flow the company has paid dividends to its shareholders
to the tune of 140 Cr and kept the balance for its future growth / investments (cross
holdings).

Self-Sustainable Growth Rate.

The SSGR for NPL has increased form 2% 3 years back to 27% with the strong
performance of the business. This is mainly due to the rise of the Net Profit margins
(As per earlier discussion the profits are linked to volatility of crude oil prices which
does effect the RM costs of the business. Hence SSGR could drop in future with
volatility in crude prices). The company is being growing well below its current SSGR
rate which is also evident from the fact that they don’t need to relay on external
borrowings to growth their business.

Peer Comparisons

Other major business houses running in this segment are

Hindustan Organic Chemicals Limited (HOCL) (http://www.hoclindia.com/ )

(a GOI undertaking)
Hindustan Organic Chemicals Limited (HOCL) is Government of India owned company based
in Mumbai, Maharashtra.[5] It was established in 1960 to indigenise manufacture of basic
chemicals and to reduce country’s dependence on import of vital organic chemicals. Its products
are Phenol, Acetone, Nitrobenzene, Aniline, Nitrotoluenes, Chlorobenzenes &
Nitrochlorobenzenes. Basic Organic Chemicals includes Pesticides, Drugs & Pharmaceuticals,
Dyes & Dyestuffs, Plastics, Resins & Laminates, Rubber Chemicals, Paints, Textile Auxiliaries &
Explosives.[6][7][8]

Source (Wikipedia)
HOCL is a government of India undertaking mainly in the business of Phenol, Acetone,
50%w/w Hydrogen Peroxide. 10450 MT is the installed capacity of the HOCL and the
company gets only 7% of their revenue from selling H2O2 (Hydrogen Peroxide). The actual
production in 2017-18 was 9008 MT and 2018-2019 6789 MT which shows that the capacity
utilization of the company for H2O2 plant is 65% odd. The major revenue contribution and
focus of the management is on Phenol and Acetone.

Source:- (HOCL Annual Report 2018-19)

Asian Peroxide (unlisted private player established in 1987)

Asian Peroxides Limited (APL) is the third largest HPO player in India. It was
incorporated in 1986 by NRI promoter and Managing Director Mr. Shiv K. Dewan, as
a 100% export-oriented unit (EOU) in technical and financial collaboration with
Peroxygen Technologies Limited, UK. Having commenced operations with an installed
capacity of 5,000 metric tonnes per annum (MTPA) at Sullurpet (Andhra Pradesh), 80
kms north of Chennai, it has gradually expanded its capacity to 18,000 MTPA (100%
w/w basis) now.

APL debonded its EOU status in two stages in 1995 and 2005 and currently caters to
the domestic demand of HPO, largely to the paper and textile industries for bleaching
applications. The company is looking to expand its capacity to 38,000 MTPA with the
commissioning of the Gwalior plant, and further to 45,000 MTPA by debottlenecking
the Sullurpet plant. The company procures its feedstock (naphtha) and fuel (furnace
oil) from Indian Oil Corporation Limited (IOCL), while the solvents are imported.

Source (Chemical Industry Reports)

Gujarat Alkalis and Chemicals Ltd (GACL) (a Government of Gujrat Undertaking)

Gujrat Alkali has diverse business it would not viable to compare the operating
metrics of Gujrat Alkali with NPL. Gujrat Alkali has production capacity of 53080 MTA
as per their Investor Presentation.

it seems there is a trend in the industry that all the players working in Hydrogen
Peroxide industry have high capacity utilization levels.

Gujrat Alkali has little export presence for Hydrogen Peroxide also which NPL does
lack.

Indian Peroxide (http://www.indianperoxide.com/index.html ) (unlisted private player)


Indian Peroxide is a private company having setup capacity of 45000 MTA in 2018. They
produce Hydrogen Peroxide in 3 grades namely 35% w/w , 50% w/w, 60% w/w.

(Source worldwide.com)

Management Analysis & Additional aspects of NPL

1) Management: - Wadia Group has big diverse business conglomerate. Where

the highly successful companies Britannia Industries are also in their basket of
holdings. Ness Wadia is the MD of NPL. Mr Ness Wadia holds several
directorships in several other group businesses also enclosed.

Remuneration: - The combines remuneration of the Top level management is 4 Cr

which will comparing with average last 3 years (96 Cr average profits) profits of the
company is about 4% which look decent with the trend and increment of profitably of
the company in last 3 years.

In 2019 there were 123 employees working in the company. There was a median
24.4% increase in the remuneration of the employees from 2018 which gives a sense
that there are cordial relations of the top level management with the employees of the
company. Regular increments in employee remuneration keeps them motivated to
utilize the assets of the company and work more efficiently for better outputs.

From the structure of the directors of NPL it seems that after MR Ness Wadia steps
down it will be a professional managed company. As management succession
information is not given.

2) Fraudulent Cheques: -- Hundreds of fraudulent Cheques were issued from the

bank accounts of NPL totally Rs 37 Crores. The company in their 2018 annual report
had stated about this in Director’s Report.

The company has stated that they have further strengthen their controls so such a
kind of action does not take place in future.

The management has filed police FIR (Criminal Proceedings) against the same with
Joint Commissioner of Police.
MD has been asked to resign due to Rs.36 Cr embezzlement: On November 07, 2017,
NPL informed that funds of the Company have been embezzled by an employee of
the Company Mr. Nipul S. Trivedi and others, if any, who are yet to be identified and
there might be a potential loss to the Company of approx. Rs.36 cr. On Dec 15, 2017,
as per the management, the earlier MD Mr. S R Lohokare had to resign due to his
careless manner, wherein, he signed large number of bearer cheques. Also he did not
follow the procedures laid down due to which was found guilty. While this loss may
have to be written off (subject to any insurance claim and/or recoveries if any made),
it will be considered an extraordinary loss.

3) Cross Holdings: - NPL holds 1.7% stake in The Bombay Burmah Trading
Corporation and 0.7% stake in Bombay Dyeing and Manufacturing Company. The
company gets dividend income from Bombay Burmah Trading Corporation.

4) Related Party Transaction and CSR Spends

The company engages in several related party transactions with members and other
corporations of Wadia Group.

Any significant advances to group companies and heavy debt ridden capex can hinder
the performance / liquidity position of the company.

NPL engages in lots of related party transactions due its linkage with Wadia Group.

Note on the ICD deposit given

The Company has, during the year, given Intercorporate Deposits (ICDs) to certain
parties covered under section 189 of the Companies Act, 2013, viz. Nowrosjee Wadia
and Sons Limited ` Nil (Previous Year ` 3,000 Lakhs), Wadia Techno-Engineering
Services Limited ` 350 Lakhs (Previous Year ` 500 Lakhs), Bombay Dyeing Limited `
10,000 Lakhs (Previous Year ` Nil) and Go Airlines (India) Limited ` 10,000 Lakhs
(Previous Year ` Nil). These ICDs are for general business purpose and carry an
interest rate of 10% p.a (Previous Year 12.50% p.a.) and have tenure for less than a
year
It is interesting to see that in 2019 the company sold its liquid investments in several
mutual funds to the tune of 63 Cr. Also looking at the year end cash and bank balances
of the company it is pretty evident that the proceeds from this money was utilized to
give the ICD loans to other. The company has stated this as general business
purposes where NPL is entitled to get interest rate at 10% p.a (previous year which
was 12.5%). 10% is still good what the company can get from its liquid investments
but the same coming down from 12.5% raises eyebrows that what was the need to
sell the liquid investments and fund other (sister concern) company from the same.

5) Book Over Draft

Seeing the liquidity stability of the company it is contrarian that there is a Book
Overdraft in liabilities. Book over draft is when the checks issued exceeds the
arrangements in the bank and the same have not been presented in the bank. The
company gives huge intercorporate advances at one end and at other end has to face
issues with checks to honor. Though the amount is small Rs 1.48 Cr looking at the
size of operations of the business.

6) Jump in Finished Goods

It is evident from the communications from that companies reports. The finished goods
have gone up from 4 Cr to 22.2 Cr. This is in plan of action that the company has kept
to fulfill the demand from its customers during the time its plant is shut down for
expansion process (which is currently going on) so they don’t lose customers.

For the same expansion the company has raised the capital advances from 6.36 Cr to
17.7 Cr for the purchase of equipment.

Capital work in progress as at March 31, 2019 of ` 7,540.39 lakhs (March 31, 2018 `
563.98 lakhs) includes cost incurred towards expansion of existing plant of 95 KTPA
to 150 KTPA located at Company’s property in Mohone, Kalyan. Additions to Capital
work in progress during the year includes ` 43.93 lakhs (March 31, 2018 Nil) being
borrowing cost capitalised in accordance with Indian Accounting Standards (Ind AS)
23 on “Borrowing costs”.
Business & Industry Analysis

There are 3 other producers of Hydrogen Peroxide besides NPL (one of which is
Hindustan Organic Chemicals {A Government of India Undertaking}) in the
country and the combined production is 210000 MT. NPL holds 33-35% (which has
fallen by 3-5 % in last 2-3 years) of market share. With the eco-friendly nature of the
product (stringent environment pollution norms, rising awareness) the demand in the
market is expected to grow by 7-10%. Due to continues surplus in other Asian
Countries there has been continued import of Hydrogen Peroxide in India. The growth
of pulp / paper, Textile (the focus of Government of India to further boast the growth
of textile sector) industry with its large size and new capacity expansion of several
companies’ in these segment will rip up demand for Hydrogen Peroxide in future. The
demand from oil refineries will also grow as India needs to process approx. double
quantities of crude oil to cope up for the rising demand.

Raw Material Threats: - NPL needs Hydrogen Gas as a key raw material. Steam
reforming of natural gas is done to get hydrogen gas. India imports (India imports
LNG through Petronet (Dahej), Shell (Hazira) and Ratnagiri Gas and Power Pvt.
Ltd. (Dabhol) half of its natural gas requirements. Forex (US $ / Rupee) and price of
natural gas (Crude oil related) fluctuations effect the prices of raw material for the
company to a great extent. Also natural gas does not fall under the limits of GST and
the VAT paid on the same is not allowed to be claimed under input tax credit which
further puts pressure increasing the raw material costs for the business.
NPL has a long term contract from GAIL (which has a clause for price for the same at
average of 60 months).

Significant imports of Hydrogen Peroxide have taken place from Thailand, Bangladesh
and South Korea. The imports from these neighboring countries were significantly at
low prices than Indian domestic companies selling prices. Government of India has
imposed an Anti-Dumping Duty to protect the domestic industry. The same has been
imposed from Bangladesh, Taiwan, South Korea, Pakistan and Thailand. From some
ASESN and SAARC countries there is still “zero” customs duty, this will distort the
business economics. It is mainly because of the protection from this anti-dumping duty
the domestic companies are increasing their production capacities to fulfil the demand.
They are working to become an import substitute for their B2B relations.

As per the 2016 annual report the company starts that GAIL (India) has entered into
a long term contract. This should give some sense that NPL contract with GAIL will
be honoured for long term as they state.

(Source: - NPL AR 2015)

Other Risks

Single Product Risk: - 98.5% of the business revenues come from a single product
that is Hydrogen Peroxide and single location of production facility might can hamper
the revenues in adverse times. The size of the industry is small for NPL to grow its
revenue’s exponentially.

Large Scale Imports: - Large scale imports from countries like Thailand, Pakistan
and Bangladesh were always a threat for Hydrogen Peroxide industry. But after the
imposition of anti-dumping duty these risks are mitigated to some good extent.

Valuation Analysis

NPL currently trades at a P/E of 8.34 which does offer some margin of safety.
However, with the protection of anti-dumping duty and capacity expansion of the plant
can give growth going forward. Here important aspect to take a note is there are lot of
moving parts in this business being fluctuations in crude oil (natural gas) prices, forex
fluctuations, cheaper imports, (long term contract with average of 60 months with GAIL
might lead to very different RM prices than current prevalent prices).

Conclusion

NPL is the largest producer of Hydrogen Peroxide in India with 35% market share.
They sell domestically with zero exports but have to bear the forex fluctuations for their
raw materials which acts as a risk to their profitability. The products it makes is used
by several B2B players in their industry from Pulp / Paper, textile to oil refineries. The
key raw material for the company is Hydrogen Gas which is made from steam
reforming of Natural Gas which is linked to crude oil. The fluctuations of crude oil prices
effect the prices of the raw material for the company. To protect from the same, the
company has entered into a long term contract with GAIL India which has a special
clause to account for crude oil prices on the average of 60 Months. This clause has
shown adverse effects in 2015 when the prices of crude oil dropped drastically and
stayed at lower levels. Due to the average the net costs for the company were much
higher than those of that prevalent in the market during that time. Recently the
company is expanding its production capacity from 95000 MT to 150000 MT which will
be operational in CY 19-20. The company has taken a plant shut down for the same
and expects to cater the demand from the customers from the Inventory it holds in
hand. Other players also in the industry are expanding their capacities. This is mainly
because of imposition of Anti-Dumping duties from Government of India to protect the
domestic industry. The size and demand for the Pulp / paper industry is growing and
Government of India has key focus on the development of the Textile industry. This
leads to the visibility for demand of Hydrogen Peroxide (coupled with the benefits from
Anti-Dumping Duty). NPL is a commodity business in nature which has to relay on
several aspects like crude oil, forex, anti-dumping, constant supply of raw materials
for un intercepted production. Commodity business move in cycles and past excellent
performance in profitability may not sustain going forward.