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The world would be colourless without pigments. But can a pigment manufacturer give colour to your portfolio? Maybe yes, provided it takes care of Mother Nature and caters to the requirements of MNCs worldwide.

The Jaykrishna family led, Ahmadabad-based Asahi Songwon Colors is a case in point. The same family has been the promoter group of another chemical company, AksharChem India. Paru M Jaykrishna holds the position of Chairperson and Managing Director at both these companies.

Asahi Songwon is a leading integrated manufacturer of phthalocyanine pigments and derivatives and manufactures the entire range of blue pigments, which are widely used in the manufacturing of inks, paints, papers, plastics and textiles amongst others. It derives nearly 2/3rd of its revenue from exports.

Asahi Songwon: have margins bottomed out?

# PAT adjusted for exceptional items
(Source: Company records)

Over the last few years, the company has witnessed stagnation and its PAT margins have also been under pressure. But the scenario is likely to change in future.

New growth strategy…

Apparently, the company has already inked a strategy to address its growth concerns.

In FY20, Asahi Songwon formed a Joint Venture (JV) with Tennant Textile Colours (TTC)—one of the leading colour manufacturers from the UK, to get into the AZO pigments segment.

The JV has spent Rs 100 crore to build a 2,400 tonne p.a. facility to manufacture red and yellow pigments at Dahej, Gujarat.  The company has guided that it will commence production at its new facility in the current fiscal. AZO pigments are expected to gain popularity in future since they are better alternatives to toxic organic and inorganic pigments.

The company has been banking heavily on the success of the JV for its future growth. TTC, which holds a 49% stake in the JV, has brought its sophisticated technologies to the table and Asahi Songwon will contribute immensely to maintaining cost-competitiveness in manufacturing.

At present, the AZO pigments business is dominated by China. However, as global players are looking to cut back their reliance on China, India has a great opportunity to grab market share.

With new capacity additions, the company aims to double its revenue in the next 4-5 years. Diversification in non-toxic AZO pigments would not only make Asahi future-ready but it may also help the company expand margins. At present, the company derives repeated business from 58% of its customers, which leaves ample room for cross-selling opportunities once it commences AZO pigments production.

REACH compliance

Asahi Songwon follows the 3R—reduce, reuse and recycle approach to conserve Mother Nature. The company has made sustained investments in effluent treatment plants, equipment and other infrastructure to minimize the impact of its production on the environment.

The company has been investing continuously to meet the REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) compliance. REACH is an EU adopted regulation that aims to minimize the risks posed by chemicals to the environment and human life. Asahi has in place a sound emission and effluent management system.

It has undertaken a number of initiatives to conserve energy, which include the replacement of old equipment, process automations, LED-lighting and green energy initiatives. The company operates a windmill with a total installed capacity of 750 KW WTG and also has a 128 KVA solar power plant. It’s adding another 869 KW solar power plant in the current fiscal.

Asahi Songwon has set up Electrostatic Precipitators (ESP) for boilers and flue gases which help arrest particulate matter upto 95%, thereby helping to curb the air pollution. The company also keeps fresh water consumption under check by using technologies that allow treating and reusing water.

Ready to regain the lost ground?

Data as on December 09, 2020
(Source: ACE equity)

Buyback: a confidence booster?

Interestingly, Asahi Songwon has proposed to buy back 2,45,000 shares—2% of issued, subscribed and paid-up equity shares at Rs 330 a share—a 44% premium to its closing market price as on December 09, 2020.

As per SEBI regulations, 15% of the shares to be tendered under the proposed buyback are reserved for small shareholders. The promoter and promoter group intends to (and may) participate in the buyback. Nonetheless, assuming that the buyback receives 100% response, the promoter shareholding in the company will increase to 66.69% post buyback, from the existing shareholding of 66.58%. The offer opens on December 10, 2020 and closes on December 23, 2020.

The buyback may help the company improve its return ratios. It’s noteworthy that the company became net debt-free in Q2FY21.

Where does the company stand on valuation?

At the closing price of Rs 229 as on December 09, 2020, Asahi Songwon trades at the P/E multiple of 12.3 on its FY20 earnings. The company has guided to double its revenue over the next 4-5 years. Will it deliver on its guidance? Well, in the last 10 years, the company has managed to grow its turnover from Rs ~80 crore to Rs ~280 crore with just phthalocyanine pigments.

Now that AZO pigments are under its belt, the prospects of Asahi Songwon appear more promising. Ethical buying from European MNCs (a trend which is catching fancy elsewhere too) may push the demand for non-toxic chemicals higher in the years to come. The company has shown its willingness to further enhance its production capacity, whenever required, to compete with global players.

Considering all these factors, Asahi Songwon is available at just 4.8 times its FY25 earnings. If the company manages to report higher earnings in future, the stock may witness re-rating.

In a nutshell

Improved prospects for non-toxic pigments, conservative management approach, product diversification, virtually debt-free balance sheet and focus on conserving environment may bode well for Asahi Songwon Colors.

Before you close the window of your mobile browser or hit the back button, you may want to recite what Paul Samuelson famously said:  Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.

Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.

If you are investing in any family run company, besides governance, you may also want to take stock of significant developments in the lives of the promoters. Sometimes, their personal life can overshadow market sentiments. Also pay attention to issues such as pledging of shares by the promoter group and the working capital.

You may also like to read: Mangalam Organics: can it do sabka mangal?



We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

Consult your financial advisor before taking any investment decision.

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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