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Company Background

Black Rose Industries Limited (BRIL) is led by Mr Anup Jatia, Executive Director, part of the promoter family which has strong business routes in Japan for over six decades. Originally promoted as a textiles company Asia Fab Ltd. in 1990, Mr Jatia, who schooled in Japan and graduated as a chemical engineer in USA, started the Chemicals Distribution Business (CDB).

BRIL imports and distributes specialty chemicals, performance chemicals and rubber chemicals with strong and direct relations with manufacturers in Japan. CDB provided a strong foundation for BRIL to move into manufacturing and continues to grow. BRIL entered into Chemicals Manufacturing Business (CMB), starting with manufacturing of Acrylamide Liquid (AcrylamideL) in FY14 in Jhagadia, Gujarat with an initial capacity of 10,000 mtpa set up at a capex of Rs 400 mn.

Subsequently it expanded the capacity to 20,000 mtpa (for merchant sales), at a negligible incremental capex. Acrylamide-L finds extensive usage in manufacture of polymers. As natural forward integration, BRIL has set up a 40,000 mtpa Poly-Acrylamide Liquids (PAM-L) and is also setting up 3,600 mtpa of Acrylamide Powder (Acrylamide-P) capacity at the same site which is expected to get commissioned by Q1FY22 end. It also plans to set up 10,000 mtpa Poly-Acrylamide Solids (PAM-S) capacity at the same site.

Investment Rationale

Stable quarter led by better demand from end users

* During Q3FY21, BRIL’s standalone sales witnessed stable growth of 11.6% y-o-y to Rs 744.2 mn on the back of better demand from end users. CMB reported strong growth of ~38% y-o-y and ~42% q-o-q to Rs 276 mn led by high demand from paint emulsion and ceramic tiles industry. The Acrylamide-L plant operated at optimum capacity utilisation (CU).

* BRIL also benefited from its low cost Acrylonitrile (key raw material) prices. However, prices started increasing towards the end of Q2FY21 which currently is at peak due to temporary shutdown of manufacturing plants in USA on account of unfavourable weather conditions. With increase in raw material prices, domestic prices of Acrylamide-L also increased. CBD sales during Q3FY21 remained muted y-o-y at Rs ~475 mn on back of material shortages due to shipping disruptions. Delay in material arrival resulted in sales being pushed into next quarter; however, demand for distribution products is increasing gradually since January 2021.

* The Company launched its ceramic binder product, BRILBIND CE01, for ceramic tile industry of Morbi during Q4FY20 which has found good acceptance across end users. With performance consistency having been established, the Company has targeted to expand trials during Q4FY21 to widen its customer base.

* Going forward we expect BRIL sales at ~Rs. 5.5 bn and EBITDA margins at ~16% by FY23E on account of better product mix with contribution from high margin PAM-L and optimum CU of Acrylamide – both liquid and powder. PAM-L and Acrylamide sales are expected at ~Rs 1 bn and Rs ~1.9 bn respectively, by FY23E. We understand that existing infrastructure can support further capacity enhancement at minimal incremental capex.

Setting up Acrylamide-P capacity to replace imports from China:

* BRIL is venturing into manufacturing of Acrylamide-P (3,600 mtpa), at an estimated capex of Rs 80 mn, funded through internal accruals, which is expected to generate revenue of ~Rs 550 mn at optimum CU. Currently, the entire Acrylamide-P India requirement (3,500 mtpa) is fulfilled through 100% imports from China. The initial capacity would be aimed at replacing 100% of India’s imports while further capacities could be added going forward, to serve larger global requirements. The Company has entered into a technical services agreement with Mitsui Chemicals, Inc., Japan, for this planned expansion.

Game changing entry in Poly-Acrylamides with capex of Rs 600 mn:

* From an initial capacity of PAM-L of 6,600 mtpa commenced in January 2020, it has now been scaled up to 40,000 mtpa. The Company has launched BRILBIND CE01, which has found good acceptance from end users and now the Company is targeting at expanding trials to widen its customer base and gain market share. Further, the Company is also developing two more PAM-L products majorly for construction and textiles industry. PAM-L sales are expected to grow sequentially in subsequent quarters, reaching optimum CU during FY23E.

* Work on the 10,000 mtpa PAM-S plant is currently in R&D/Pilot stage after completion of initial civil work for the building, slightly delayed due to Covid-19 related restrictions and to facilitate BRIL’s entry into Acrylamide-P and new PAM-L products. The PAM-S project is now expected to be operational by FY23 end. At full capacity, PAM-S is expected to generate revenue of ~Rs 3 bn. In PAM-S, BRIL is expected to emerge as a significant regional player due to lack of existing capacity. It is in line with Government of India’s plan of ‘Atma Nirbhar Bharat’.

Valuation

* With improvement in business climate, we expect BRIL to emerge as a strong player due to its focus on niche Acrylamide-L, Acrylamide-P to capture the market hitherto catered to by China and strategic move towards PAM-L and PAM-S, which find extensive usage in several growth industries, good future growth opportunities and a strong CBD. BRIL revenues and margins are expected to increase steadily in coming years.

* BRIL has negligible debt and strong current cash flows. Capex of Rs 600 mn in PAM-S may require raising some funds, if at all, to expand the balance sheet size commiserating with expanding size of operations. With increased market capitalisation, a potential NSE listing could provide BRIL stock a better visibility, which may have a positive influence on valuation.

* We have valued BRIL on PE basis, assigning a multiple of 15x to FY23 EPS of Rs 12.6. We recommend a “Buy” on the stock with a target price of Rs 190/- (~45% upside), in 18 months.

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