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Camlin Fine Sciences: Canvas to Chemicals ✏️

Updated: Oct 27, 2023

No matter how old you are, you must have used a Camlin pencil at some point. But did you know that this household name doesn’t just make stationery?

In fact, Camlin started as a company producing ink powders and tablets, back in 1931. It later, in 1947 diversified into art materials and stationery products, becoming a household name in India. Not leaving its chemical manufacturing roots though, it later got into the production of fine chemicals - mainly antioxidants. Yes, quite unrelated to stationery.

But it could barely replicate the success it received in stationery for its chemicals. Camlin Fine Sciences, the company Camlin demerged from itself and separately listed in 2015 couldn’t really make money for its shareholders till 2020.

In fact, between 2017 and 2018, the stock had halved as Camlin Fine Sciences struggled with losses. But it sketched its way back up from the red, and in just 5 years, has managed to turn things around.

From a loss of Rs. 24 crore in FY18, Camlin Fine Sciences has come a long way, making a Rs. 40 crore profit in FY23. And while the steps it has taken have brought it back to the surface, they also act as a foundation for sustained growth in years to come.

Rising from the ashes

The key problem for Camlin Fine Sciences, which resulted in its losses was the meteoric rise in the price of Phenol. The key raw material for Phenol is benzene, which reached an all-time high, sending the prices of Phenol sky-high.

Why is Phenol important? Well, it’s the starting point for all of these products that Camlin Fine Sciences makes. Its primary offerings include shelf life solutions (preservatives), performance chemicals (antioxidants), and aroma ingredients (flavours and essence) - all of which are made from Phenol.

The company procures Phenol, splits it into two products Hydroquinone and Catechol, and then processes these two products to make a variety of products, which have several uses, mainly in food and pharmaceuticals.

For example, a majority of the world’s vanilla flavour comes from synthetically made Vanillin, rather than from vanilla pods. Synthetic vanillin is made from Catechol, which Camlin Fine Sciences makes from Phenol.

The rise in Phenol prices back in FY18 resulted in a spike in the cost to produce Hydroquinone and Catechol. Unfortunately, the company couldn't pass on these increased raw material costs to the customers, which further exacerbated the situation, ultimately leading to losses.

There were three ways to tackle the situation, all of which resulted in not just the turnaround from FY18-23, but which also act as a strong foundation for the future.

1. Vertical Integration

The chemical industry is notorious for changes in the prices of raw materials that are used in further production processes. The most common way of reducing this volatility is through vertically integration - which simply means the company starts producing most of its raw materials by itself.

Over the years, organically, and through acquisitions, Camlin Fine Sciences has managed to produce most of its requirements in-house, giving it the ability to control supply and pricing.

💡 Through at least 5 acquisitions and JVs, Camlin Fine Sciences has achieved a high level of integration - from making Catechol and Hydroquinone at the top, to now entering the nutraceuticals market.

2. Down-streaming

However, the vertical integration still leaves Camlin Fine Sciences exposed to the risk emerging from volatility in the price of Phenol. This can be waived to a considerable level through down-streaming - a process where the company increasingly makes derivatives of the raw material, by using complex processes, to make chemicals which have specialised applications.

This gives the company significant value-addition, stickier demand, higher bargaining power, and eventually better pricing, which is not as directly linked to the price of the key raw material and has a higher potential for a rise to be passed on to customers.

💡 Catechol prices have been so depressed that they don’t even cover its production cost. Camlin Fine Sciences can potentially utilise all its Catechol production to make Vanillin, specialty chemicals and other derivatives, giving the company a profitable twist.

3. Local Production

In a pivotal development, the company recently commissioned a state-of-the-art manufacturing facility in Dahej, Gujarat. This strategic investment of Rs. 180 crore is poised to revolutionise the production of Catechol and Hydroquinone on a global scale.

This transformational move eliminated the previous constraint of a 49-day transport time from Italy (where it was making its Catechol and Hydroquinone) and is set to drastically reduce the number of inventory days.

Beyond Catechol and Hydroquinone, the company also has the space and capacity to expand into downstream products like MEHQ, Ethyl Vanillin, and tailor-made formulations.

💡 The cost of producing Catechol and Hydroquinone was reduced by 40% versus making it in Italy, giving Camlin Fine Sciences significant cost and competitive advantages.

Set for future growth

Over the last 5 years, Camlin Fine Sciences’ efforts to strengthen vertical integration, move downstream and increase local production have all resulted in healthy financial performance.

On the same lines, Camlin Fine Sciences can deliver an acceleration in growth over the next two years. It expects to deliver 20% revenue CAGR over the next two years. This is likely to be accompanied by margin expansion, driving even higher earnings growth.

The factors that are likely to result in this improvement in financial performance include:

  1. Debottlenecking of Hydroquinone and Catechol plant in Dahej, which will add capacity to the tune of 5,000 MT, an addition of 50% to the existing capacity

  2. Capacity of addition of 6,000 MT of Vanillin, which would

    1. efficiently utilise the low-value Catechol production in-house,

    2. get Camlin Fine Sciences into the market since its Vanillin plant in China has been shut on account of the legal case against the partner, and

    3. enable Camlin Fine Sciences to get a cost advantage in the sale of Vanillin since it has invested in in-house production of Guaiacol, which is a key raw material for making Vanillin

    4. solve for the demand-supply gap in the Vanillin market, as the world looks for an alternate supply to China

  3. Commencement of supply of a specialised chemical made from Catechol to Lockheed Martin, which further efficiently utilises the low-value Catechol production in-house

  4. Investments in downstream products in the segments of shelf-life solutions, performance chemicals and nutraceuticals will increase overall realisation and margins

  5. Higher proportion of production in India, resulting in lower cost of production, massive reduction in overheads, and higher efficiencies, leading to margin expansion

For estimated revenue CAGR of 20% and PAT CAGR of 48% over the next two years, the stock is trading at a two-year forward PE of 29x, which is at a 20% premium to historic valuations.

For the upgrade in both the nature of business and financial performance, a steeper premium can be commanded by Camlin Fine Sciences.

Additionally, a two-year forward PE of 29x implies a PEG of just 0.6x, for an estimated PAT CAGR of 48%, which also gives comfort on current valuations, and potential for re-rating.

Nostalgia, drama, complications and a whole lot of work later, Camlin Life Sciences may be a business that needs a fresher science lecture, but is no stranger to gains. So, you might as well sharpen your pencils and get to studying so that this makes a cool addition to your watchlist!


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