25 January 2013

What to do with Clariant Chemicals (India)?

Clariant Chemicals is one of India’s leading specialty chemicals company. It holds leadership positions in pigments, textile chemicals, leather chemicals etc. In stock markets, its a well respected company which is held by a lot of long term investors. The company is known for its generous dividends and it shares more than 70% of its profits with its shareholders.


clariant chemicals india
Clariant Chemical India

If you are familiar with our stock picks in Dead Monk’s Portfolio & list of great dividend stocks, you would know that we hold Clariant in our personal & family portfolios. This is the reason why we are concerned about the recent announcement by company’s parent Clariant AG (link). Also, the share prices of Clariant India have fallen 15-20% since the announcement.

Stock Price after the deal announcement

Recent Announcement

“Clariant has signed an agreement to divest its Textile Chemicals, Paper Specialties and Emulsions businesses to SK Capital. The total consideration of the sale amounts to approximately 460 million in cash, equivalent to 6.3 times the estimated full year 2012 recurring EBITDA of those businesses."

Effects of this announcement

Effect on revenues & profits

On a global level, this would reduce revenues by about 15% and profits by 10%. As far as Clariant India is concerned, we don’t know the exact impact as even after a month of the announcement, company has not given out details about revenue, profits & margins of the divested business. Our mail to assistant company secretary of Clariant India regarding the same did not elicit a response. As of now, we can only make a guess that revenues and profits are bound to reduce.

Effect on growth, profitability & margins

Are the remaining businesses more profitable & growth focused than the divested ones? Seems probable because of parent company’s announcement:

“Repositioning the company’s portfolio is an essential part of Clariant’s profitable growth strategy. To achieve the targets set for 2015, Clariant will focus on markets with future perspectives and strong growth rates and on businesses that have a competitive position, resulting in strong pricing power.

Effect on dividends

Should the investor’s expect a generous dividend this time around? This again seems probable because of company’s long term policy of sharing most of its wealth with its shareholders.

What are we doing?

We have held Clariant India in our personal & family portfolio for years. So, even after this correction, our holding is highly profitable and we are not interested in selling it. Clariant India has been a Dividend Champion for us and we will continue holding what we already own. But, with a correction of close to 20%, aren’t we tempted to buy more? Yes we are. But we will wait to get more clarity on issues raised above. For example, if remaining businesses of Clariant offer higher margins and higher growth potential, then this fall (& further fall, if any) in stock price, can offer good entry point for long term investors to accumulate this stock. Though revenues and profits would be reduced for next few quarters/years, so would be the stock price.

But as of now, there are too many missing pieces in this jigsaw and hence, it is better to wait for further announcements by the company.

What should you be doing?

If you already own this stock, then don’t panic. Clariant India is a great company which is known for its leadership position and for efficient capital allocation. Wait for the company to clarify before you take any call on whether to hold, accumulate or sell the stock.
If you have any information or any other views, feel free to share it in comments section or our Facebook Page.

Disclosures: Hold Long term investments in Clariant India.

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15 comments:

  1. Guys, not sure if you ever noticed...Going through the annual reports, I have seen that one of the directors for Clariant India is on the boards of Atul Ltd, a competitor for Clariant Chemicals...now isnt that a rather obvious conflict of interest ? Or am i missing something?

    ReplyDelete
  2. @2ff086ba9bddf5dfd037a4bdbfbee0af:disqus
    We think you are talking about Mr. R A Shah. Actually he is on board of many other chemical companies too. He is also a Senior Partner of M/s. Crawford Bayley & Company, a firm of Solicitors & Advocates. He specializes in a broad spectrum of corporate laws.
    As far as conflict of interests are confirmed, it is possible. But we think this fact may have no bearing on the current issue of divestment of 3 businesses as its the decision of the Parent company rather than Indian subsidiary.

    ReplyDelete
  3. Yup , i got that....seemed rather odd , though...Im a long time tracker of Clariant Chemicals:)...you guys should consider Eclerx and Engineers India for either your dividend or long term portfolio...

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  4. @2ff086ba9bddf5dfd037a4bdbfbee0af:disqus

    Alright. We haven't tracked Eclerx, but we do we like EIL.
    Do keep us posted about Clariant though :-)

    ReplyDelete
  5. Any thought on weather it can be added now or not? did we get any clarity? I already own this stock and purchase price is around 560

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  6. @798aebd5066c051cef704eebffa1ba87:disqus

    The company has failed to disclose the margins of the businesses it sold as well of those which still remain with it. And stock seems to be in a continuous downtrend. We feel that it may be a wise idea to wait a little more to get clarity on these fronts.

    ReplyDelete
  7. In May beginning, the chairman's speech states change of guard at top and also the parent is looking at divesting more business segments as per BSE

    Read this for some more views
    http://www.iias.in//downloads/IIASreports/ClariantChemicalsIndiaLtd-PB-20May13-IIASRecommendations_20130515120235.pdf

    ReplyDelete
  8. SI Any latest thoughts on Clariant?

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  9. Before we could even think of something, the stock went up from around 380 to 500+. All because of the probable land deal which seems would provide investors with loads to dividends. :) Company has been generous in the past with its dividends. And this news will defintiely keep the stock up in coming months. On the face of it, seems that below 400 was a good price to buy into the stock. (Secret - And we did buy some) ;)

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  10. That may be the reason (Secret) you replied after the stock went up :( .

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  11. If our replying to a comment can make markets move, then we must be supermen of the markets :)

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  12. Sorry me Misinterpret your previous comment :)

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  13. I too picked it at around Rs 390/share.

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  14. Great. We hope that it turns out to be a good decision in the long term for you and us :)

    ReplyDelete

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