A stable proxy to India's growing Chemical exports?

disc: I am invested in the business. This is strictly NOT a recommendation, but rather an attempt to understand a business. Please do your own diligence.

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Before we begin, it is helpful to understand some key concepts.

Proxy investing: When you invest in a key supplier or intermediary catering to a growing industry, so that you benefit from broader industry growth no matter who wins in the industry. These businesses also tend to get higher multiples with time as investors wanting a safe way to play a theme flock to it. (1)

Consumables: Items that need to be purchased afresh every time instead of a one time purchase (think ink for a printer vs a printer). This helps because there is more stability and lower cyclicity in demand - this not only helps business fundamentals but also the multiples businesses can get. (2)

Fixed asset turns: Fixed asset turns is the amount of revenue you can generate for every rupee of fixed assets you own. A high fixed asset turns allows for businesses to scale revenue fast even off a smaller investment in capex, and allows capex to be fully funded by internal accruals.(3)

Proximity driven moat: In items where the cost of the item is low, but volume and therefore cost of logistics is high, proximity ends up being a significant moat. This moat is further strengthened as the business reaches efficient scale by catering to most clients in that geography developing a further moat on cost competitiveness. (4)

With that covered, let us dive into the business.

Pyramid Technoplast is a leading manufacturer of polymer drums, intermediate bulk containers and metal drums in India. These containers are used for storage and transportation of chemicals and agrochemicals - and Pyramid caters to many marquee clients including Deepak Nitrite, Patanjali, Adani Wilmar, Asian Paints, GACL, and Alkyl Amines.

It is focused in West India, with plants around key clients it supplies to - and with a bulk of India's chemical exports coming out of Gujarat the business has 7 manufacturing facilities in Silvasa and Bharuch, and an 8th coming up in Maharashtra.

Unit 1- Silvasa 5180 MTPA Unit 2- Silvasa 3282 MTPA Unit 3- Bharuch 6694 MTPA Unit 4- Bharuch 5322 MTPA Unit 5-Bharuch 3240 MTPA Unit 6- Bharuch 10,800 MTPA Unit 7- Bharuch 120,000 units

The Indian chemical industry has gone through a cyclical downturn over the last 4-6 quarters driven by a combination of inventory destocking at client end and excessive Chinese supply driving a glut in the market.

The inventory situation has now normalized and demand appears to be gradually picking up. Over the long run the chemical sector is poised to grow broadly above GDP driven by strong domestic demand as well as a growing share of the export market.

Industrial storage and transport is a natural proxy to this growing chemical industry, and being largely volumes driven is relatively better protected against the vagaries of pricing pressures and fluctuation (ref 1: proxy investing)

The industry has a natural proximity driven moat due to the high volume low value nature of containers which will keep international competition at bay. Strong domestic players located strategically close to the manufacturers are therefore bound to benefit driving a stable oligopolistic structure in the business. (ref 4: proximity driven moats)

IBCs also act like a consumable for the sector, because their low value high volume drives single use in most instances. Channel checks suggest IBC containers at destination are usually given off for recycling or scrappage. We like consumable businesses because unlike capex driven proxies to the chemical sector the demand here is less cyclical and more steady. (ref 2: consumables)

The business is also in growth mode, investing quite heavily in capex over the next two years. More importantly all of the growth will be driven by internal accruals. The business also enjoys a 5x+ fixed asset turns, which drives a strong revenue potential of 900-1000cr as the new capex goes upstream. (ref 3: Fixed asset turns)

Capex

FY21 7cr FY22 2cr FY23 18cr FY24 37cr FY25E 50cr FY26E 50cr

Margins: Interestingly the business also has mutliple levers of margin expansion over the next few years.

Op Cost saving: In addition to the growth capex, the business also plans to invest 60cr+ to build captive solar plants at both Maharashtra and Gujarat that will drive ~2%+ of operating cost reduction when complete, and will be financed by relatively low cost (8.5%) debt.

Mix shift: The IBC segment which aids logistics efficiencies of businesses materially has a substantially higher margin profile than the traditional polymer drums and MS drums segment. The IBC segment is also increasing as a percentage of revenue every year from 26% in FY21 to 33% in FY24. As capacity ramps up at Unit 7, IBC as a % of total business is likely to increase further. This will be another lever of margin expansion.

This gives us a potent mix of good growth visibility, steady and improving margins, and a stable proxy to a high growth sector in the country.

Risks:

Continued weakness in the end market: The business is heavily dependent on agri-chemicals, specialty chemicals and generic chemical businesses. Although there might be challenges in the space from time to time, long term the Indian chemical space is poised to grow well. Therefore this is likely to be a persistent short term risk, but not a major risk from a long term perspective.

Supply chain risks: Around 60% of the raw materials the business consumes are imported from countries like Kuwait, Qatar, Saudi Arabia, Oman and Singapore. Both of the primary raw materials in the business - polyethylene and polypropylene are crude derivatives and hence face a commodity price risk. Any material shortage or interruption in the domestic and international supply or decrease in the quality of raw materials due to natural causes or other factors could result in increased production costs that the company might not be able to pass on to end customers. However historically the business has been able to manage margins in a very tight range.