Savita has fundamentals edge

Savita Chemicals Ltd (SCL) specialises in the manufacture of petroleum-based products and operating of wind power plants.

Business: SCL, known for its petroleum-based products, has manufacturing plants located at Navi Mumbai, Mahad and Silvassa. It has installed production capacities equaling 2,50,000 kl/mt besides an installed capacity of petroleum jellies exceeding 3,000 mt. Its leading products can be classified as transformer oils, white oil, lubricants and other specialty oils including liquid paraffin, cable filling compound, emulsifiable polyethylene wax, optic fibre cable filling compound, pour point depressants, petroleum sulfonates, waxes and specialty wax emulsion for leather finishing, water based paints, and printing inks.

Transformer oils: Transformer oils stand to be main drivers of revenue and contribute about 40% to total revenues from petroleum products. Its product Transol is premium transformer oil. SCL customer list for transformer oils includes all major electricity boards in India besides major private sector giants like ABB and others.

White oils: The personal products and pharmaceutical industry finds extensive use for these oils. Thus, white oils’ contribution to revenues stands second after transformer oils. These contributed around 30% to total petroleum products revenues. All major pharma and personal products giants such as Johnson & Johnson, Dabur, Hindustan Unilever, Proctor and Gamble, etc are clients for SCL.

Lubricants: Lubricants are the third-largest revenue contributors in the petroleum products segment. They contribute around 15-20% to overall petroleum products revenues. SCL produces both automotive and industrial lubricants. In the automotive lubricant segment, Idemetsu is a flagship brand of automotive lubricating oils, which is available in collaboration with Idemitsu of Japan.

Other specialty oils: These specialty oils find various applications in industries and account for the remaining revenue contribution in the petroleum product segments. These include Savofil, Sovaflod, Vitagel, Savoflow and Sulfopet.

SCL also markets other wax emulsions, which find extensive use in leather finishing, wood coating and staining, water-based paints and printing inks, leather, shoe and textile finishing, etc.

Wind power generation: The company’s wind power plants are located in states of Maharashtra, Karnataka and Tamil Nadu. A relatively smaller contributor to revenues as compared with petroleum products, it offers good prospects for the future and has comparatively superior margins.

The business, which after installation does not require any input costs, sees only running and maintenance costs. Its combined installed capacity for wind power is at 21.8 mw. Realising prospects and margins in this business, SCL is gradually expanding into the same.

SCL also has a wholly owned subsidiary in the Middle East at Sharjah, UAE, in the name of Solaris International.

Investment rationale: Demand for petroleum products will keep on growing, while the expansion in power sector will boost demand for transformer oils. Thus, transformer oils, which contribute around 40% of SCL’s revenues, will keep doing well.

SCL’s growth will be supported by white oils, which are second-largest revenue contributors. Steady growth in pharma and personal care industry will keep pushing revenues from white oils.

Lubricants, the third-largest contributors to revenues, will also see a steady growth. While demand for automotive lubricants is growing at a brisk pace, that for industrial lubricants will also look up. Demand for other specialty oils will also grow.

The present capacity of 25,000 kl/mt is being pushed up to 30,000 kl/mt at a cost of Rs 5-7 crore. Further boost will lead capacities to touch 40,000 kl/mt by year-end. Capacities will require further boost in the next year. Looking at growth, SCL may consider new production capacities.

SCL’s basic raw material for petroleum-based products is base oil. SCL was able to maintain margins despite the surge in base oil prices. With crude oil prices cooling off, the margins can only get better.

In the wind power generation segment, SCL is looking at a 5 mw expansion. This segment has excellent margins as there is no input cost pressure. This could give a Rs 5-7 crore boost to revenues.

Concerns: SCL’s business comprises mainly industrial supplies. Slower industrial growth and recession will impact its growth. Since the major contributors to revenue are petroleum-based products, volatility in base oil prices can have a negative impact.
Valuations: SCL saw a robust topline growth of 32.9% year-on-year in the first quarter of the fiscal. Topline at Rs 290.06 crore surged on higher volume growth in transformer oils. Net profit also grew by a good 10.66%.

The company’s ability to pass on price increments saw operating margins being maintained at around 9% despite base oil prices rising. Profit margins were also almost maintained.

Going forward, company sources suggest a 10-12% volume growth, with margins being maintained. However, crude price direction over the medium to long run is hard to predict. The impact of lower industrial growth and economic slowdown cannot be ruled out either.

Still, it is a good bet for the long run.

Disclaimer: The writer does not hold any share of the company.