Asahi Songwon Colors (NSE - ASAHISONG) - Jul'18 Alpha - Alpha Plus Stock - Katalyst Wealth

8/24/2019 Asahi Songwon Colors (NSE – ASAHISONG) – Jul’18 Alpha/Alpha Plus stock – Katalyst Wealth
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Asahi Songwon Colors (NSE –

ASAHISONG) – Jul’18 Alpha/Alpha Plus
stock
 July 29, 2018
Dear Members,
We have released 29th Jul’18: Asahi Songwon Colors Ltd (NSE Code – ASAHISONG) – Alpha/Alpha Plus
stock for Jul’18. For details and other updates, please log into the website at the following link –
https://katalystwealth.com/index.php/my-account/
Note: For any queries, mail us at info@katalystwealth.com
Date: 29th Jul’18
CMP – 248.95 (BSE); 249.00 (NSE)
Rating – Positive – 4% weightage; this is not an investment advice (refer rating interpretation)
In the last 5-6 months the small and mid cap indices have corrected by 20-25% and a lot of stocks are
down by 30-40% or even more. As a result of the recent correction, the excesses and frothiness have
subsided; however there’s nothing to suggest that stocks can’t correct further or if we have already
bottomed out.
We believe the odds are more favourable for the long term investors and the staggered purchases
over the course of next 8-12 months could be the best way to capitalize both on the correction and
avoid the trap of trying to time the markets.
In line with the same strategy we are releasing our new recommendation on Asahi Songwon Colors.
Introduction
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https://katalystwealth.com/2018/07/29/asahi-songwon-colors-nse-asahisong-jul18-alpha-alpha-plus-stock/ 1/9
Asahi Songwon Colors basically deals in Organic pigments, more speci cally phthalocyanine
pigments and derivatives like CPC blue crude, Beta Blue, Alpha Blue, etc. These pigments nd
application in printing inks, paints, plastics, textiles, paper industry, etc.
The company and the promoters have a long standing track record in the pigments industry and
have been supplying products to demanding downstream customers worldwide.
As on date, we like several points about this company and they are as below:
Increasing promoter holding – Since Mar’16 the promoters have increased their holding in the
company from 62.28% to 65.72% (including 0.31% increase in Jun’18 quarter) through open market
purchases.
Forward integration with foray into value added products – Till FY 15 Asahi was largely dependent on
CPC blue crude for its sales; however since then it has forward integrated and introduced products
like Beta Blue, Alpha Blue, etc which should help the company realize better margins.
Debottlenecking and capacity expansions without any strain on balance sheet – Since the past 2-3
years the company has been steadily working on debottlenecking its existing CPC blue capacity and
added 600 TPA Alpha Blue and a 3,000 TPA Beta 15:4 facility.
Besides, during H2 FY 18, the company spent ~50 crore on further expansions which should drive
revenue growth in the years ahead; however the balance sheet of the company continues to be very
strong with very low leverage.
Depressed FY 18 earnings – For FY 18, while the company reported around 14% growth in sales, the
pro ts contracted on account of sharp uptick in input cost which the company could not pass on
immediately.
As per our analysis, the gross margins for FY 18 were one of the lowest in the last 8-9 years. We
believe this should be temporary phenomenon and like previous instances the same may again
improve by 400-500 bps in next few years. Company’s internal target is to maintain 17-18% EBITDA
margins against 13% recorded in FY 18.
Reasonable valuations – Last but not the least, the stock is currently trading around 13 times trailing
twelve months earnings while during the last 2 years it traded in the range of 11.5 times to around 18
times earnings.
In case of really bad markets, the downside might be limited at around 15-20%.
Basic details
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Asahi Songwon is engaged in the business of manufacturing pigments for over two decades. The
company is one of the leading manufacturers of CPC Blue Crude and has also set-up facilities for
manufacturing Beta Blue and Alpha Blue pigments as part of forward integration. CPC Blue crude is
captively consumed for manufacturing Beta Blue and Alpha Blue.
Diversifying client base – Asahi supplies to some of the world’s largest colorant companies like DIC
Corporation (Japan), Sun Chemical Corporation (USA; part of DIC group), Clariant Chemicals India
Limited, BASF SA (Germany) etc. and it has a strong and long-standing business relationship with all
of them. In fact, till FY 16 Clariant Chemicals India held 5.86% stake in the company and as of Jun’18
DIC Corporation held 7% stake in the company.
Income from the above mentioned clients remained in the range of 70%-80% till FY16. However,
Asahi has been adding new customers in both domestic and export market over last two years thus
leading to moderation in the client concentration risk. This is also evident from reduction in the
income from key clients to around 63% in FY 17.
Reducing export dependence – Asahi is primarily export oriented with export sales accounting for
69% of total sales of the company in FY 17. However, since the last few years the company has
increased focus on domestic markets and the same has also helped it diversify its client base and
reduce dependence on key customers. As a result the contribution from domestic sales has
increased from 14% in FY 15 to 31% in FY 17.
In fact, increased focus on domestic sales has helped the company report growth, albeit low, because
otherwise the export sales contracted in absolute terms from FY 15.
Widening product portfolio – In the last 2-3 years the company has ramped up its research and
development activities to widen its product portfolio. While in 2015- 16, the company launched two
new products – Alpha Blue and Beta 15:4, in 2016-17 it developed another four products –
Phthalocyanine Blue 15.0 and 15.1 for plastic application, Phthalocyanine Blue 15.0 ( for ink, paint
and textiles), and Azo pigments Orange 64 and Yellow 12.
The focus on new product development can be gauged from the fact that while there were only 2
new products launched in ten years leading to 2014-15, 3 new products were launched in two years
leading to 2016-17.
Environmentally conscious – It’s a well known fact that regulators in China have been cracking down
on local industries driven by environment pollution related concerns. Even the global clients are now
increasingly seeking products from environmentally complaint companies.
Even in India as well the authorities have been issuing production suspension orders for polluting
companies. In order to avoid such mishaps and continue uninterrupted business operations, Asahi
has invested more than 21 crore (during the last 5-6 years) towards improving its sustainability way
beyond the prescribed norms.
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Promoters/Management
Like several Indian companies, Asahi Songwon Colors is largely an owner operated business.
Company’s Chairperson, Mrs. Paru M. Jaykrishna, is a noted industrialist and a former President of
Gujarat Chamber of Commerce & Industries (GCCI). Presently, the business operations of the
company are being managed by Mr. Gokul Jaykrishna (CEO & Joint MD) who is well quali ed and has
been engaged with the company since 1996.
In owner operated companies it is important from shareholder’s perspective that owners have high
stake in the company and in the case of Asahi Songwon the promoters own more than 65% stake in
the company. In fact what is good is that during FY 17 the promoters increased their holding in the
company by 3% through open market purchases and in the last 15 months they have further added
0.44% to their stake.
Promoters market purchases is a big positive in our view as they are ones running the company and
know it better than anyone else.
On the front of corporate governance, we have not found any major red ags.
Operating Performance
Source: Asahi Songwon’s Annual Reports
Asahi Songwon has performed well over the years with steady growth in sales and pro ts while
maintaining a very healthy balance sheet.
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Between FY 06 and FY 14 the company grew its sales at a CAGR of 38-39% and pro ts at a CAGR of
36.5%. Post FY 14, i.e. in FY 15 the Company’s revenues were a ected on account of the demerger of
the green pigments division of the company into its associate company Aksharchem (India) Ltd.
So, e ectively FY 15-FY 16 can be considered as the base years and since FY 16 the company has
been recording 14% CAGR in sales.
As far as operating margins of the company are concerned, they have hovered largely in the range of
12-18%. The main determinant of operating margins is raw material cost. The raw material prices
tend to uctuate a lot and it’s not always possible for the company to immediately pass on the same
to its customers. As a result the gross margins of the company have hovered in the range of 39-47%
with an exception of FY 14 when the gross margins contracted to 37.50%.
On account of the above cyclicality, we believe if one is able to invest in such companies during
periods of low pro tability (low gross margins), the results in general can be good over a cycle of 3-5
years.
For FY 18, while Asahi Songwon reported around 14% growth in sales, its pro ts contracted on
account of sharp increase in input cost. The gross margins of the company contracted to around 39-
40% i.e. closer to lows of last 7-8 years.
Considering the fact that competition from China is a bit subdued and the fact that company is
moving upwards in the value chain, we believe the gross margins and operating margins should inch
up in the years ahead. In fact, management has an internal target of maintaining 17-18% EBITDA
margins.
Another positive about this company is its recent spate of expansions. While the company had been
debottlenecking and expanding capacities for its new products like Beta Blue, Alpha Blue, etc, it
carried out a major expansion in 2nd half of FY 18 wherein it spent around 50 crore on xed assets.
Compare this to 138 crore gross block till FY 17.
The company has done well on the front of balance sheet and cash ows as the company has
managed to grow the operations without straining its balance sheet. In fact, before the 50 crore
capex carried out in H2 FY 18, the company was almost debt free on net basis (including its equity
investments).
The company has also done well on the front of capital allocation with both ROE and ROCE having
been maintained in the range of 15-20%.
In our view, with the expansion in capacity, widening of product portfolio and reversion in margins to
higher levels, there’s good probability of company recording decent growth in sales of around 15-
20% and even higher growth in pro tability over the course of newt few years.
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Valuations
From the above sections we know that Asahi Songwon Colors is a well managed company operating
in easy to understand business of colour pigments. The company has a long standing history of
operations with reasonable growth in sales and pro ts across the years.
After a long gap company’s management is trying di erent things like expanding product portfolio,
introducing value added products and expanding capacities at brisk pace and that too without
straining the balance sheet much.
We also know that in the last 2 years the promoters have increased their stake in the company by
more 3%. While major stake purchase was around 150 odd levels, the recent purchases have been in
the price range of 250-400.
Lastly, the pro tability of the company tends to be a bit cyclical and based on the past data the
current pro tability is cyclically low. Thus, considering the above factors we believe the valuations are
reasonable at around 13 times trailing twelve months earnings while during the last 2 years it traded
in the range of 11.5 times to around 18 times earnings.
In case of really bad markets, the downside might be limited at around 15-20%.
Risks and Concerns
Higher client concentration is a risk in the case of Asahi Songwon. While the company has tried to
diversify its client base, it still derives decent sales from its top few clients.
Declining exports is another key concern for the company. Export sales contracted from Rs 205 crore
in FY 15 to Rs 176 crore in FY 16. While the company could arrest de-growth in FY 17, any further
contraction will pose growth challenges for the company.
Chemical based industries are being regulated across the world as their discharge impacts the
environment. While the company has installed systems even better than the prescribed norms, any
further tightening will both increase the cost and may even cause disruptions in the operations of the
company.
The trading volumes in the stock are a bit low; though it also tends to depend on the market
conditions.
Disclosure: I don’t have any investment in Asahi Songwon Colors and have not traded in the stock in
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the last 30 days.
Best Regards,
Ekansh Mittal
Research Analyst
http://www.katalystwealth.com/
Ph.: +91-727-5050062, Mob: +91-9818866676
Email: info@katalystwealth.com
Rating Interpretation
Positive – Expected return of ~15% + on annualized basis in medium to long term for investment
recommendations and in short term for Special situations
Neutral – Expected Absolute return in the range of +/- 15%
Negative – Expected Absolute return of over -15%
Coverage closure – No further update on the stock
% weightage – allocation in the subject stock with respect to equity investments
Short term – Less than 1 year

Medium term – Greater than 1 year and less than 3 years
Long term – Greater than 3 years
Research Analyst Details
Name: Ekansh Mittal Email Id: ekansh@katalystwealth.com Ph: +91 727 5050062
Analyst ownership of the stock: No
Details of Associates: Not Applicable
Analyst Certi cation: The Analyst certify (ies) that the views expressed herein accurately re ect his (their)
personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation
was, is or will be directly or indirectly related to the speci c recommendation(s) or views contained in this
research report.
Disclaimer: www.katalystwealth.com (here in referred to as Katalyst Wealth) is the domain owned by

Ekansh Mittal. Mr. Ekansh Mittal is the sole proprietor of Mittal Consulting and o ers independent equity
research services to retail clients on subscription basis. SEBI (Research Analyst) Regulations 2014,
Registration No. INH100001690 Privacy - Terms
The views expressed are based solely on information available publicly and believed to be true. Investors
are advised to independently evaluate the market conditions/risks involved before making any investment
decision.
A graph of daily closing prices of securities is available at www.bseindia.com (Choose a company from the
list on the browser and select the “three years” period in the price chart.
This report is for the personal information of the authorized recipient and does not construe to be any
investment, legal or taxation advice to you. Ekansh Mittal/Mittal Consulting/Katalyst Wealth is not soliciting
any action based upon it. This report is not for public distribution and has been furnished to you solely for
your information and should not be reproduced or redistributed to any other person in any form. This
document is provided for assistance only and is not intended to be and must not alone be taken as the
basis for an investment decision. Ekansh Mittal or any of its a liates or employees shall not be in any way
responsible for any loss or damage that may arise to any person from any inadvertent error in the
information contained in this report. Neither Ekansh Mittal, nor its employees, agents nor representatives
shall be liable for any damages whether direct or indirect, incidental, special or consequential including
lost revenue or lost pro ts that may arise from or in connection with the use of the information. Ekansh
Mittal/Mittal Consulting or any of its a liates or employees do not provide, at any time, any express or
implied warranty of any kind, regarding any matter pertaining to this report, including without limitation
the implied warranties of merchantability, tness for a particular purpose, and non-infringement.
The recipients of this report should rely on their own investigations. Ekansh Mittal/Mittal Consulting
and/or its a liates and/or employees may have interests/ positions, nancial or otherwise in the
securities mentioned in this report. Mittal Consulting has incorporated adequate disclosures in this
document. This should, however, not be treated as endorsement of the views expressed in the report.
We submit that no material disciplinary action has been taken on Ekansh Mittal by any regulatory
authority impacting Equity Research Analysis.
Disclosure (SEBI RA Regulations)
Whether the research analyst or research entity or his associate or his relative has any nancial interest in
the subject company/companies and the nature of such nancial interest – No
Whether the research analyst or research entity or his associates or his relatives have actual/bene cial
ownership of 1% or more securities of the subject company (at the end of the month immediately
preceding the date of publication of the research report or date of the public appearance) – No
Whether the research analyst or research entity or his associate or his relative has any other material
con ict of interest at the time of publication of the research report or at the time of public appearance –
No
Whether it or its associates have received any compensation from the subject company in the past twelve
months – No Privacy - Terms
Whether it or its associates have managed or co-managed public o ering of securities for the subject
company in the past 12 months – No
Whether it or its associates have received any compensation for investment banking or merchant banking
or brokerage services from the subject company in the past 12 months – No
Whether it or its associates have received any compensation for products or services other than
investment banking or merchant banking or brokerage services from the subject company in the past 12
months – No
Whether the subject company is or was a client during twelve months preceding the date of distribution of
the research report and the types of services provided – No
Whether the research analyst has served as an o cer, director or employee of the subject company – No
Whether the research analyst or research entity has been engaged in market making activity for the
subject company – No
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8/24/2019 Asahi Songwon Colors (NSE – ASAHISONG) – Jul’18 Alpha/Alpha Plus stock – Katalyst Wealth

 My Account Logout  ₹ 0.00

Asahi Songwon Colors (NSE –

 July 29, 2018

Note: For any queries, mail us at info@katalystwealth.com

CMP – 248.95 (BSE); 249.00 (NSE)

Source: Asahi Songwon’s Annual Reports

Risks and Concerns

Short term – Less than 1 year

Research Analyst Details

Analyst ownership of the stock: No

Details of Associates: Not Applicable

Disclaimer: www.katalystwealth.com (here in referred to as Katalyst Wealth) is the domain owned by

Disclosure (SEBI RA Regulations)

Copy Protected by Chetan's WP-Copyprotect.

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