Success In Different Colours

At times when most companies have posted a mediocre performance in the first quarter of 1998-99, Hindustan Inks and Resins (HIRL), stood apart. HIRL, which supplies inks to flexible packaging laminate manufacturers, reported a net profit growth of 121 per cent to Rs 4.39 crore, while its net sales grew nearly 50 per cent to Rs 34.23 crore in the first quarter of 1998-99.

HIRL's excellent performance can be attributed to the boom in user industries, especially the fast moving consumer goods (FMCG) sector which in turn improved demand for flexible packaging. Further, the closure of a number of unorganised ink units, which constitute a large party of the industry, helped HIRL increase its market share. HIRL also entered the export market.

 

In this process, HIRL has successfully challenged the market leader, Coates of India. But things do not halt here. In order to remain competitive, it has focused on in-house research for product development, reduce project costs and accelerate commercialisation of new products. It has already achieved complete cost control by backward integration into resins. HIRL has appointed consultancy firm McKinsey to develop core competencies and leadership in its chosen field of business. It is also implementing enterprise resource planning systems in the current year covering both manufacturing units and sales. All this is expected to yield results in the coming months. Satish Khanna, group president, HIRL, says, " We hope to grow at a compounded annual growth rate of 30-45 per cent in the next five years as our past investments are expected start yielding results now."

HIRL is currently trading at Rs 91.40, discounting its latest earnings of Rs 38.17 (annualised) only 2.4 times. But the stock deserves a better discounting, thus investors can buy at its current level. A closer look at the stock.

Expanding product range

In the last five years, HIRL has expanded its product profile from liquid inks and resins to lamination adhesives, wire enamels, general inks and can coatings. The market for printing inks, can be classified into general inks (this includes offset inks and screen inks), liquid inks (this includes flexo inks and gravure inks), paste inks and can coating. The total market size for inks is estimated between Rs 400-600 crore in the organised sector.

Of this, liquid inks are estimated Rs 125-150 crore, offset inks at Rs 175-200 crore, metal decoration at Rs 25-50 crore and balance by other varieties. In the liquid ink market, HIRL and Coates of India are the major players in the organised sector. Together, these companies account for nearly 50 per cent of the business. Liquid inks are used for flexo and gravure printing on printing materials such as polyester, BOPP, LDPE, HDPE, aluminum foils and paper. About 74 per cent of HIRL's turnover in 1997-98 was from printing inks and the balance from sale of wire enamels and adhesive.

HIRL had entered general inks in 1995 which it had ignored earlier. And this has now started paying off. Within 18 months since its launching general inks, the company has become the second largest player. It currently controls around 25 per cent of the organised sector in this segment.

HIRL is looking at general inks segment for increased volumes as it has more than 24,000 shades and a customer base of 4,500. For this, it has already built a strong infrastructure, including setting up new matching centres across the country which are crucial for an ink company to provide the exact shade required by a client. It has two manufacturing locations, one at Vapi in Gujarat and the other at Daman. These manufacturing sites are backed by five technical service centres. Further, it has set up marketing offices in Mumbai, Delhi, Noida, Baroda, Ahmedabad, Chennai and Calcutta. It has also started matching centres at Mumbai, Delhi and Ahmedabad.

HIRL has also started new products. In 1997-98, it introduced high performance aqueous products like flexo inks and coatings, which are import substitutes. In addition, new grades of gravure lamination inks and adhesive for upgradation of packaging to international standards were also introduced. This year, it plans to introduce polyamide resins based on imported dimer acids. The manufacturing process for this product has been developed in-house. HIRL is also working on the development of speciality inks for specific application such as security inks and lami-lube inks. The demand for these inks is entirely met through imports. Security inks are used in printing currency notes and the total market size is estimated at Rs 75-80 crore.

Building a strong base

HIRL has also made sizeable investments in building infrastructure for future growth. In 1997-98, it has invested Rs 9.23 crore for expansion of manufacturing facilities and upgrading infrastructure. Its Daman unit has now become the single largest single point ink plant in Asia. In the current year, it is further expanding its capacity from 7800 tonne to 12,000 tonne at a cost of Rs 8 crore, which will be internally financed. Further, as a part of diversification, the company has put up a new manufacturing plant for fine chemicals, with an installed capacity of 540 tonne.

Going global now

In 1997-98, HIRL started exports and achieved export sales of Rs 3 crore. It has already made an entry into major markets in Europe, US and 20 other countries. HIRL has the required export expertise from group company Mitsui Industries. With world class production facilities, complete range of inks, customised and technical service, it plans to achieve a 40 per cent growth in exports this year.

Working capital constraints

In spite of a tough year in 1997-98, HIRL's net sales grew 15 per cent to Rs 100.36 crore in 1997-98. However, its margin were under pressure. Operating profit margin (OPM) declined to 18.39 per cent from 19.99 per cent. Here it needs to be noted that margins in this industry are dependent on international price movements of the raw materials and finished goods. All the players in this industry have found it difficult to maintain margins in light of increasing raw material prices. HIRL, for its part, has the highest OPM in the industry. Even well established player like Coates of India have an OPM of only 8-9 per cent. HIRL's net profit grew 12.4 per cent in 1997-98 to Rs 9.76 crore. It has a good reserve position.

But there are some problem areas too. HIRL's net working capital is close to 200 days' sales, and the biggest challenge (and risk) in the future will be the company's ability to manage working capital as its product range grows. Average debtors days are in the region of 100 days, while average creditors days are around 27 days. The key to HIRL's success lies in its ability to provide a near comprehensive range of inks and related products, while maintaining a cost structure that is comparable to the small unorganised players in the industry. However, the company has taken several measures to improve working capital management. It has also taken steps to contain the various overheads and the effect of the same will be seen in the coming years.

Investment decision

Coates of India has been the market leader in the ink market for over a decade. HIRL on the other hand has been a new player and has challenged Coates's position. It has been able grab a substantial market of Coates. It is already working on a number of new projects. This makes investing worthwhile.

Above all, HIRL can be considered a good bonus candidate as its reserves are more than ten times its equity capital of Rs 4.6. The only loose end is that there will be a warrant conversion by promoters this year at Rs 100, taking the equity capital to Rs 6 crore. The fully diluted annualised quarterly earnings discounts the current price of Rs 92 about three times making it a good buy.