Ushanti Color Chem Ltd. | Finception
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Review & Analysis by Pawan, IIM Ahmedabad
A brief history of the Legendary Blue Gold

The year is 2200 BC. A young boy heads out into the plains of Rojdi ( Modern Day Rajkot ) to collect leaves from a very special plant. The plant is called Neelini and it’s unlike any other plant the outside world has ever seen. When Neelini leaves are soaked in water and fermented and dried, the leaves would give way to a rich blue paste that could be then used to colour things. The world had finally discovered the magic of Dye (A substance used to colour things) and the Indus Valley Civilization was perhaps the first ancient civilization to use dyes to color clothes. Once this magical substance captured the imagination of ancient Indians it did not take long for Indigo to reach Ancient Greece and Rome, where many considered it a luxury product. It would take archaeologists another 4000 years to finally recover artifacts from the ancient world to confirm what is perhaps the first use of Indigo (A dark Blue Dye) but its place in history remains etched in stone.  

By the late 15th century, Large scale cultivation of Indigo starts in India and huge quantities of Indigo is exported to Europe. By this point, traders have concocted a new name for Indigo. It is now called Blue Gold for it is everything a trader has ever wanted. It is compact, has high value and is long lasting, just like gold. However the world’s love affair with indigo would abruptly end during the late 19th century when a german chemist found ways to synthesise Indigo inside his lab. Synthetic blue dye had introduced itself to the world. 

Ushanti Colour Chem Limited

Perhaps the promoters at Ushanti are not aware of this rich tradition, but they too are mostly restricted to manufacturing synthetic blue dyestuff (Substance yielding dyes) and exporting it to other countries. It’s no longer called Indigo, instead it’s called Turquoise Blue or Reactive Blue 21.

The company for its part has been in existence for a while now. They began operations as far back as 1993 but have recently carved out a niche in manufacturing blue synthetic dye. The company wants to raise money so that they can increase their manufacturing capacity and pay off some off their debt.

So should you invest in this company? We will take you through this story by asking questions that any reasonable investor ought to ask while investing in an SME IPO?

Are they making lots of money?

  1. Some years they have made close to 34 Crores in Net Revenues. Some years, 23 Crores. As of December FY 2018, the company made close to 27 Crores. This inconsistency isn't very comforting and the company clearly isn’t on a growth path. 
  2. The profits too follow a similar pattern. One year they are making 2.2 Crores, the next they are making 22 lakhs. As of December FY 2018 though, the company made 1.8 Crores in profits.  
  3. The company sells about 41% of their produce in India and the rest they export to countries like Pakistan, UAE, Thailand etc.                                     

So, what will they make next year ? 

Well that depends on 3 things

1. Demand for textiles : Most of Ushanti’s output eventually finds its way into textiles and if demand for textiles increase, demand for dyes inevitably increase. 

2. Price of dyestuff : Here is an excerpt from NDTV profit explaining this little feature 

“Indian dye manufacturers used to face strong competition from Chinese dye companies. However, in a recent move to control pollution, the Chinese government has cracked down on some companies, which has led to the shutdown of a major dye manufacturer in China, which was contributing nearly 30 percent of global dye production. Closedown of the Chinese unit has led to shortage of products in the markets and prices of dye and intermediaries have increased sharply”.

This happened in 2016. An event like this is both good and bad for Ushanti because price of dye increases disproportionately when events like these happen. But, it also increases the price of raw materials used to make dyes. So, while it helps them increase their revenue it does not necessarily help them increase profits because they have to now spend more to produce dye.

3. Capacity: If Ushanti wants to sell more, it has to produce more. Our company is already operating at peak capacity. During FY 2018, their capacity utilization stood at 90%. So, there is no way that the company can sell more without setting up a new plant. 

So what are they doing about it ?

They are setting up a new plant and they need your money for it. The plan is to set up this new manufacturing plant to produce more dye and in different colours too. They also want to produce some intermediaries used to make dyes. This way they don’t have to worry about price movements in raw material and the hope is that, once the plant is fully operational the company can increase both their top line (revenues) and bottom line (profits). The new plant is supposed to be much much bigger than their existing plant.

Any red flags ?
  1. The new plant is expected to be operational during FY 2020-2021. So what happens between now and 2020. As we have already stated, the company is running at peak capacity. Does that mean revenues won’t increase until the new plant is operational?
  2. Also, the total cost in setting up the plant is estimated to reach 8 crores. Although the company is raising 11 Crores from the Public, only 3 crores from the proceeds will be used to fund the plant. The remaining 5 crores, the company wants to fund through internal accruals. For a company that hasn’t been able to show consistent profits, that might be a challenge considering the short timeline in which they need to finance the new plant.
  3. The company has a debt of about 10 Crores and they want to spend about 5.8 Crores repaying some of their debt. However there is one small problem and we will let the company (RHP) explain it for you.

    “The company also has certain borrowings for which higher rate of interest is charged by our lenders and the same is yet to be repaid. Our decision of repayment of lower rate borrowings prior to repaying borrowings with higher rate of interest may impact our finance cost consequently leading to lower profitability”

  4. The company has an outstanding loan on a BMW Car and the promoters, Maunal and Minku Gandhi are drawing 70 LPA (Lakh per annum) as salaries, each. That’s a lot for an SME. 

Based on annualized earnings the asking price of Rs. 60 per share translates to a PE of about 18. We don’t know about this one. Maybe the company will in fact get the new plant up and running by 2020 and then make boatloads of money. But what if it doesn’t? What if something goes wrong? We will let you decide that one. We here at Finception, wish the company all the best in its future endeavor.

No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.


Finception, Ideapad, CIIE
IIM Ahmedabad, Vastrapur Ahmedabad - 380015


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