Green and growing: Arrow Greentech

A leading manufacturer of water soluble films in India, AGL is currently expanding capacity and continues to focus on creating niche products and monetizing the same.

   

With environment conservation gaining currency Arrow Greentech Limited (AGL) is an interesting growth stock to keep an eye out for.

A leading manufacturer of water soluble films in India, AGL is currently expanding capacity and continues to focus on creating niche products and monetizing the same.

Recently DSP Blackrock bought 4.71 lakh shares (4 percent of AGL’s equity) through open market purchases.

AGL’s Products

Incorporated in 1992, AGL (market cap Rs 654 crore) is a leading company in water soluble film technology. Through its key product Watersol (water soluble film), the company is currently serving end markets of agro-chemicals and embroidery. The key benefit it brings is the avoidance of human touch in handling harmful chemicals and the optimum usage of such agri-chemicals – for example, application of certain pesticides. Currently, about 81 percent of AG’s revenue (FY 2016) comes from royalty income, 7 percent from consultancy and 12 percent from the sale of water soluble film based products. AGL’s manufacturing unit is in Ankleshwar and major institutional clients are in the field of agro-chemicals (eg: UPL).

Water Soluble Film and its Market

Water soluble film, manufactured from PVA (Poly vinyl alcohol), is a biodegradable packaging film which can dissolve in water or waste. Globally, North America is the largest market for water soluble film, having a 35 percent market share. Detergent industry (~37 percent) is the largest end user segment, followed by agrochemical packaging (35 percent).

As per ALG’s annual report, global PVA film market is about USD 500 million and is presently growing at 5 percent. Quicker adoption of this technology for applications as diverse as healthcare, agro-chemicals, embroidery, dyes, cement, enzymes, fish baits, edible films packaging etc. hold promises for steady increase in demand.

Kuraray (Japan) and Sekisui Speciality chemicals are among the largest producers of PVA and films. Aicello Corporation, The Nippon Synthetic Chemical Industry and Arrow Greentech are the other known players. Over the years, China has developed a large capacity which, in turn, increases the competitive intensity for the low margin applications of water soluble films.

Positioning of Arrow Greentech - Healthy royalty income backed by scores of patents

AG boasts of 32 registered patents related to water soluble film technology which helps it to garner healthy royalty income and consultancy fees that has grown at CAGR (compounded annual growth rate) of 58 percent between FY16.

So far the company has monetized 3 out of 32 patents in the form of consultancy fees for the technical know-how, royalty income and sale of related products. Going forward, the company has plans to monetise its remaining patents which have high functional applications (refer table). Recently, AGL is exploring prospects of water soluble film for drug delivery with various pharma companies.

The company has alliances with technology leaders in various end markets like Proquimia (cleaning and hygiene products), Tsukioka and Trace tag (security products) in order to make more end consumer products. In the near future, the company is focusing on high margin products like embedded edible film, mould release film and detergent films.

Three-fold capacity expansion for the water soluble films

AGL is currently tripling its water soluble films capacity from 150 tonnes to 450 tonnes and the new capacity is expected to post a utilization of 75 percent in the current fiscal year. We estimate segmental revenue contribution from sales of products would ramp up to 25 percent by FY19 from 12 percent currently. This would help in meeting the existing demand for water soluble films/related products from the domestic clients.

Key Risks

Currently, company imports all its raw materials including PVA which exposes it to price volatility of these materials. Import threat from Chinese players are low as the company caters to relatively high value added applications – except for embroidery. However, presence of international players like Kuraray in India is a more credible threat.

Valuation

 

Compared to leading global companies in the PVA film segment, AG trades at slight premium (12 percent on average). However, given the fact that company is at the early stage of growth (revenue CAGR of 14 percent for 2017-19E) a sustained premium is justified due to array of patents (higher share of royalty income), potential for monetization and the capacity expansion.

 

 

In our projections, we estimate 50 percent utilization for the added capacity in FY18. Due to reduced percentage share of royalty income, blended EBITDA is expected to moderate to 73 percent in FY19. At the current price, the stock is available at 15.7x projected earnings of FY19, which is attractive in our view. Investors having an appetite for high beta growth stock can consider this for accumulation.

Happy investing

Source:Moneycontrol.com