ITDL – Boring Industry But Lucrative Valuation – Zorba Wealth

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(Price: 95 ; Mcap:120 Crores ; EV: Nil )

Industry:

  • Toner is essentially a consumable (powder ink) used to print in existing laser printers and photocopiers. The total global industry size is pegged at 225,000 tonnes per annum with OEM (printer manufacturer) constituting the majority 75% market share and rest being classified as after-market sales (25%) that is around 50,000 tonnes.

  • The domestic after sales market size is pegged at 7000 tonnes per annum with ITDL being the largest player with market share at 28-30%.
  • Value proportion: Product pricing are at minimum 50% discount to OEMs, so the after-market industry surely has a significant market to cater to, more so, in developing markets like Asia which finds OEMs toner to be extremely expensive
  • After-market toner industry is fiercely competitive in nature and except consistency, peers don’t really have much to differentiate themselves. Neither the growth in the industry is something that will raise your eyebrows.
  • Good part about the industry is that it has high ROEs, mainly due to negligible incremental capital requirements, lower working capital and due to high asset turns

Company Profile:

  • ITDL caters to after-market toner industry and has an installed capacity of 3600 tonnes for pulverised toners and is currently operating at ~80% utilisation level. It also markets chemical colour but its proportion to financials is not much significant
  • Co’s product directly caters to various printers like wide format copier, laser toner, MICR printers and copiers of top brands like HP, Canon, Toshiba, Brothers, Sharp etc.
  • ITDL caters to around 600 dealers,1500 refillers and 44000 jobbers present in all parts of the country. It has sales force constituting of over 100 employees
  • Co. currently realises ~22-25% top-line from branded sales (higher margins) while it realises the remaining 75% from bulk purchasers (unbranded, lower margin profile)
  • It caters majorly to domestic markets which forms 73% of revenue as per FY19 and 27% of the revenue comes from exports. Majority of the raw materials at ITDL are imported in nature.
  • It has warehousing facility in Singapore and also formed wholly owned subsidiary in Florida, US but exports are stagnant since many years at around Rs.30 Crores
  • Brochure for its product range can be found here
  • Co. markets its products under flagship brands like supremo, formula, racer and ITDL colour premium
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Past Performance:

  • The co. was founded by Mr. Sushil Jain who belongs to family of industrialists. He founded the co. in 1990 with equity funding from a Switzerland based co and loans and setup 350 tonnes capacity. He has been successful in transforming from minuscule capacity to largest market share holder in industry
    Currently, his son Mr. Akshat Jain also joined the management team as director
  • Below depicted picture reflects how the management has been able to transform the co. from minuscule capacity to one of the leader in the domestic toner industry, growing its capacities by 10% CAGR funded majorly through internal accruals:

I agree that the growth of the co. over past 3 decades is not mesmerising but its decent given the extremely competitive industry it caters to.

Research & Development:

  • Co. houses its R&D plant in Rampur, Uttar Pradesh. Management repeatedly emphasis on the importance of having inhouse R&D plant which enables to develop better quality of toners consistently and at lower cost
  • One manufacturing line is dedicated for exclusive R&D pilot plant comprising broadly of Pre-mixer, Compounding, Classification and Milling machinery of German Origin
  • In 2010 co. developed technology for chemically produced toners, in 2012 technology for wide format printers & copiers was developed and in 2013. In 2016 it developed ink formulation for MICR printers.

Financials:

  • Constantly generating good & stable revenue with margins ranging from 20-25%
  • No significant top-line growth since past 4 years with deterioration in margins from 25% to 15% over past 2 years mainly due to import dumping by Chinese/Malaysian manufacturers. Recently, DGTR recommended import duties recently, which if finalised, can help in attaining previous margins
  • Debt free balance sheet and majority of capex in past has been funded via internal accruals. Annually average CFO generation of 20 Cr
  • Investments: Business is cash cow with low incremental capital deployment need. As a result, co. has been investing all its profits in mutual funds and corporate bonds. Currently, its liquid investments are valued at Rs.101 Cr and Cash is valued at Rs.10 Cr, Hence Its market cap is equal to cash on books and the business is essentially free
  • Cash Conversion: Last 10 years cumulative PAT at 125 Crores and CFO at 150 Crores signifying that majority of accounting profits are converted into cash flows and are not merely accounting entries.
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Risk To Investment Thesis:

  • Chinese/Malaysian Imports: undoubtedly lower quality Chinese imports are rampant in the industry but this has been prevalent since years now and management has been delivering decent numbers despite this headwind. But dumping is increasing from these countries which is visible in falling operating margins from 25% to 15%. Also, significant quantum of RM is attained from China and any disruption on Indo-China tariff pertaining to COVID-19 can impact co. from procuring its RM. Similarly, if consumer avoid Chinese products, its demand rise marginally
  • Minority Shareholders: As we are studying this co. from minority investors perspective, in case the board of directors/management takes steps of allocating Rs.110 Cr of cash in ventures which directly hampers interest of minority shareholders

Anti-dumping Duty

  • Complaint was filed to the DGTR by Indian toners & developers ltd and pure toners & developers pvt ltd claiming that Chinese and Malaysian producers are dumping “Black toner in powder form” to Indian markets. Combined these two companies form 100% of domestic production
  • Investigation period was April’19 to Dec’19. FY17-19 was also evaluated
  • Injury to domestic producers: Chinese injury margins= 10-30%; Malaysian injury margins=40-60%. These countries accounts for 88% out of the total imports
  • In its preliminary finding dated 18/06/20, DGTR recommends duties of $196-1686/MT
  • If these anti-dumping duties are imposed, it would safe guard the industry from massive dumping and company can achieve past operating margins which were much higher than current margins

Import rates have almost halved over past 3 years as visible from below image (source:screener) :

Legacy CG Issues Being Resolved:

  • Co. formed a JV in 2008 by the name ITDL Imagetec. Co. held 51% stake and promoters held 49% in personal capacity. All of the capex since then was done only via that subsidiary at this new plant located at Sitargunj, Uttarakhand (rational: due to tax advantages at new plant).
  • Red Flag: Effectively, it was a legal way of not sharing the profits and growth benefits with minority shareholders as the subsidiary declared significant proportion of its profits as dividends, however, in-turn ITDL didn’t declare dividend until 2017. Hence, In my opinion, despite being cash rich co., minority shareholders of ITDL were blatantly deprived from sharing profits. This point would be even lucidly visible from below attached image:
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  • However, In 2018, that JV was amalgamated with the parent co. in all equity deal, ending the legacy CG overhang on the co. Promoter stake increased from 50% to 70% as a result of this amalgamation and now there is no more conflict of interests. Seems like they finally understands the positive impact it could have on market cap as the interest of promoters and minority shareholders are now aligned.
  • In FY2018, Co. declared dividend of Rs.1.5/- for the first time and in FY19 co. declared total dividend of Rs.3/- which clearly denotes that co. is on the right path and now is also evolving to a shareholder friendly management.

Valuations:

  • 2014: Co. was trading at Rs.30/- with above CG issues and cash investments of 30 Crores, hence the business was available for free
  • 2020: Currently co. is trading at Rs.95/- (Mcap:120 Crores). And co. has liquid funds and cash of over Rs.110 Crores. Hence, its business is again available for free with above issues being already resolved and management becoming minority shareholder friendly

Resources:

Corporate film for ITDL:
https://www.youtube.com/watch?v=9XMhQc-TN5U

For reading more on the toner industry click:

https://zorbawealth.files.wordpress.com/2020/07/the-future-of-the-toner-industry-in-china.pdf

https://www.itwire.com/it-industry-news/market/72421-declining-asia-pacific-demand-for-printer-consumables,-says-idc.html

https://amp-businessinsider-com.cdn.ampproject.org/v/s/amp.businessinsider.com/why-printer-ink-so-expensive-2019-8?usqp=mq331AQCKAE%3D&amp_js_v=0.1

Read ICICI Direct report on Indian Toners & Developers:

https://zorbawealth.files.wordpress.com/2020/07/icici_mgmtnote.pdf

To read more about management click:

https://zorbawealth.files.wordpress.com/2020/07/management_magazine-3.pdf

https://zorbawealth.files.wordpress.com/2020/07/management_magazine-1.pdf

https://zorbawealth.files.wordpress.com/2020/07/management_magazine-2.pdf

To access the company’s product catalog :

https://zorbawealth.files.wordpress.com/2020/07/product-catalogue.pdf

Would you bet on a company whose business is available for free and behavior of management towards minority shareholders changing for good? Or do you think the valuations would remain cheap due to historical steps taken by management?

Kindly mention your opinion in comment section



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Aashav Patel
Aashav is an Equity market enthusiast who strives to learn daily.
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