Ultramarine & Pigments Ltd

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(Price:330 ; Mcap: 980 Cr ; EV/EBITDA: 12x)

Company Profile:

  • Co. was formed over 6 decades back in 1960 by Mr. Rangaswamy Sampath, Thirumalai group promoters with manufacturing units located in Chennai & Tamil Nadu
  • Product Profile: Inorganic pigments & Surfactants with core products- inorganic pigments(32% of topline) & Surfactants(54% of topline). Company does contract manufacturing for leading FMCG clients and has its own retail brand- “OBB” which is dominant in southern India. They also have an IT division(15% of topline).
  • Pigments product basket includes ultramarine blue, ultramarine violet & Bismuth Vanadate which are used as colorant in industries including plastic, fabric, printing ink, cosmetic etc.
  • Surfactants product line comprises of Linear Alkyl Benzene Sulphonic Acid (LABSA) & Alpha Olefin Sulphonate (AOS), which are used in detergent, dish washer, cosmetics.


  • Bifurcation between organic & inorganic pigments:
Source: Koelcolours.com, Progressive Research
  • Global market for ultramarine pigments is estimated to grow at 4% CAGR from $190 Million in 2020 to $249 Million in 2027. So, ultramarine has roughly 13% market share globally in ultramarine pigments division.
  • Ultramarine blue- an inorganic pigment, is made using China clay. It is a difficult manufacturing process because it takes lots of trials and errors to master the quality of the pigments. It is used while making plastic compounds so that the plastic retains it color for longer time. High grade pigment is used in plastic, paints, coating etc. whereas lower grade pigments are used in whitewashing & laundry application.
  • Surfactants are compounds that lower the surface tension (or interfacial tension) between two liquids, between a gas and a liquid, or between a liquid and a solid. Surfactants may act as detergents, wetting agents, emulsifiers, foaming agents.
  • Key RM for surfactants is Alpha Olefin which is 100% imported and very volatile in nature.
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Key Rationals:

Greenfield Capex

  • The Company has seen tepid growth over the last decade in pigments wherein topline has increased from Rs.45 Cr to Rs.100 Cr whereas surfactants have increased in topline from Rs.55 Cr to Rs.165 Cr. This growth was achieved with mere debottlenecking in pigments and slight capacity addition in Surfactants.
  • However, in Jan’21 co. has commercialized its greenfield project at Naidupet, Andhra Pradesh with capital outlay of Rs.80 Crores, majorly funded by internal accruals. Stabilization of all processes was achieved by 31st March’2021.
    This capex is in surfactants division (32,000 MT) and can generate around Rs.200 Cr of incremental topline as per management guidance given in FY20 AGM.

Strong Financials

  • Company was debt free until now and has grown over decades primarily with internal accruals. Management is extremely risk averse.
  • Company has never diluted its equity capital.
  • It generates cashflows of around Rs.50 Cr annually and these cashflows have funded debottlenecking and innovation in product mix in the past.
  • Margin profile is very sticky and have structurally grew from 17% to 25% over last 5 years. These margins are expected to sustain as they are due to higher contribution from value added products.
  • It also has 20% holding of Thirumalai Chemical Ltd which is valued at over Rs.200 Crores. However, we are not assigning any value to it as its part of cross holding and there are no plans to liquidate the stake in near future.
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Prudent Capital Allocation

  • Over last decade, company generated cumulative CFO almost equal to the cumulative PAT. Almost 50% of Cumulative CFO was distributed as dividends.

Changing Product Mix

  • With a focus on improving yield of high value grades of pigments, the company invested in R&D in all stages of the production process, from Raw Material procurement and processing to the final stages of value addition. Co. is currently processing 30% more of the high value grades than they did last year by volume, and 150% more than they did in 2016-17, entirely due to internal innovation.
  • This change in product mix, towards value added products have led to margin expansion over last couple of years with operating margins increasing from 20% to 25%. Management is focused to increase the specialty products in both surfactants and pigments going forward.

Key Weaknesses:

Volatile Raw Material

Surfactants are relatively low value-adding business. The key RM used for surfactants is Alpha Olefin which is crude derive  which is 100% imported and is highly volatile with erratic availability. Hence, co. may not be able to instantly pass on the RM rise in finished products and margins may be hampered in short term. Such margin squeeze was observed in Q4FY21 wherein operating margins fell to 19% compared to 24% YoY and 28% QoQ.

Product Concentration

Almost 1/3rd of topline comes majorly from Ultramarine Blue pigment which has very niche market globally and co. is already a market leader in ultramarine pigments with market share of 13%. Hence, scalability in this segment might be difficult in future.

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Delay In Ramp Up

Any delay in ramping up surfactants plant to optimal utilization or delay in attaining EC for pigments can delay the growth expectations in the co. and put minor strain on the balance sheet.

Management Selling

Company was promoted by few different families but from recent shareholding changes, it looks like consolidation of shareholding is happening wherein few promoters are constantly selling the shares in open market. The promoter selling creates pressure in short term on the stock and such promoters still have 13L shares which is 4.5% of total equity and may create pressure on the stock as it is highly illiquid counter.

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Aashav Patel

Aashav Patel

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