Rossari Biotech Ltd - Stock Valuation and Financial Performance

About the company

Rossari Biotech (Rossari) is a specialty-chemicals manufacturer which was established in 2003 as a partnership, between Mr. Edward Menezes and Mr. Sunil Chari. Rossari has built a strong base of more than 1000 customers across segments with the likes of Hindustan Unilever (Love & Care, Cif, Rin, Vim), Reliance (Enzo), Arvind, Raymond, Gokul Poultry Industries. Currently, they are distributing more than 4,250 products and delivering their services through 435 distributors in 28 states and 8 Union territories in India. Rossari also exports its products to more than 33 countries. 

Rossari operates 8 manufacturing facilities at Silvassa and Dahej in Gujarat, with a total production capacity of 354,100 MTPA. It has leveraged its 4 strategically placed R&D facilities, including a cutting-edge certified laboratory at the Mumbai IIT campus, to drive growth through smart chemistry and research. The company's R&D strength lies in its ability to swiftly deliver customized and cost-effective product solutions, encompassing synthesis, formulation, development, and technical services.

Rossari offers solutions in three main product categories:

• Home, personal care, and performance chemicals (HPPC) - It manufactures chemicals which improve appearance, texture, performance, strength and process ability of end products for various industries. Example- It manufactures active agent for detergents. Rossari is involved in a wide range of activities, from supplying raw materials to developing complete products for other brands, allowing it to tap into various levels of the supply chain in the home care industry.
• Textile specialty chemical (TSC) - Textile chemicals are specialty chemicals used during the dyeing and processing of textiles to impart desired properties to the end-product. These products include coating and casing chemicals, colorants, auxiliaries, finishing agents, desizing agents and many more.
• Animal health and nutrition (AHN) - Rossari manufactures over 100 products for its customers in this category which include poultry feed supplements and additives, pet grooming and pet treats including for weaning, infants and adult pets. 

Inorganic growth initiatives 

Rossari Biotech successfully acquired and integrated three companies in last 2 years- Unitop Chemicals Pvt Ltd (33% FY23 revenue share), Tristar Intermediates Pvt Ltd (13% FY23 revenue share) and Romakk Chemicals Pvt Ltd (2% FY23 revenue share).The strategic acquisition of Unitop has helped Rossari diversify its product portfolio with its expansive product range in the agrochemicals, anti-foams, hand gels, viscosity modifiers, marine cleaners and Anti-Stats segments. Tristar has brought in significant synergy to Rossari in Pharmaceuticals, Textiles, Paints, Automotive and Agro-chemicals segments. The focus of the acquisitions will be on cross-selling products to existing customers and expanding into new areas of specialty chemicals. 

In 2019, under the pet care segment, Rossari acquired a reputed Indian pet grooming brand - Lozalo International.      The product range includes natural pet shampoos, powders, deodorants, sprays, creams, and floor washing liquid. 

Competition 

• In the HPPC segment major Indian companies producing active ingredients are Aarti Industries, Galaxy Surfactants and Atul. And in the institutional cleaning chemicals, some of their competitors are Diversey India, Schevaran Laboratories, Satol Chemicals, Ecolab India, Haylide Chemicals, Altret Industries, Croda India Company, and BASF India. Market is also characterized by strong presence of multinational companies such as Wacker AG, Merck and others.
• Due to the large unbranded textile segment in India, the textile specialty chemical market in India is fragmented and largely unorganized and comprises a total of ~500 large and small manufacturers in India. In the organized textile specialty chemicals sector, some of Rossari’s competitors include Archroma, CHT, Rudolf, Croda international, Huntsman Corporation, Fineotex Chemical, Resil Chemicals, Sarex Chemicals, Dai-ichi Karkaria, Britacel Silicones, Indokem. 
• In the animal health and nutrition products category, they compete with Cargill India, Zydus AH, a division of Cadila Healthcare, Bayer Animal Health, Boehringer Ingelheim Animal Health, Ceva Sante Animale, Sequent Scientific, Elanco, Merial and Virbac.

While competition is present across categories, Rossari has created a place for itself on back of a) partnering with customers for solutions, b) long standing relationships, c) expertise in select sub-segments.

Positives and triggers 

• HPPC segment growth- 
  • HPPC segment has grown at 56% CAGR over FY19-23 (including acquisitions). 
  • Ethoxylation is the property of providing cleaning, wetting, foaming and anti-foaming effects in personal care products such as cosmetics, shampoos, shower gels and detergents.
  • There have been capacity constraints in terms of Ethoxylation (current capacity -36,000 MTPA) which had capped growth. In Q2 FY24, the company proposed a capacity addition of 30,000 MTPA for Ethoxylation at its subsidiary Unitop Chemicals for a capex outlay of Rs.128 crores. 
  • Also, planned a capex of Rs.50 crores for adding 20,000 MTPA capacity at its Dahej Facility dedicated to products related to HPPC. These projects are expected to be commissioned in a phased manner till Q3 FY25. From this capex of about Rs.180 crores, company is expecting to generate incremental revenue of Rs.400 crores (~2.22 asset turnover; peak ~3.5x) or higher in the next 2-4 years. 
  • New product launches include green surfactants, performance chemicals, and biosurfactants in the HPPC segment. The company also plans to expand the manufacturing capacity of biosurfactants by 10 times from current capacity of 3 tons per month.
• Export opportunity - Export turnover is expected to grow by a higher percentage than the domestic turnover which is ~14% CAGR. The company expects great upside for exports, especially in America in industries like home care, agro, food processing and surfactants for food processing. Launch of Ester Quartz (Softeners) which goes into commercial laundry as well as mainly into retail laundry seems to be a great candidate to bring growth in exports.  The emphasis is particularly strong on areas such as Specialty Surfactants, Phenoxy Series, Institutional Cleaning and Performance Chemicals. By leveraging the existing and new product lines, Rossari aims to penetrate deeper into new geographies and further increase the wallet share with existing partners.

Concern areas 

Client concentration risk and short term contract: Reliance on a limited number of customers for the business may generally involve several risks. Notably, the company does not have any long term agreements with most of their customers, and the loss of one or more of them or a reduction in the demand for their products could adversely affect the business. 

Raw Material Risk: Rossari’s largest expense is the cost of raw materials. Their primary raw materials are acrylic acid, surfactants and silicone oils which are subject to volatility due to factors beyond the company's control, such as market dynamics, economic conditions, and transportation and labor costs. The company does not have long-term agreements with suppliers, relying instead on purchaseorders, necessitating precise forecasting of supply and demand. Since product prices are typically fixed upon receiving a customer's purchase order, the company may not be able to fully transfer increased raw material costs to customers. But the same is done with some lag effect. 

Financials  

Revenues have more than tripled in the last 5 years from Rs.516 Cr. in FY19 to Rs.1656 Cr. in FY23 at a CAGR of 34%, majorly coming from the growth of HPPC segment. EBITDA has also shown consistent growth of 29% CAGR from FY19 to FY23. PAT has increased from Rs.46 Cr. in FY19 to Rs.107 Cr. in FY23 maintaining a moderate CAGR of 24% owing to increase in raw material costs. However, the raw material pressure has eased off over the last few quarters, which has led to an improvement in gross margins.

Management profile - Founders are technocrats with growth focus and clearly defined business roles. 

Mr. Edward Menezes - He is the Executive Chairman and guides the company's technical, manufacturing, and marketing strategies. He has a B.Sc. in Textile Chemistry from University Department of Chemical Technology (UDCT) and master’s degree in marketing management from Prin. L. N. Welingkar Institute of Management Development and Research. His career spans over 34 years in textile processing.

Mr. Sunil Chari- He is the Managing Director and brings over three decades of expertise in textiles and related chemicals. He has a Bachelor's in Arts from Kakatiya University and a diploma in technical and applied chemistry from Victoria Jubilee Technical Institute. He is the cornerstone of Rossari's formidable sales and distribution network, driving market expansion and financial fortitude.

Moneyworks4me Opinion- Rossari has low debt to equity ratio, industry leading asset turnover, and an experienced management team with a great execution track record. It is also a proxy play on FMCG sector wherein branded companies are relatively expensive. Future outlook is strong on a) expansion coming into play, b) entering new industries and increasing target addressable market, c) stable raw material prices. Only short term hindrance looks like muted FMCG volume growth (esp. rural volumes). We value Rossari at Rs.700 (18x forward PE for FY26) and will wait for a better entry price given that current risk reward scenario is not lucrative.