Elastomer Industry and Puneet Resins
Elastomers can be of various types. Thermal, High Performance etc. They can be commodity or specialised which are distinguished by exceptional chemical, mechanical and thermal properties. Dupont, Bayer, Zeon and Polyone are respected names with significant market share in West. PolyOne has annual revenues of 2 Billion $. PolyOne ranks as North America’s largest compounder with a market share estimated at 10-11 percent. Its distribution unit also ranks among North America’s largest.
Excel Polymers was a spin off from PolyOne in 2004 as a non core business. It has very specialised business and Lion One Chemical which bought it from Polyone has made 4X profits on its sale of Excel Polymers to HEXPOL in December 2010. Excel Polymers recorded annual revenues of 350 million $ in latest fiscal.
Excel Polymers isn’t as commodity a business as it appears, i.e. collection of rubber from trees and selling it. Even though it makes intermediate products and not consumer brands, Elastomers require R&D. They make B2B segment rubber products for medical, transportation, space, consumer, performance additives industry and do command brand name. Similar to making a flavour of ice cream and taste addiction, there is lot of R&D required and IP is valuable for many years.
Products of elastomer industries are not an array of items. They are solutions to the challenges some or the other industry experienced. As new products are built which require new chemical, mechanical or thermal property, elastomer manufacturers have to concoct a new recipe for the solution.
A very long list of PhD chemists working with Excel Polymers affirms the super specialized nature of Elastomer industry. NP margins of Puneet’s principals are upwards of 10% meaning not bottom of the food chain commodity.
But then one could say, sage of Omaha prefers Johnson and Johnson whose brands are inside our minds to Dupont or 3M, majority of whose brands are in minds of just B2B populace. True, former is without a doubt better, since it does not have to innovate decade after decade. But its only truly better for an investor if its available at reasonable price relative to underlying value and growth rate.
In 1990s the industry experienced consolidation and now seems set to sail for above average growth rates of existing leaders. I am still learning more about this industry.
This should give a brief overview of Excel Polymers
It has only a handful of its own specialised polymers like Vulconoil and Vinoprene. Bigger companies have dozens of specialised compounds. It has earned most of its revenue from trading activities of products from its principals. They are expanding production line as per BSE announcement in Jan 2011 to cater to increasing demand. The company has yet to prove itself as a learning, lean and continuously improving organisation to achieve scale and respect in this industry.
Positives are :
Low equity base
No equity dilution
Promoter increasing stake from open market
Dividend declared in 2010
Chance of increasing offerings from Excel through Puneet
Less liquid market for stock
Link to underlying industry cycles such as auto
Culture of scientific research and innovation has to be maintained to lead
Mainly into trading as yet