Here’s why Jigar Mistry is bullish on Archean Chemical

“NBFCs in the time when the interest cost is rising, you would want to not traditionally own them because the cost of borrowing which is from banks or money market instruments, NCDs, etc, tend to go up and obviously most of them are able to pass it on,” says Jigar Mistry, Co-Founder, Buoyant Capital.

There is also a hypothesis which is now developing in the market that the phase of the macro cycle from here on will actually be better suited for MFIs and NBFCs and in this light if you look at the commentary from the recently listed Fusion or even Spandana, they have given very ambitious commentary and there is some interest there, even the NBFC space. What do you like in this space and why?
For a lot of these players things have been again a flat line for a fairly long time. NBFCs in the time when the interest cost is rising, you would want to not traditionally own them because the cost of borrowing which is from banks or money market instruments, NCDs, etc, tend to go up and obviously most of them are able to pass it on. But it is not a situation where many of them are able to extract. MFI is turning positive. Within the space, the player that we do own is a company called Satin Creditcare. It is around one of those smallcap with Rs 1,000 crores market cap. From what I understand, almost 90% of their current MFI book is built out from July 2021. Obviously, they have very low asset durations. But this comes at a 0.2% gross NPA.

The company will grow between 20-25%. So, you potentially have, say, FY25, 13 odd thousand crore loan book, two and two and a quarter thousand crore sort of net worth, generating 3% ROA, which means about four odd hundred crores in profit, available at something like Rs 1,000 crores in market cap. So, I think that is an interesting space which is developing. This is one name that we have owned for a while now and I think we continue to like that name.

Just in terms of banking or the selloff that we have seen, what sort of risk would you price in for what is happening globally because if anything happens, FII sell, and when FII sell, it is almost the banking names that get derated.
Yes, I think that is the situation which is very similar to the last calendar year of 2021. So back then, you will have interest rate rise which was being priced in and whenever interest rates rise and if your NIMs are going to sort of expand post that, the fundamental value of the bank increases. But a rising dollar also brings in with itself the FII outflows and then if you look at the largest FII ownership, they are the banks as you rightly pointed out. So, this becomes a question of the rising value of the underlying asset at a time when the largest shareholder is forced to sell out and that over a longer term always ends up becoming a very interesting proposition. So, if we are not really very path dependent, as in let us say if we are buying something at Rs 100, the fair value of which we assess to be say Rs 200, then if you are not really bothered if 100 goes to 81st or 121st, then I think banks do provide at this juncture a very-very attractive proposition. If we are path dependent, as in if we are somebody who plays on leverage or would want to always report a positive mark to market, then it is very difficult to time as to when the FII selling, etc, ends. The way we approach it is that if something has a higher value tomorrow than today, then we are not really worried in between what it shows in terms of share prices. So that way banking does provide a very interesting time.

What do you like about Archean Chemical? This is a recently listed IPO. The stock has not done a whole lot after the IPO. But tell us, what exactly, what kind of numbers do you see and why do you like this one?
That is again one of those businesses we own about eight-and-a-half thousand crores in market cap. This is one of those marine specialty chemical producers.

Now, there are very few players globally that see bromine is depleting, so is the case with China and this is a company with maybe 22 Indian sellers and maybe 50 overall global buyers that go around. And therefore, if you look at the pricing of bromine, that has been fairly stable. This is one company that has been growing, the productions of what is about 24,000 tonnes, could go up to something like 42,000 tonnes over the next few quarters and by which time it will have almost 43% India’s market share. So, if you just plug those numbers in, your earnings could more than double in the next two years, maybe triple over three years. If you look at bromine in the manufacturing process, you will find that that is not really as difficult to make, just a couple of degrees over and above when you do salt.

But the real fun of the business lies in the stability of the pricing. And when you have a company that is available under 10 times which is growing as fast, it does make a lot of sense. So, the stock is up almost 50% since listing at a time when nothing else seemed to be working. But I think there is still a reasonably large upside from where we see now.

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