For last couple of years, segment of people are very conscious about organic foods, go-green initiative, and reduction of carbon foot prints. Was looking for some business which may be a service provider or making product solution to address this. Got to know about Arrow Greentech (name changed in FY16 from Arrow coated products) from the analysis of Ashish Chugh (twitter: @hiddengemsindia), blog and referred link few months before. It was having core information and counter views in valuepickr forum analysis. Keeping them as overview, wanted to make in-depth analysis.
Business Model & Segments:
Arrow Greentech is established 24 years before and propositioned it to a technology driving company with focus on innovative and eco-friendly products. The foundation of the company on the platform of Research & Development, Sustainability and Intellectual Property. The company has taken strategic initiatives to achieve its vision of being Green Company.
From FY16 Annual report - Chairman Message:
It is having four business units namely (a) Water Soluble Film (Watersol), (b) Arrow Care Division, (c) Security Products, (D) Patents and IPR SBU. Revenue streams are having 3 segments as Royalty, Consulting, and Sales of Products (Water Soluble Film). Annual Report MANAGEMENT DISCUSSION AND ANALYSIS REPORT is giving very good informations and progress for each of the business unit and revenue stream segments (Page#30 to Page#34).
Water Soluble Film:
1) This is the manufacturing division. It is having 150MT capacity and expanding to 3 times (450MT) by Oct'16 to address the demand.
2) Product has got varied applications in industries ranging from Agrochemicals, Construction, Chemical, Embroidery, Health& hygiene to Water transfer printing (3D printing).
3) Agrochemical sector and the health/hygiene sector which adds up to be around 72% of the water soluble film market.
From FY16 Annual report:
World health organization recently in their article to all the agrochemical companies advised as below to ensure safe usage of pesticides using water soluble films:
“Water soluble packaging is for pesticides that are diluted with water before application. The soluble sacks are put directly into the spray tank where they dissolve and release their contents. There are two main advantages: §there is no operator exposure to the contents, as the packs do not require opening; and §there is no contaminated container to be recycled or disposed of.
Water soluble packs should be considered an integral component of the formulation. Pesticide regulations should encourage innovation in package design that improves public safety and reduces the burden on the environment.”
In the hygiene division Arrow Greentech limited has developed a new cast Water Soluble film which is used for manufacturing water soluble detergent filled capsules. These capsules can be either be incorporated within the WSF laundry bags as precise portion packs (Solopacs ), or the same Solopacs can be used in any household applications such as washing machines, dishwashers, glass cleaners etc.
Arrow Care Division:
1) Arrow's Klenz Pro is a dedicated brand that provides Eco labeled Cleaning and Hygiene Chemicals for the institutional market. We cater to Hotels, Pharmaceutical plants, Manufacturing industry, Auto Mobile Industry, Corporate offices, facility management companies etc. We provide a customized mix of Eco friendly chemicals that helps our client attain top quality results at affordable price points.
2) Klenz Pro has a total of 19 products already introduced in the market and plan to expand the range to about 70 products before the end of 2016-17.
3) Our Marketing and launch Strategy along with quality built products made us win the “Best Innovative Chemical Product in India"
4) The past few months have been clearly designated to build a strong Distribution and Sales team which will help our long-term vision. We have now a very strong and rapidly growing network and cover regions like Maharashtra, Gujarat, Delhi, Rajasthan, Goa, Karnataka & Kerala.
Security Products:
1) Arrow has been granted many patents in security field. This relates to patents used for brand protection and goes well up to high end security products like Passports, Bank Notes and security paper. Presently, Arrow is in the process of forming strategic alliances with some of the world's best in the field.
2) Security division of Arrow has been bifurcated into medium end products and higher end products catered to Government business division with their cutting-edge technology.
3) As IPR becomes important to Indian FMCG products and grey market diversion may become rampant, brand protection will gain importance and Arrow will be in the forefront to offer sharp solutions. Arrow has several patents in this security cluster and intends to create revenues in the coming years. Many of the European and Australian FMCG companies have been approached for propagating this technology.
4) Current year, hoping to add more companies to ensure that their brands are protected while using our patented product as an exclusive supply chain vigilance system.
Patents and IPR SBU:
1) Patents protect company's own product lines against infringers and sometimes create a windfall profit, when the law suits are successfully prosecuted. This then result in continuous royalty income, besides one time fees as granted by the Courts.
2) Arrow has been granted a patent in Australia, for Method of Manufacturing Embedded Water Soluble film Carrier which has been successfully prosecuted and a grant has been secured. Arrow till now has received 3 patent grants in Australia. In all we now have 31 granted patents nationally and internationally.
3) It has monetized 3 patents so far and having more residual income for few years more. Also planning to monetise more number of patents (3 to 4) every year and translating to the addition of huge revenue to patent revenue model.
4) Products produced by these patented processes are protected against infringements/duplication for 15 to 20 years.
5) In future, Arrow proposes to enter crop protection using a different version of this patented process and patented product. As India starts it's vision into providing food grains for the world population, the need for low pesticides residue will be very important.
Arrow UK Activities:
1) Arrow UK operation (which includes three companies i.e. Arrow Green Technologies (UK) Limited, Advance IPTechnologies Limited and Arrow Realty Limited) is continuously major contributor to our top-line and bottomline.
2) Revenue is primarily contributed by royalties from patents. UK laws allow all IP related income to be taxed at a lower rate bracket, so Arrow UK will gain monetary advantage in this process.
3) Recently we have made investment in manufacturing facility in UK and we are expecting to expand our foot print in European water soluble film market.
Export Division SBU:
1) Arrow's quality of Watersol film has opened various export markets, including Brazil, Latin America, Europe, and Asian TM markets. We expect better revenues from Export of Agrochemical and detergent based Watersol film to add to top line and bottom line, going forward with our new expansion in the production line.
2) Exports of our products have increased but there is a potentially unlimited and untapped market worldwide. Arrow is one of the major players in cast water soluble films and each manufacturer of cast water soluble film have unique methods of production of these films and have earned patent protection.
Management:
Arrow Greentech's chairman Shilpan Patel has given couple of interviews. It is good to see them to understand the quick view on the business model, conservative manufacturing setup compared to grand scale manufacturing model followed by Monosol (biggest WSF manufacturer), and upcoming year plans.
https://www.youtube.com/watch?v=WrJcShAPCZA (Very good)
https://www.youtube.com/watch?v=DMz4qHxpFlU
Share Holding Pattern:
Promoters=70.96% (skin in the game) + MF=0.17% (not noticed yet) + Non-institutions Corporate=3.54% + Retail=12.70% + HNI=10.16%.
Financials:
It is having Operating Profit Margin of 70%+ and Net Profit Margin of 60%+ due to asset light model and patent protection. With the addition of production capacity (with EBITA margin of 25%+, it will moderate). But more patent monetisation may keep this up for more time.
Valuation:
Company is into very niche segment and innovative business model (most revenue comes from patent royalty) and available at 17 times TTM price to earnings. It is increasing the production capcaity by 3 times, and 28+ patents yet to be monetised. IPR act in india will be reducing its tax rate possibly from this financial year!
Market may be treating this as plastic products or packaging solution. It is a great technology driven company and enabling solutions to eco-friendly environment with patents! It is getting ready to fire from all cylinders. Overall my view is (again confirmation bias?) with high level potentials in 3 to 5 years time:
Items to be tracked/discounted:
1) Production capacity expansion completion and un-tapping export and domestic potentials.
2) 27+ Patent monetisation and updates. Existing patent residual income.
3) Patent infringement case against Shilpa medicure and one more pharma player. More here: http://corporateethos.com/corporate-domain/arrow-greentech-takes-aim-at-2-cos-for-patent-violation/
4) Arrow Care and Security Division start contributing big revenue potentials.
