Kiri Industries - Special Situation Opportunity
Founded in 1998, Kiri Industries Limited (Kiri) is a leading manufacturer and exporter of a wide variety of Dyes, Dyes Intermediates, and Basic Chemicals from India.
Kiri's dyes business has been struggling. It hasn't seen much growth in the last 10 years and continues to face challenges, such as weak demand, underutilized capacity, and rising raw material costs
However, the investment thesis is not related to Kiri's current business. Instead, it is based on the ongoing legal battle between Kiri and Senda over the DyStar case, which appears to be nearing its conclusion after more than a decade of litigation.
In 2010, Kiri Industries (India) and Zhejiang Longsheng Group (China), through its subsidiary Senda International, acquired DyStar, a market leader in the global dyes market. Kiri held a 37.57% minority stake, while Senda owned the majority.
Although the two companies managed to turnaround DyStar’s operations, disagreements arose between them over DyStar's management and operations. In 2015, Kiri filed a case against Senda in the Singapore International Commercial Court (SICC), accusing Senda of unfair practices and mismanagement. Kiri claimed that Senda engaged in activities that were not in DyStar's and the minority shareholder’s best interests, such as related-party transactions, misuse of patents, unfair suppression of dividends, and unauthorized payments to directors.
The SICC ruled in Kiri’s favor, determining that Senda had acted unfairly and ordered Senda to buy out Kiri's stake in DyStar for $603 million (~₹5000 Cr ). However, when Senda failed to execute the buyout as ordered, the SICC ordered the sale of DyStar without a reserve price, granting Kiri priority payment of $603.8 million in May this year.
The sale process, managed by Deloitte as the court-appointed receiver, is now in motion. Non-binding offers are expected by November 2024, with binding offers due by January 2025. The sale is projected to conclude by March-June 2025.
Kiri Industries, a company that trades at an EV of 2700Cr is therefore expecting to receive a cash inflow of 5000 Cr by June next year, an amount almost twice the value that it is currently trading at.
*EV calculated excluding the judgment based funding of $130 Mn.
Kiri plans to use the money from the DyStar sale to enter the copper business to address the supply-demand gap that exists in the Indian market currently, aiming to build a 0.5 MTPA facility to produce copper products like rods, coils, tubes and cathodes. The total investment will be 8000Cr, funded with a 2:1 debt-to-equity ratio in two phases. The first phase is set to start in 2026, with the second following a year later. Fertilizers are expected to be produced as a by-product as well. As production increases, the company expects to generate revenues of close to 16k Cr from the first phase and 40-50k Cr from this new venture post the second phase over the next 3-4 years. (FY24 topline - 950 Cr)
The company thus has a short-term catalyst in the form of cash inflow from the settlement of the DyStar case and a long-term growth driver through significant expansion of its business with the planned entry into the copper segment, funded by the DyStar proceeds.
While there have been several instances in the past where it seemed like the DyStar case was about to conclude, there are two key developments this time that provide strong confidence the case will finally reach a resolution.
First, the promoters of Kiri Industries have applied for warrants worth ₹492 Cr in October, which, when converted over the next 18 months, will increase their shareholding from the current 27% to 41%. The company has already received ₹250 Cr and an additional ₹60 Cr recently from this arrangement.
Second, Kiri has taken a $130 million loan, called judgment-based funding, to start its planned capex without waiting for the DyStar sale cash. This loan is given with the expectation that it will be repaid once the DyStar sale is completed next year.
Both these actions by the management show their strong confidence that the transaction will finally close successfully this time, and Kiri will receive the ₹5000 Cr payout it has been waiting for over a decade.
Risks
Short Term
The entire thesis here is based on the sale of DyStar going ahead and Kiri receiving 5000Cr for its stake. The main risk for Kiri is that the sale of DyStar might face delays or may fail to generate the expected interest from buyers.
However the management in the concall has indicated that they expect the asset to receive close to 20 non binding bids in the coming week indicating strong interest for DyStar. Also, DyStar has strong financials - a cash balance of $600m, Current Assets of over $1B and an EBITDA of 90M in 9MFY24. Therefore the management seems confident that the sale proceeds will go through successfully and generate sufficient amounts to cover the $600m buyout of Kiri’s holdings.
Long Term
Kiri is planning to invest a huge amount in a new business that’s completely different from what they’ve done before. They’ve brought in experienced people, like a former board member from Hindalco, to help lead it. However, since this is a much bigger investment than what Kiri’s done in the past, it’ll be important to watch how well they can handle the project (eg- sourcing copper concentrates which seems to be having a very tight supply currently)
Other Considerations
Kiri has appealed for interest on the buyout amount in the latest hearing. The judgment regarding this is expected in the month of January. Any favorable ruling here will mean an additional inflow of $60-90m.
Judgment on Senda’s appeal to overturn the priority payment to Kiri has to be closely monitored too. Any unfavorable outcome here could lead to uncertainty on the expected receipt even though negligible considering the financials of DyStar.
The company has sketched out the plan to spend 2500 Cr out of the 5000 Cr cash. Special dividend to reward the shareholders out of the remaining amount is not ruled out.
Technically, the stock has been range bound in the 250-680 range over the last 6 years. It seems to be finally breaking out of the diagonal trendline and has crossed the 420-450 range that has acted as a resistance over the last 9 months. The 660-680 range seems to be the next major hurdle post which has acted as a resistance multiple times in the past.
Conclusion
This seems to be a pivotal point in the life of the company. The stock has been ignored by the markets providing 0 returns over the last 6-8 years in spite of the larger bull market. With the catalyst coming in, this could be an inflection point for the company that triggers an up move in the stock both on the back of receipt of the 5000 Cr cash from the buyout in the short term and the expected multi fold increase in the overall business from ramping up of the new segments in the long run.
Disclaimer
I own the stock. My first purchase was at 390.
This is not a recommendation to buy the shares of the company.
Loved the articulation, it looks like a good turnaround company!
Brilliant Jaddu.! Long story short. Appreciate your real hardwork.!