clariant, low or high pe

Clariant Chemicals is selling at an earnings multiple of 2.4 compared to the industry multiple of 5.34. If we do not consider 2014 numbers, its average historical low multiple is 10.44, and high multiple is 17.99. Here we go, the classic low multiple stock, a buy.

Or is it? It is very costly to jump to conclusions immediately based on what we see, in investing in particular. The low multiple is actually after considering exceptional items in the financial statements. This is one reason I don't rely on external sources for information. It is always good to get the required information from the original sources such as annual reports and company presentations.

In the last few years, Clariant has done significant restructuring of its business. Moving forward, it wants to concentrate on its core identified segments: Pigments and Colors and Dyes and Speciality Chemicals. 

Clariant acquired Masterbatches business of Plastichemix Industries (a partnership) for Rs.1,310 m in April 2014.

In September 2013, it sold its Textile Chemicals, Paper Specialities and Emulsions (TPE) business (part of Dyes and Speciality Chemicals segment) to Archroma India Pvt. Ltd. for Rs.2,091 m.

In fact, Clariant has a history of exceptional items:

In 2011, it sold its manufacturing facilities at Balkum, and also sold its subsidiary.

In April 2014, it sold the business of Leather Services (again part of Dyes and Speciality Chemicals segment) to Stahl India Pvt Ltd. for Rs.1,560 m. 

Also in April 2014, it sold 87 acres of land (together with buildings and structures) located in Thane to Ishwer Realty and Technologies Pvt. Ltd (a subsidiary of Lodha Developers Pvt. Ltd.) for Rs.11,025 m.

In March 2015, it acquired Carbon Black business from Lanxess India Pvt. Ltd. for Rs.135 m.

Because of the massive restructuring carried out it is not possible to compare 2014 financial performance with the past performance. Nevertheless, the company incurred operating losses of Rs.87 m. This is before all exceptional items, and comprises results of its current core business model. 

The reason for loss as per the annual report: Highly competitive market segment, low turnover due to divestment businesses, higher raw material costs, rent, facilitation, depreciation and amortization costs associated with shifting of registered office and operations from Kolshet to Reliable Tech Park, Airoli and Vashere in Bhiwandi District and one time write-off of inventories, etc. have affected the operational profits of the company for the year 2014.

If the core business itself is going to be hit at the operational level, it is not a good sign. Yet, the company is optimistic about its coming years. While the managers note excess cash that is available for buyback, they do not mention (in the buyback notice of May 2015) whether they consider the current stock price to be cheap compared to the company's fundamentals; they have announced a share buyback program of Rs.3,400 m: Clariant is going to buy 3.58 m shares at Rs.950 per share.

While this announcement would probably fall under the investment operation of risk arbitrage, let us check whether the managers are right about the company's intrinsic value. Clariant had cash of Rs.10,444 m as of December 2014. With assumptions on perpetual growth for the operating cash flows and expected rate of return, in order to justify the buyback price, the free cash flows to firm would have to be between Rs.500-1,000 m (depending upon the assumptions).

Can Clariant generate those cash flows? I don't know. Its past free cash flows are probably not any guide to its future particularly because we don't have all the (past) information relating to its core business.