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Stock Pick From The Chemical Industry

| 4/18/2013 9:00 PM Thursday

HERE IS WHY:

  • Ability to maintain profitability during intense cost pressures
  • Extensive expansion plan
  • Strategy of diversification to expand portfolio and reduce risk

What’s the common link between aluminium production, drilling mud, making paper, cleansing products and edible dyes? A product with a wide range of uses - Sodium Hydroxide or caustic soda. This product, along with liquid chlorine and soda ash forms the base of chlor-alkali chemistry. And who is one of the largest players in the domestic chlor-alkali industry? Gujarat Alkalies and Chemicals (GACL). 

Demand from alumina, paper and textiles constitutes 60 per cent of the total demand for caustic soda. These industries, according to the twelfth Five Year Plan, are growing at 10 to 11 per cent, four to five per cent and 12 per cent respectively. Catering to this demand, with an 18 per cent market share is GACL. 

While the demand for this industry exists, increasing manufacturing costs have made the industry rather challenging. However, GACL has managed to sustain growth despite these conditions. Electricity constitutes 60 to 70 per cent of the total manufacturing cost of caustic soda. In FY12, GACL incurred 23.32 per cent higher electricity charges and 17.05 per cent higher raw material prices. This has been adding pressure on the costing of domestic manufacturers. GACL has managed to tackle this issue through diversification and improvement of efficiency. 

Shareholding pattern ( 31/12/2012)
Promoters 76.72
FII 2.9
DII 6.04
Others 1.54
GRAND TOTAL 100

While chlor-alkali has tonnes of uses, it reacts with other compounds to produce thousands of vital products which are further used in various industries from water purification to pharmaceuticals. GACL has, through forward and backward integration, diversified its portfolio to include 28 products. Through a complex maze of products and uses, GACL enjoys the benefit of diversification, efficiency and thus outperformance. For instance, sodium chloride is used in the manufacturing of caustic soda, which produces chlorine as a by-product. Chlorine can be further used to manufacture Hydrochloric Acid. Hydrochloric Acid can be further combined with Lime Stone to manufacture Calcium Chloride. 

With this, GACL gets 50 per cent of its revenues from derivative products of the chlor-alkali category. It enjoys a capacity utilisation of 89.76 per cent as against the industry average of 81.70 per cent. The diversification and capacity utilisation have led to a drastic improvement in margins regardless of intense cost pressures. In 9MFY13, GACL saw a YoY improvement in operating profit margin and net profit margin by 361 basis points and 300 basis points respectively. 

Steepening of manufacturing costs has translated into end-product price rises in the caustic soda industry, leading to international players gaining an edge over domestic players. This has resulted out of lower power costs resulting in dumping in the domestic market. To take corrective action, the Finance Ministry recently imposed definitive anti-dumping duty on caustic soda imports from four countries. This is likely to further strengthen GACL’s performance. 

To further boost growth, GACL is continuing to embark on its strategy of enlarging its portfolio. Among its plans are Hydrogen Peroxide expansion, setting up of Sodium Chlorate manufacturing and consideration of projects to manufacture a host of other products. It has lined up projects with investments worth Rs 2600 crore for the next three to four years. Having looked at the efficiency and resilience shown so far, combined with the prospects of the strategy of diversification and product expansion, GACL seems to have bright prospects. Moreover, it is available at a trailing 12- month PE multiple of 6.36x making it attractive at the current levels. 

Last Five Quarters (Rs/Cr)
Dec-12Sep-12Jun-12Mar-12Dec-11
Sales 419.71 481.74 441.05 427.4 443.38
Operating Profit 100.75 113.12 117.65 108.15 76.03
Depreciation 37.01 34.96 34.61 34.7 35.91
Net Profit 33.34 66.01 55.27 44.21 25.94
Equity Capital 73.44 73.44 73.44 73.44 73.44

 

Find More Articles on: DSIJ Magazine, Choice Scrip, Product, Mid Cap, Stock Recommendations, Fundamental Picks

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