Gujarat Alkalies and Chemicals Ltd

Transcription

1 Gujarat Alkalies and Chemicas Ltd. is a Caustic Soda Manufacturer based in the state of Gujarat. It was set up in 1973 and is owned and operated by the Gujarat State Government. The company currently has a capacity to manufacture a little over four lac tonnes of caustic soda per annum. Investment Rationale Captive Power Plants The manufacturing of Caustic soda is extremely power intensive, and this accounts for a large part of the costs incurred by any caustic soda manufacturer. Gujarat Alkalies is almost fully integrated in this respect, as it has captive installed capacities of a 90 MW gas based power plant, 100 MW wind power, and a JV of another 150 MW gas power plant. Chlorine Disposal A by-product of the manufacturing process is the generation of chlorine gas, a highly toxic and unstable gas. Gujarat Alkali has entered in to JV s and installed technologies to process Chlorine, and it generates revenue by selling this processed gas. By 2014 a new JV signed with Dow Chemicals, USA is expected be onstream, and this should further add value to chlorine sales. Takeover possibility A reputed market investor, The Lok Prakashan Group (and people acting in concert) (as reported in bseindia.com), have been steadily increasing their stake in the company for some time now. The shareholding in Dec 12 quarter was a little over 20%, this has climbed from 7.5% in the Dec 10 quarter. Considering the low promoter holding (37%), we anticipate that there may be a takeover of the company. Recommendation The company is very attractively valued, quoting at just 5.9 times P/E (TTM), 3.5 times cash earnings, and 0.7 times book value. It has consistently paid dividends, and for a capital intensive industry, it has negligible debt. At current valuations we find that the company has significant upside potential. We initiate coverage with a Outperform Rating on the stock. CMP(INR) Market Data Rating 160 Outperform NSE/BSE ticker Bloomberg ticker Reuters ticker : GUJALKALI : GALK : GALK Face value (INR per share) : 10 Shares outstanding (mn) : 73.4 Market cap (INR BN) : week range (INR)/(H/L) : 166/115.3 Beta : 0.72 Free float (%) : 45% Avg. daily volumes (30-days) - BSE : 15,000 - NSE : 1,47,000 Shareholding Pattern Promoters Lok Prakashan Others Dec-10 Dec-11 Dec-12 Key numbers (INR Mn) FY13 YTD* FY12 FY11 FY10 Total Income 13,348 17,109 14,354 13,158 Expenditure 10,110 13,398 11,667 10,546 Depreciation 1,065 1,389 1,329 1,215 Interest Tax PAT 1,546 1,536 1,143 1,718 EPS CEPS RoCE% FCF per share Source: Company, Pratibhuti Research, Bloombeerg, Bseindia.com * First 3 quarters, FY12-13 For Disclosure, refer last page of this report 1

2 Investment Rationale Captive power plants Caustic Soda Manufacturing is an extremely power intensive industry, with power costs being a large component of cost. Gujarat Alkalies is almost fully integrated in this respect. It has gradually ramped up its captive power production capacity, and currently has a 90 MW gas based power plant as well as 100 MW of wind power. It also has a JV with an installed capacity of 150 MW. In 11-12, the company consumed 11,126 lakh units of power (127 MW), of which only 829 lakh units was bought from the grid, which is only around 7.5% of total consumption. Prudent and capable management Prudent long term management has ensured low debt levels, consistent profitability and regular dividend payouts, despite significant capital expenditure in adding power and caustic soda capacities. The company has kept adding capacity periodically with creating any debt burden. Despite record gas prices in , which can cripple such power intensive companies, Gujarat Alkali has generated significant profits, and this speakes volumes about the capability of the management. Cost of gas In a scenario of high gas prices, despite CAPEX investments the company has consistently generated significant profits to shareholders. The cost of natural gas consumed for Gujarat Alkali has increased from 269 crore in (for 22.1 crore SM 3 of gas) to Rs 341 (for 20.5 crore SM 3 ) in Moving forward, Pratibhuti Research anticipates a reduction in gas prices for Gujarat Alkali, and this will enable the company to improve margins. This is due to GAIL signing contracts for gas supply starting 2014 at about 8-9 dollars per MMSCFD, significantly lower than the peak prices of 14 dollars per MMSCD (in India). Pratibhuti Research also anticipates an increase in output of gas by Reliance, the cumulative impact of which is beneficial to Gujarat Alkali. Replacement cost The book value for Gujarat Alkali is Rs 220 per share, and the P/B is currently 0.7. This is after adjusting for depreciation - to the extent of 50% of gross block. The replacement cost of the Gujarat Alkalies captive power plants itself is currently more than the market cap of the company. Assigning a replacement of Rs 6 crore per MW of gas power, and Rs 10 crore per MW of wind power, just the replacement cost of Gujarat Alkalies captive power plants exceeds the companies market cap. In other words, effectively the manufacturing facilities are available to no cost to investors. According to our research, the replacement cost of setting up only caustic soda manufacturing facilities would be anywhere between Rs crore for 1 lac tonnes of capacity*. *Input from industry insiders 2

3 Consistent dividends The company has a record of paying dividends, and for the past 5 years now have been paying Rs 3 as dividend share consistently. Chlorine gas The biggest concern for caustic soda manufacturers, apart from power is the disposal of chlorine gas. Chlorine, a highly toxic and dangerous gas, is a by product of the manufacturing process. Gujarat Alkali has set up plants to process and manufacture derivatives of chlorine, thus mitigating a major concern, and indeed add value via sales generated by the chlorine derivatives. They have set up a JV with Dow Chemicals (USA) to set up a plant to process chlorine, this will come online by 2014 and should add significant value to its chlorine derivative sales. Government protection Caustic soda, chlorine and their derivatives are used in a variety of industries of national importance, in plastics, chemicals, fertilizers, textiles and a whole host of other industries. As such, governments would like to ensure local manufacturing capacities for caustic soda and not be dependant on imports for these products. Thus, taking cognisance of dumping of caustic soda in domestic markets, the government has imposed an anti-dumping duty on import of caustic soda in order to protect the local manufacturers. Takeover possibility The Lok Prakashan group and people acting in concert, have been steadily increasing their shareholding in this stock over the past few years. Their shareholding has increased from around 7% in Dec 10 to over 20% in the Dec 12 quarter. We anticipate a possibility of a takeover of the company, especially considering that the promoters (Gujarat Govt) hold only around 37% in the company. Key Risks Dumping from international players Internationally, caustic soda is treated as a by product of the manufacturing process, and chlorine is considered the primary product. This can lead to dumping of caustic soda, especially during times when markets slow down. However the Indian Government is aware of this, and has protected the domestic manufacturers by imposing anti-dumping duties. Locational Risk Gujarat Alkali has both its plants located close to each other in the Gujarat. All its major customers are also located close its facilities. Natural disasters, economic slowdown, social unrest etc. can potentially have adverse reactions for the company. 3

4 Recommendation This is an extremely good value offering stock for discerning investors. Being in a capital intensive industry, the company has a very low level of debt and is very well placed in terms of liquidity. The company has maintained profitability and consistent dividend payouts, despite repeated capital expenditure and threats such as the increase in gas prices in It also holds treasury stocks in other Gujarat State companies which are worth significantly more than reflected in the Balance Sheet. The stock is quoting at 0.7x book - this after the gross block is depreciated to the extent of 50% of the net block. The current P/E ratio is 5.9x, and it is trading at a CEPS of 3.3x. In our opinion the company is very undervalued at these prices, and has the potential to offer very attractive returns for investors. Additionally, the company may see a complete rerating in scenarios of a takeover or low gas prices, or a combination of the two. If any of these scenarios play out, the company has the potential to offer even higher returns for investors. We initiate coverage with a outperform recommendation. 4

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