S t o c k I d e a Date: 22-Mar -13 CMP: `189 TARGET: `237 Upside: 25.4% M A I N T A I N BUY SENSEX* 18770 NIFTY* 5661 Eq. Cap. (` Crs) 73.44 Face Value (`) 10.0 M. Cap (` Crs) `1,388 BSE Code 530001 NSE Code Financial Year GUJALKALI Apr-Mar 52-w H/L 190/100 Avg. Daily Vol. 156,661 TTM EPS (`) 27.07 TTM P/E (x) 6.98x BVPS (`) 239.98 P/BVPS (x) 0.79x Stock vs. Sensex *at 12:03pm on 22-03-13 Latin Manharlal Securities Pvt Ltd. 124 Viraj, S,V.Road, Khar (W), Mumbai 400 052 www.latinmanharlal.com GUJARAT ALKALIES & CHEMICALS LTD. (GACL) Gujarat Alkalies and Chemicals Ltd (GACL) was incorporated in by GIIC, a wholly owned company of Govt. of Gujarat, as a Core Promoter. GACL is the single largest producer of Caustic Soda in India, with a production capacity of 429,000 MT and enjoys economies of scale. The Company has ~18% share in the domestic Chlor- Alkali market. Multi-Product Company: Benefit of leveraging against slow moving products GACL s products basket comprises total 28 products including Caustic Soda, Chlorine, Hydrochloric Acid, Hydrogen, Chloro-methanes, Potassium Hydroxide, Potassium Carbonate, Phosphoric Acid (85%), Sodium Cyanide, Sodium Ferro Cyanide, Hydrogen Peroxide, Calcium Chloride, Stable Bleaching Powder and Chlorinated Paraffin Wax etc. Owing to availability of 28 products in its basket, the products in short supplies provide leverage against slow moving products. Diversified User Industries GACL products are used by various industries viz. Textiles, Pulp & Paper, Soaps & Detergents, Alumina, Water Treatment, Petroleum, Fertilizers, Pharmaceuticals, Agrochemicals, Plant Protection, Dyes & Dyes Intermediates, etc. Strong domestic demand & limited supply drives Caustic Soda Price Domestic caustic soda prices have picked up as caustic soda inventory levels are down and due to higher domestic demand. Caustic soda production has been reduced globally due to lower chlorine demand and this has resulted in firm caustic prices. Continued focus on Expansion & Diversification Sodium Chlorate at Dahej Complex is in advance stages of implementation and is scheduled for commissioning during 1QFY14E. Plans to set up another 10.5 MW wind farm project in Kutch Plans are on to set up Caustic soda project with JV with Nalco JV with Evonik-Degussa GmbH for Polyols Projects Developing technology for manufacturing 8,000TPA Hydrazine Hydrate Project 9MFY13 net profit up 41.3% Y-o-Y on improved realisations GACL has registered 41.3 % rise in the net profit for 9MFY13 at Rs154.6 Crs, up from Rs 109.4 Crs in the same period last year. 9MFY13 Net profit was higher than the full year FY12 net profit of Rs.153.6 Crs. Company's net sales for the 9MFY13 stood at Rs 1334.8 Crs against Rs 1276.1 Crs reported in 9MFY12. In 3QFY13, EBITDA margins improved by 250 bps y-o-y to 19.3% against 16.8% reported in 3QFY12. Improvement in the margin is mainly attributed to better realisation in different segments including caustic soda group, caustic potash group, phosphoric acid etc. Strong Operating Metrics Despite economic slowdown, inflationary pressure it continuously improving EBITDA margin; from 17.5% in FY10 to 21.1% in FY12 and 23.0% in 9MFY13. Book Value Per share stood currently at ~Rs.240 and translates to P/BVPS of just 0.79x. At the CMP of `189 the stock is trading at 5.2x its FY14E EPS of `36.42. We MAINTAIN our BUY rating on the stock with a 12-18 months revised target price of `237, providing an upside of 25.4% from the current levels. Please Refer DISCLAIMER on the Last Page
Company Profile GACL has ~18% share in the domestic Chlor- Alkali market GACL outpaced the industry average capacity utilization of 81.7% with its 89.76% capacity utilization Gujarat Alkalies and Chemicals Ltd (GACL) was incorporated in 1973 in the State of Gujarat by Gujarat Industrial Investment Corporation Ltd (GIIC), a wholly owned company of Govt. of Gujarat, as a Core Promoter. GACL is the single largest producer of Caustic Soda in India, with a production capacity of 429,000 MT as on 31 st March 2012 and enjoys economies of scale. The company has ~18% share in the domestic Chlor- Alkali market. The company has 2 plants; one at Baroda and 2 nd at Dahej. The company is accredited with ISO 9001:2008, ISO 14001:2004, IS 18001:2007 OHSAS Management Systems Certifications in its pursuit for excellence and sustainable growth. Since inception, the Company has from time to time, expanded its operations in Chlor-Alkali Sector and also diversified into several higher end products, through forward/backward integration. Besides 90 MW gas based Captive power plant and participation in a 140 MW Joint Captive Co-generation Power Plant, the Company has taken major initiative for green energy by setting up Wind farms for a total installed capacity of 94.25 MW. The Company is aiming to meet substantial part of its power requirements through alternative environment friendly sustainable renewable energy sources. GACL has always ensured upgrading and adapting eco-friendly and green technologies while it outpaced the industry average capacity utilization of 81.7% with its 89.76% capacity utilization. Business Model The strengths of the company are economies of scale, state of the art ecofriendly technologies, economical and reliable power supply, extensive usage of renewable energy, integrated downstream plants, strong network for Marketing and Distribution, In-house Research and Development facilities, Proximity to major raw material source and markets etc. Revenue Mix Other value added products 47% Chlor-Alkali business 53% GACL derives ~53% of its revenues from Chlor-Alkali business and ~47% of its revenues from the other value added products. Gujarat Alkalies & Chemicals Ltd. 2 22-March-13
INVESTMENT POSITIVES A Multi-Product Company Benefit of leveraging against slow moving products Owing to availability of 28 products in its basket, the products in short supplies provide leverage against slow moving products products are used by industries like Textiles, Pulp & Paper, Soaps & Detergents, Alumina, Fertilizers, Pharma, Agrochemicals GACL s products basket comprises total 28 products including Caustic Soda, Chlorine, Hydrochloric Acid, Hydrogen, Chloro-methanes, Potassium Hydroxide, Potassium Carbonate, Phosphoric Acid (85%), Sodium Cyanide, Sodium Ferro Cyanide, Hydrogen Peroxide, Calcium Chloride, Stable Bleaching Powder, Poly Aluminium Chloride, Anhydrous Aluminium Chloride, Toluene based chemicals and Chlorinated Paraffin Wax etc. All Chemical products generally pass through cyclic phase. While some products are in short supply, some others do not move satisfactorily. Owing to availability of 28 products in its basket, the products in short supplies provide leverage against slow moving products. GACL s products viz., Phosphoric Acid, Potassium Hydroxide, Potassium Flakes, Potassium Carbonate are under threat of rise in raw material prices due to its scarcity in the global market. The Company has only single channel procurements for the raw materials for the above finished goods, namely Rock Phosphate from Jordan and Potassium Chloride from Canada. GACL has obtained sample of Rock Phosphate of Morocco origin and it is found suitable for blending with the Rock Phosphate from Jordan. Efforts are on to search for other suppliers of these materials of technical suitability for the designed plant at present, through domestic dealers / foreign suppliers. Most of the GACL plants are integrated in such a way that part of finished product of one plant is consumed as a raw material for the other plant. Thus it enjoys some leverage over its competitors due to its integration philosophy. Diversified User Industries GACL products are used by various industries viz. Textiles, Pulp & Paper, Soaps & Detergents, Alumina, Water Treatment, Petroleum, Fertilizers, Pharmaceuticals, Agrochemicals, Plant Protection, Dyes & Dyes Intermediates, etc. The company has marked its presence across the globe even against stiff international competition by exporting its World class products viz. Aluminium Chloride, Hydrogen Peroxide, Caustic Soda Flakes and Prills, Caustic Potash Flakes, Calcium Chloride Powder, Methylene Chloride, Poly Aluminium Chloride (30%), Potassium Carbonate and Chlorinated Paraffin Wax to various Countries. Strong domestic demand & limited supply drives Caustic Soda Price Domestic caustic soda prices have picked up as caustic soda inventory levels are down and due to higher domestic demand. Caustic soda production has been reduced globally due to lower chlorine demand and this has resulted in firm caustic prices. Gujarat Alkalies & Chemicals Ltd. 3 22-March-13
Higher caustic prices have lead to better Electro Chemical Unit (ECU) realization for Indian players Chlorine and caustic soda are co-products that are evenly produced by the Chlor-alkali industry. Since chlorine cannot be stored, chlor-alkali plants are operated in line with demand for chlorine. Chlorine demand has been impacted due to lower demand from downstream industries like PVC. PVC demand has been impacted as economic uncertainty prevailing in world economy and fears of double dip recession in Europe is giving a negative sentiment to the housing sector. Recently, the higher caustic prices have lead to better Electro Chemical Unit (ECU) realization for Indian players. Rise in caustic soda prices in India is faster due to the Government increasing the duty on its import and the sharp depreciation of Indian currency against the US dollar in recent months. Continued focus on Expansion & Diversification 20,000 TPA Sodium Chlorate at Dahej Complex is scheduled for commissioning during 1QFY14E. Another 10.5 MW wind farm project in Kutch district Keeping in view, the current trends of Indian and global economy, the Company has planned new projects involving investments of over Rs.2,600 Crs during next 3-4 years, to diversify, add new products, enlarge portfolio and expand its existing capacities. It will also enable it to consolidate and maintain its leadership in Chlor-Alkali and other integrated downstream products. Sodium Chlorate Project: GACL has taken up project for manufacturing 20,000 TPA Sodium Chlorate at Dahej Complex. The project has good synergy with the core business of the Company. The project is in advance stages of implementation and is scheduled for commissioning during 1QFY14E. Hydrazine Hydrate Project: It is also developing technology for manufacturing 8,000 TPA Hydrazine Hydrate Project in association with Indian Institute of Chemical Technology (IICT). Plans to set up another 10.5 MW wind farm project in Kutch GACL will set up another 10.5 MW wind farm project in Kutch district for which details are being worked out. It has already commissioned one 10.5 MW wind farm project during FY12 and with this another project the total capacity of wind farm project will go up to 21 MW. Plans to set up Caustic soda project with JV with Nalco GACL has joined hands with National Aluminium Company (Nalco) for setting up 200,000 TPA caustic soda project at Dahej in Gujarat. The feasibility report for the proposed project (GACL will have majority stake in the project) is currently on and the estimated project cost could be between Rs 600-700 Crs. Nalco would source nearly 100,000 tonnes of caustic soda from the project and is expected to be set up over next 2-3 years. JV with Evonik-Degussa GmbH for Polyols Projects GACL with a JV with German specialty chemicals major Evonik-Degussa GmbH plans to diversify product portfolio and cut dependence on caustic soda. GACL will invest Rs.1,800 Crs to set up a plant to manufacture Gujarat Alkalies & Chemicals Ltd. 4 22-March-13
Commissioned 14,000 TPA Hydrogen Peroxide expansion project polyols at its Dahej complex while Evonik will invest Rs 700 Crs to supply basic raw materials for polyols. The capacity of the polyols plant will be 150,000 TPA and it will produce import substitutes for Indian industries With this diversification drive, GACL is expecting to increase its turnover to Rs 4,000 Crs by FY15E and reduce its dependence on caustic soda from ~53% to ~35%. To fund these projects, GACL has tied up 70% cost through debt while 30% will come from internal accruals. Monetising its Carbon Credits to further drive profitability Besides, the company will also benefit from monetising its Carbon credits. Carbon credits or Certified Emission Receipts (CERs) are issued by United Nations Framework Convention on Climate Change (UNFCCC) under Clean Development Mechanism. GACL has registered 3 projects with UNFCCC and has taken initiatives to register a few more projects including Windmills projects. So far, the company got 1.66 lakh CERs approved, which the company will monetise in due course. The company has indicated earlier (during 1QFY13) that it plans to monetise CER in FY'13E. 9MFY13 net profit up 41.3% Y-o-Y on improved realisations In 9MFY13, EBITDA margins improved by 250 bps y-o-y GACL has registered 41.3 % rise in the net profit for 9MFY13 at Rs154.6 Crs, up from Rs 109.4 Crs in the same period last year. 9MFY13 Net profit was higher than the full year FY12 net profit of Rs.153.6 Crs. Company's net sales for the 9MFY13 stood at Rs 1334.8 Crs against Rs 1276.1 Crs reported in 9MFY12. In 3QFY13, EBITDA margins improved by 250 bps y- o-y to 19.3% against 16.8% reported in 3QFY12. Improvement in the margin is mainly attributed to better realisation in different segments including caustic soda group, caustic potash group, phosphoric acid etc. Continuously improving margin EBITDA Strong Operating Metrics Achieved an all time high sales of Rs 1,863 Crs, registering a growth of 19.3% in a challenging FY12. Despite economic slowdown, inflationary pressure it continuously improving EBITDA margin; from 17.5% in FY10 to 21.1% in FY12 and 23.0% in 9MFY13. Achievement of 93% production level regardless of the volatile market and severe competition due to dumping of products in the country. Total debt decreased to Rs 311 Crs as on 31st March, 2012 from Rs 352 Crs as on 31st March, 2011, despite the increase of External Commercial Borrowings which resulted into improvement of Debt Equity Ratio. Book Value Per share stood currently at Rs.240 and translates to P/BVPS of just 0.79x. Gujarat Alkalies & Chemicals Ltd. 5 22-March-13
Impressive Shareholding Source: Capitaline, LMSPL Research Increase in Promoter Holdings Promoter Group Shareholding 31/12/2012 22/03/2013 No of Shares % of Holding No of Shares % of Holding Govt of Gujarat 21 0 21 0 Gujarat Industrial Development Corp 1,888,000 2.57 1,888,000 2.57 Gujarat Industrial Investment Corp Ltd 7,119,028 9.69 7,119,028 9.69 Gujarat Maritime Board 1,883,200 2.56 1,883,200 2.56 Gujarat Mineral Development Corp Ltd 3,268,480 4.45 3,555,070 4.84 Gujarat Narmada Valley Fertilizers & Chemicals Ltd 292,800 0.4 1,719,996 2.34 Gujarat State Investments Ltd 12,513,438 17.04 12,513,438 17.04 TOTAL 26,964,967 36.71 28,678,753 39.04 Source: BSE Announcement, LMSPL Research The promoter groups (GUJARAT MENERAL DEVELOPMENT CORPORATION LTD and GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD) have bought shares between 26 th Feb 2013 to 19 th Mar 2013 from open market transactions. CONCERNS Increasing cost of gas and power, rock-phosphate and Potassium Chloride etc. are the areas of concern. Facing import threat and dumping at low prices in various products which affects its capacity utilization, prices etc. Gujarat Alkalies & Chemicals Ltd. 6 22-March-13
VALUATIONS At the CMP of `189, the stock is trading at 5.2x its FY14E EPS of `36.42. We MAINTAIN our BUY rating on the stock with a 12-18 months revised target price of `237, providing an upside of 25.4% from the current levels. We have earlier recommended GUJARAT ALKALIES & CHEMICALS LTD in our Weekender Stock Idea dated 9 th November 2012 at the then market price of `139.0 with a 12-18 months target of `182.0 providing an upside of 31.0%. The stock has achieved our target price yesterday (on 21 st March 2013). Profit & Loss A/c - Rs. Crs 3Q12 3Q13 FY11 FY12 9MFY12 9MFY13 Net Sales 440.9 416.6 1423.2 1698.2 1276.1 1334.8 Total Expenditure 366.9 336.2 1165.4 1339.8 1020.7 1028.2 Raw Material Consumed 204.6 175.5 615.8 720.8 538.4 536.4 Stock Adjustment -18.1-25.5-4.7-30.6-27.9-8.4 Purchase of Finished Goods 3.8 0 16.0 8.9 8.6 0.0 Employee Expenses 29.7 30.1 114.9 118.1 90.1 91.9 Power, Oil & Fuel 82.1 85.1 229.7 265.4 200.6 213.5 Provisions & Write Offs 0 0 0 0.2 0.3 0.1 Other Expenses 64.8 71.0 193.6 257.0 210.6 194.7 EBITDA 74.0 80.4 257.8 358.4 255.4 306.6 Margin 16.8% 19.3% 18.1% 21.1% 20.0% 23.0% Depreciation 36.0 37.0 133.1 139.0 104.3 106.6 EBIT 38.1 43.4 124.6 219.4 151.1 200.0 Interest 5.4 2.1 21.2 20.5 16.5 7.7 Other Income 3.4 6.81 23.7 24.5 17.6 23.1 PBT 36.2 48.1 127.1 223.4 152.2 215.4 Tax 10.2 14.8 12.8 58.4 42.8 60.8 Fringe Benefit Tax 0 0 0 0 0.0 0.0 Deferred Tax 0 0 0 11.4 0.0 0.0 PAT 25.9 33.3 114.3 153.6 109.4 154.6 Source: Company, LMSPL Research Margin 5.9% 8.0% 8.0% 9.0% 8.6% 11.6% EPS (`) 3.53 4.54 15.57 20.92 14.90 21.05 Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai 400 052. Tel. (022) 4082 4082, Fax (022) 2649 7997. research@lmspl.com www.latinmanharlal.com, LMSPL Network: Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana, Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh) This document is for information only and is meant for the use of the recipient & not for circulation. The information contained in this document has been taken from publicly available information, trade and statistical services & other sources. While the information contained herein is from sources believed to be reliable, we do not hold ourselves responsible for its completeness and accuracy. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. Investors are expected to use the information contained in this report at their own risk. This report is not and should not be construed as an offer or the solicitation of an offer to buy or sell any securities. M/s Latin Manharlal Securities Pvt. Ltd. and its affiliates may act as market maker or have assumed an underwriting position in the secure-ties of companies discussed herein and may sell them to or buy them from customers on a principal basis. Gujarat Alkalies & Chemicals Ltd. 7 22-March-13