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C. Raja Rajeshwari

INVESTORS with a medium-term perspective can contemplate buying into the Thirumalai Chemicals (TCH) stock. The company's strong presence in the phthalic anhydride (PAN) segment, broadening of the product portfolio and the improved fundamentals provide growth optimism.

The earnings prospects for this fiscal appear brighter than last year because of the firm trends in product demand and prices. Investors can consider exposure in the stock at Rs 86, trading at about six times its 12-month trailing earnings. The stock trades close to its latest book value of Rs 82.

TCH makes organic acids, anhydrides and its derivatives that are mainly used in the paints, plastics and resins industry. The company operates an 87,000 million tonne (MT) plant for PAN and 10,750 MT plant for MAN. The company derives about 75 per cent of its revenues from PAN, 14 per cent from maleic anhydride (MAN) and about 8 per cent from food acids.

Business prospects: The company's sales have grown steadily in the past three years. Operating margins have also been sustained in the 12-14 per cent range. The broadening of its portfolio to include low-volume, high-margin food acids business would help TCH to iron out some of the cyclicality in its business owing to PAN prices.

Prices firm, margins steady: Average prices of PAN ruled higher (Rs 4-5) in June-September than the prices of last year. In the case of MAN, the increase in prices was in the Rs 10-12 range. The rise in oil prices has resulted in across-the-board jump in petrochemicals, with PAN and MAN (downstream petrochemicals) following suit. The increase in its primary raw materials such as orthoxylene and benzene has muted the margins.

Going forward, the margins will hinge on the company being able to pass on any further increases in raw material prices. The demand for its product range is expected to remain firm as the offtake of its products are directly linked to the economic environment. With the economic conditions showing signs of improvement, the end-user demand is likely to fuel topline growth.

The company operates at 70-75 per cent of its installed capacity in PAN over the past three years.

Export exposure: Much of TCH's production of PAN is consumed in the domestic market. Since the domestic demand-supply equation is likely to remain balanced, higher growth rates may emerge from the export market. The company is focussed on the export market.

There is robust demand for PAN in China, but Indian exports attract anti-dumping duties of 13 per cent. This is lower than the 66 per cent dumping duties imposed on Japan. Any further cuts in duty would help cater to the growing demand from China.

As for MAN, the company exports all its production to the European and Australian markets.

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