Ciba Specialty Chemicals (India): Sell on uptrend

Recommendation: Sell on uptrend

Suresh Krishnamurthy

Trading at around Rs 53, Ciba's stock may form part of a moderate-to-high-risk portfolio. The stock trades at a price earnings multiple of around six times its latest annualised earnings per share.

The earnings performance in the recent past has not been all that impressive. But this has been the case with most players. Opportunities for growth may also not materialise in the near term. The question is whether the company's performance will improve from a medium-to-long-term perspective? While this looks possible, the state of the user-industries is a worrying factor. In this backdrop, shareholders can stay invested and use any uptrends to cut exposures.

Earnings performance: Ciba Specialty Chemicals' performance for the first three quarters of 2000-01 was not impressive. Sales revenues rose around 3 per cent to Rs 344.30 crore compared to the corresponding previous period. Operating margins dropped marginally from 8.65 per cent to 7.75 per cent. Post-tax earnings dropped around 37 per cent to Rs 8.70 crore.

Business profile: Ciba Specialty Chemicals (India) is a 51 per cent subsidiary of Ciba Specialty Chemicals, Switzerland. For the year ended March 2000, the company's (former) revenues were shared more or less equally between pigment intermediates, additives, synthetic resins and dyes. Ciba derives a fairly substantial part of its revenues from trading activities.

Prospects: The prospects in the near to medium term depends largely on the user-industries' performance. Ciba is a major player in the textile chemicals business which is also among the most profitable segments in the industry. However, the growth rates in the latter have not been high, and this has led to less growth in terms of volumes. Coupled with lower margins, the impact on the bottomline has been negative. The company's ability to innovate and develop new products in the segment will be a major determinant of the future prospects.

Ciba is a market leader in such segments as additives where growth rate is likely to be higher. This places it in a good position. Apart from this, the other major aspect that has helped the company recently has been its focus on exports. The focus on exports has helped the company tackle the impact of slower growth in the domestic market.

Though Ciba has access to high-growth segments, it remains to be seen if the company will make full use of the same and manage good earnings growth. In this backdrop, the near-term performance may not be all that impressive. Investors can consider booking profits at an uptrend and re-enter at around Rs 40 levels.