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Alagappan Arunachalam

INVESTORS can consider an investment in the stock of Punjab Alkalies and Chemicals, trading at about five times its per share earnings of Rs 9.8 for the fiscal 2005.

Punjab Alkalies has increased its operating margin by over 5 percentage points to 25 per cent on account of higher realisations for the 12 months ended March 2005 compared to the corresponding previous period.

Lower interest costs on account of a corporate debt-restructuring programme have improved its profitability further.

Punjab Alkalies derives about 90 per cent of its revenues from the chlor-alkali business. Aided by a surge in electro-chemical unit (ECU) realisations (caustic soda and chlorine are jointly produced, with one tonne of caustic soda and 0.886 tonne of chlorine making one ECU), Punjab Alkalies has expanded its operating profit margin.

The realisations are expected to rise further as the chlor-alkali business, which has a 10-year cycle, is expected to reach its peak in 2006.

On account of lower ECU realisations and higher interest charges on capital infusions (due to a change in technology), Punjab Alkalies booked losses for six consecutive years from 1998.

It turned around in fiscal 2005 by returning to the black. It has reported a profit of Rs 20.1 crore in the trailing 12 months compared to Rs 1.08 crore the previous year.

Punjab Alkalies and Ballarpur Industries are the only companies with facilities in North India to make chlor-alkali.

Since Ballarpur Industries, a paper manufacturer, consumes chlor-alkalies captively, Punjab Alkalies is the only major player in the region, catering to the chlor-alkali consumers in Punjab, Haryana, Jammu and Kashmir and Delhi.

Caustic soda is used in the manufacture of paper and pulp, man-made fibres, soap and detergents, and aluminium. Chlorine is used in the manufacture of chemicals, solvents, pesticides and plastics.

Soda ash is a substitute for caustic soda that can be used by the paper and soaps and detergents industries. A sharp fall in soda ash prices could trigger threats of substitution, but appears unlikely given the recent rise in prices.

Caustic soda prices are ruling at about Rs 22,000 a tonne, which is over 50 per cent higher than the prices that prevailed a year ago.

There appears to be negligible threat from imports, as the domestic prices of caustic soda are lower than the landed costs and the global prices are also on the rise.

Domestic prices of chlorine are also ruling lower than the landed cost of imports.

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