The Hindu Business Line : GHCL: Buy

SHAREHOLDERS can consider taking fresh exposure to the stock of GHCL (formerly Gujarat Heavy Chemicals), which trades at 13 times its trailing 12-month earnings.

Higher realisations have increased the company's margins for the first quarter; the operating margins rose to 30 per cent from 20 per cent in the corresponding previous period.

Since the soda ash prices are expected to remain stable, the current margins appear sustainable. The proposed expansion plans also augur well for the company in the medium term.

GHCL, which derives 75 per cent of its revenues from soda ash, is among the larger players and low-cost manufacturers in this industry.

The company has interest in the textile industry, with yarn accounting for 16 per cent of its revenues. It also has a presence in the ITES (IT-enabled services) segment through its subsidiaries, which account for 5 per cent of its consolidated revenues.

Detergents and the glass manufacturing industry are the major consumers of soda ash. Despite the drop in Customs duty on soda ash, domestic prices have risen by 10 per cent compared to last year.

GHCL plans to double its soda ash capacity from the present six lakh tonnes. Expansion plans augur well for GHCL, with the realty construction industry, a large consumer of float glass, expected to grow at 30 per cent GHCL's captive supplies of limestone and salt have enabled it retain a competitive edge.

However, while its salt works are in the South, the soda ash plant is located in Gujarat, adding to logistics costs.

To consolidate its position, GHCL is looking for acquisitions in the soda ash industry. It is reported to be close to finalising a deal in Eastern Europe.

It is also setting up a plant for its entry into the home textiles segment; this unit is expected to be operational by the first quarter of 2006.

Aided by higher realisations of soda ash, GHCL had reported a topline growth of 14 per cent and a bottomline growth of 49 per cent for FY-05.

The operating margin for FY-05 was 21 per cent, which rose to 30 per cent on an almost stagnant production cost.

Trading of finished goods also helped it report a 16 per cent growth in revenues and three-fold rise in earnings for the first quarter.

GHCL plans to meet its capital requirements by offering global depository receipts (GDRs) or foreign currency convertible bonds (FCCBs) of $100 million (about Rs 450 crore).

It is also considering a preferential allotment of 45 lakh convertible warrants to its promoters.

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