The Hindu Business Line : Tanfac Industries: Hold

INVESTORS may consider retaining their holdings in the stock of Tanfac. The company's margins have declined over the years and it has recorded a loss in the trailing twelve-months, largely owing to loss in the preceding two quarters. But Tanfac is expected to turn in positive earnings for the current fiscal as growth in the aluminium sector coupled with high capacity utilisation levels should help it on the earnings front.

Tanfac derives about 60 per cent of its revenues from aluminium fluoride and 20 per cent from hydro fluoric acid. Tanfac is a market leader in these products. Aluminium fluoride is used in the production of aluminium, glass and ceramics. In the domestic market, it is consumed almost entirely by the aluminium sector. Hydro fluoric acid is used for producing other fluorocarbon chemicals.

In an attempt to reduce its dependence on its core products, Tanfac has diversified into the production of other speciality fluorides. This constituted about 15 per cent of its revenues in FY 2005. Revenues from this segment have grown sharply in the last three years.

There is scope for heightened demand for aluminium fluoride as the aluminium sector is on a growth curve. Tanfac would be a beneficiary of increased demand from the sector as it will be in a position to step up its capacity utilisation levels. The aluminium fluorides industry has put on a lacklustre show since FY 2000. In recent times, two players have discontinued the production of aluminium fluorides, leaving the demand to be met by Tanfac and Alufluoride.

Restarting of operations on the part of others would require time. Since Tanfac has a low capacity utilisation, it will be among the first to gain from the increased demand for aluminium fluoride from the aluminium industry. About 15 per cent of demand for aluminium fluoride is met through imports.

Tanfac being a part of the AV Birla group has a captive consumer in Hindalco, which assures it of demand for aluminium fluoride. Tanfac's realisations from aluminium fluoride are on par with landed costs of imports, which underscore the benefit that it would derive from the increased demand.

Tanfac's overall operating margin has fallen to less than 5 per cent from 14 per cent in FY 2000. Rising costs of raw materials-fluorspar and aluminium hydroxide have cut into its margins. Though exports have grown at a fast clip and constitute about 15 per cent of its revenues, lower realisations from exports appears to have reduced its margins. A weaker rupee should, however, boost its earnings from overseas sales in the current year.

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