The Hindu Business Line : Chemplast Sanmar: Buy

INVESTORS can consider taking fresh exposures in the Chemplast Sanmar stock, which trades at about 16 times its trailing 12-month earnings. Buoyed by a sharp drop in interest expenditure and a higher operating profit, Chemplast Sanmar reported a more than four-fold earnings growth in the last 12 months. A turnaround of its commodity polymer business and higher volumes on the caustic soda front could raise earnings further.

Chemplast Sanmar derives 50 per cent of its revenues from polyvinyl chloride (PVC) resins, 20 per cent from chloromethanes and 18 per cent from the chlor-alkali business. In recent quarters, the PVC division has been reporting poor results, but have been more than compensated by earnings growth in the chlorochemicals division.

PVC resins are used in pipes, cables and wires, doorframes and, to a smaller extent, in industrial textiles, and and adhesives. Chemplast Sanmar manufactures ethylene di-chloride, an intermediate in the production of PVC, through the molasses route. Low offtake of PVC in FY05 affected its revenues; this was partially compensated by higher realisations. The same trend continued into the first quarter, with revenue growth remaining flat. Unable to pass on a 150-per cent rise in the price of molasses and a 40-per cent rise in that of industrial alcohol, Chemplast Sanmar's margins took a hit.

Aided by an adequate monsoon, prices of molasses are expected to tone down and a sustained demand for PVC resins from user industries suggests an imminent turnaround. A rise in PVC prices also could come in handy, as crude oil prices have settled at higher levels. Higher realisations of caustic soda and chloromethanes aided by larger caustic soda volumes contributed to a 36 per cent revenue growth of its chlorochemicals division. Its operating margin more than doubled to 25 per cent since FY02. A sharp rise in caustic soda and chlorine prices have prompted a review on the anti-dumping duty that is being imposed on imports of caustic soda from China, South Korea and eight other countries. Scrapping of the duty could lead to substitution by imports and dampen prices.

However, with the aluminium sector on a growth phase, the demand for caustic soda is set to rise and partially offset a potential fall in caustic soda prices. Its chlor-alkali business enjoys locational advantage, as its facility is situated close to Madras Aluminium's plant. Chemplast Sanmar also manufactures refrigerant gases by way of reduction of greenhouse gases; it will be entitled to carbon emission reductions, which can be sold in the European market and serve as another string to its revenue bow.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page