The Hindu Business Line : DCW: Hold

INVESTORS may retain their exposures in DCW. At Rs 10, the stock trades at 8 times its trailing 12-month per share earnings. Though lower off take at its polyvinyl chloride (PVC) division wiped out profits from this business in the first quarter of FY 06, this is likely to change.

A healthy growth in the construction and agriculture sectors will help the PVC industry maintain its growth path. DCW will be able to meet the growing demand as reorganisation of operations at its PVC plant has increased its capacity by 50 per cent. Commissioning of wind turbines would also result in lower fuel costs at its caustic soda facility.

DCW derives 57 per cent of its revenues from PVC resins; various chemicals including soda ash and caustic soda make up the balance. A diverse portfolio of products in its basket helps in reducing risk against a downturn in a particular industry. Moreover forward integration in the chlor-alkali business serves a risk mitigation strategy.

Buoyed by higher realisations, its caustic soda division has staged a turnaround. Its margins from this business, however, are lower than other caustic soda manufacturers as DCW operates on the power intensive mercury-cell technology. Growth in the aluminium industry is expected to provide robust demand for caustic soda. However, any reversal of anti-dumping duty that has been imposed could reduce its margins from this business.

Margins at its soda ash unit continue to remain low as compared to its competitors. Lack of captive limestone quarries works to its disadvantage. Detergents and glass manufacturing industries are among the larger consumers of soda ash. The growth in the realty construction industry — a large consumer of float glass — is likely to provide a sustained demand for soda ash.

DCW uses the naphtha route to manufacture PVC resins. A 27-per cent rise in prices of polyvinyl chloride put pressure on margins of its PVC business. A 20 per cent rise in realisations of PVC failed to come to its aid as off take from this division fell by 4 per cent.

Though its other chemical businesses, which comprise up-gradation of ilemnite and manufacture of synthetic-iron-oxide, contribute only marginally to revenues; they account for about 10 per cent of earnings. It proposes to increase its capacity in these businesses, which could result in additional revenue of about 30 per cent. A low debt-equity ratio provides it leverage to raise funds to meet capital requirements for these projects.

DCW's revenues have been growing at about 10 per cent over the past three years. The increase during FY 05 has come primarily from higher realisations of PVC, but earnings remained flat during FY 05 due to higher raw material costs. A sharp decline in the prices of naphtha is likely to lower costs of vinyl chloride monomer, which is a key raw material for DCW and have a beneficial impact on profitability levels and earnings.

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