The Hindu Business Line : Lanxess ABS: Buy

The Lanxess ABS stock, trading at Rs 167 now, has run up by more than 50 per cent over the past three months. The stock, trading at a price-earnings multiple of 18 times its 2005 earnings, still looks good for acquisition at current levels from a long-term perspective.

There is a steady growth in demand for Lanxess ABS's main product, acrylonitrile butadiene styrene (ABS), a high-performance engineering plastic used in automobiles, consumer durables and computers. The company, which is expanding its capacity at minimal investment through de-bottlenecking, is already a dominant player in the ABS market.

The backing of its parent, Lanxess AG of Germany, which holds 51 per cent stake in Lanxess ABS is a great measure of comfort, especially on the technology and raw material sourcing fronts and also in possible exports in future. Lanxess AG holds its stake through its 100 per cent Indian subsidiary, Lanxess India Pvt. Ltd., which produces chemicals and intermediates at its facility in Thane.

Additional comfort factors are the healthy balance sheet of the company with zero debt and sizeable reserves and its focus now on speciality grades of ABS that fetch a premium in the market.

The risks to our recommendation stem from a possible pressure on margins as commodity prices fluctuate and a lower than anticipated growth in domestic demand. Imports are a threat too with duties at just 10 per cent. The presence of the parent, Lanxess AG, through a wholly owned subsidiary is a cause for some apprehension as there is a possibility of a clash of interests in future especially when it comes to new product introductions.

ABS is a versatile plastic that is preferred for applications where strength of material combines with the need for aesthetics such as in the interiors of passenger cars, on two-wheelers for applications such as side panels and mud-guards, as housings for television sets, computers and so on. The market is small but is growing at over 10 per cent per annum.

With the establishment of its own R&D centre, Lanxess ABS is now in a capacity to develop product grades suited to individual buyers and their applications.

Lanxess ABS's present capacity of 60,000 tonnes is being progressively increased to 1 lakh tonnes per annum by 2008.

Insipid 2005

The company, which draws up its financials on a calendar year basis, had an ordinary 2005. After adjusting for a one-time income of Rs 25.76 crore received in 2004, the bottomline shows a growth of 15 per cent in 2005. That there was a pressure on margins is evident from the sharp fall in operating margins to 7 per cent from 10 per cent in 2004.

This should, however, be seen against the fact that commodity prices were volatile during 2005 and the company's operations were affected for a while by the capacity expansion and also the floods in Gujarat where its plants are located.

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