The Hindu Business Line : Chemplast Sanmar: Buy

Investors may consider taking exposure in the Chemplast Sanmar stock, which trades at about eight times its FY-06 earnings. Growth opportunities appear attractive with the company planning a foray into the manufacture of PVC (poly vinyl chloride) products. The company plans to ramp up capacity of its PVC resins business and set up a power plant for its caustic soda facility at Mettur, Tamil Nadu.

Chemplast Sanmar is an established player in the PVC industry and is increasingly becoming integrated too, with an option to switch between the molasses and crude oil routes. It is among the few producers of PVC resin, which contributes about 70 per cent of total revenue along with the caustic soda segment. The company also manufactures chloromethanes, which contributes 19 per cent to the revenues.

A spurt in feedstock costs and lower PVC resin prices have affected its profitability. Growth in the earnings of its chlorochemicals division, which consists of caustic soda and chloromethanes, aided by receipts under the clean development mechanism, more than compensated for the performance of its PVC resin business. A turnaround of its commodity polymer cycle and higher volumes on the caustic soda front are likely to ensure growth in earnings.

Chemplast Sanmar's PVC plant at Mettur is an integrated facility, which manufactures ethylene di-chloride (EDC), an intermediate in the production of PVC through the industrial alcohol route. Rising molasses prices and ethanol blending are potential threats for the viability of this route.

Plans in the pipeline

To ensure availability of EDC at competitive rates, the company plans to set up an 84,000-tonne EDC plant using ethylene as feedstock at Karaikal, scheduled for completion by the end of 2006.

Chemplast Sanmar also plans to set up a 1.7 lakh PVC resins plant at Cuddalore with vinyl chloride monomer (VCM) as feedstock. The Rs 450-crore project is scheduled for completion in 2008.

PVC resins are used in pipes, cables and wires, doorframes and, to a smaller extent, in industrial textiles. Chemplast Sanmar manufactures a range of PVC resins, which enables it to vary its product mix according to market dynamics. With both the Central and State governments increasing their focus on irrigation and intense activity in the realty sector, the company is likely to maintain its volumes growth in the PVC segment.

The company plans to enter the value added PVC business by manufacturing pipes, profiles, and sheets. This strategy could help in reducing its vulnerability to the vagaries of the commodity cycle. Chemplast Sanmar derives about 20 per cent of its revenues from its chlor-alkali business. Although caustic soda prices appear to have peaked, volumes are expected to partially offset the decline in prices as the aluminium and paper sectors are in expansion mode.

The company enjoys locational advantages as it is among the few caustic soda players in the South. The expansion, in March, of its caustic soda facility in Karaikal by 50 per cent to 150 tonnes per day has launched it into the league of larger players.

To get over the problem of water constraints, the company has set up a desalination plant. With power playing a critical role in the caustic soda industry, Chemplast Sanmar plans to reduce its power costs. The company, which has been operating its caustic soda facility at Mettur on the mercury-cell technology, plans to convert to the energy efficient membrane-cell technology. This will reduce energy consumption by at least a third. Profitability is set to increase at this facility with the company planning to move over to the lower cost coal-based power plant at Mettur.

The company plans to raise about Rs 200 crore by offering rights shares to expand its PVC business. Compensation under the clean development mechanism of the Montreal Protocol is also likely to generate significant cash flows towards additional capital expenditure requirements.

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