The Hindu Business Line : Gujarat Alkalies: Hold

Falling global prices and the threat of removal of anti-dumping duty are likely to put domestic prices of caustic soda under pressure in the long term.

Compensation under the clean development mechanism
Sizeable investments in Gujarat Industries Power Corporation
Margin pressure in the long term

Investors can consider retaining their holdings in the Gujarat Alkalies stock, which trades at about six times its expected FY-07 earnings. Although valuations appear attractive, the company faces a potential downturn in its chlor-alkali business. The company is likely to face margin pressure in the long term, as there has been a downturn in the global caustic soda cycle.

Gujarat Alkalies, which is among the larger caustic soda players, derives about 65 per cent of its revenue from its chlor-alkali business. The company manufactures other chemicals, including sodium cyanide, sodium ferrocyanide, chloromethanes, hydrochloric acid and caustic potash, which contribute the balance revenue. Sale of carbon emission reduction certificates also serves as a revenue stream.

Operating expenditure

Power and raw material costs constitute the chunk of operating expenditure. Gujarat Alkalies operates its plants on the energy-efficient membrane cell technology. Its captive power generation facility, which meets a large part of energy requirements, also enhances its competitiveness.

With facilities located in Gujarat, the company enjoys easy access to raw materials at competitive rates as a majority of saltpans are located on the Western coastline. Its caustic soda flaking units ensure that the company, unlike other players, is not tied to a region.

Demand trends

Paper, aluminium, textiles, and soaps and detergents industries are among the major consumers of caustic soda. The diverse customer base cushions the company against a downturn in one industry. The expansion in the paper and aluminium sectors is likely to lead to continued robust demand for caustic soda.

The trend is, however, mixed on the chlorine front. With the PVC capacity set to rise, the demand for chlorine should go up. But the offtake by the paper industry is likely to be lower as elemental chlorine-free paper is making significant strides in the packaging paper sector.

Volumes are set to be the growth driver for Gujarat Alkalies. In June, the company completed the expansion of its caustic soda capacity by about 50 per cent to about 600 tonnes per day.

The company is set to benefit from the enhanced capacity at its Dahej facility that has been consistently operating at levels in excess of 100 per cent.

Though domestic prices have been firm this trend is unlikely to continue in the long term. Falling global caustic soda prices increases the threat of imports; prices have declined by about 28 per cent from a peak in December 2005.

Supply is also set to rise with other players planning to increase their capacity. The industry also faces the threat of removal of anti-dumping duty, which has insulated the industry from global prices.

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