The Hindu Business Line : Thirumalai Chemicals: Hold

Investors can retain their exposures in Thirumalai Chemicals. Valuations appear to be moderate with the stock trading at about six times its trailing twelve-month earnings. However, volatility in prices of raw materials and finished products is a dampener. Growth in key user industries is likely to translate into higher volumes for its anhydride businesses.

Business

Thirumalai Chemicals occupies a dominant position in the phthalic anhydride (PAN) business from which it derives about 72 per cent of its revenue. The company is also the largest manufacturer of maleic anhydride (MAN). Medium-term threats from peers appear muted given their financially weak position.

The threat from imports is also not imminent, as they constitute only a minuscule portion of domestic consumption. International prices, however, play a key role in determining domestic prices of PAN and MAN.

The company occupies a dominant position in its key products. The company also manufactures food acids and phthalate esters, which together contribute about 7 per cent of its revenue.

Growth

Paints, plastics, dyes and pigments industries are among the larger consumers of PAN. Consumption of MAN is driven mainly by the unsaturated polyester resins industry. Growth in the user industries has contributed to higher PAN offtake which, of late, has been in double digits.

While the real-estate boom and the government's focus on the textile industry are likely to help in sustaining this growth for PAN, higher offtake for MAN is likely to come from the automobile industry. With its plants operating substantially below installed capacity, the company is poised to tap growth opportunities in these businesses.

Margin pressure to remain

The company operates in a raw material intensive business with input costs constituting about 80 per cent of operating expenditure.

A surge in prices of inputs and an inability to pass on the entire impact to its customers led to the company facing margin pressure in FY-06. While domestic prices of PAN and MAN have stabilised, that of the key raw materials continue to fluctuate.

Thirumalai Chemicals is expected to face margin pressure with prices of crude oil hovering around $60 a barrel. Prices of orthoxylene, which constitutes about 80 per cent of its input costs, are closely linked to that of crude oil.

International prices of benzene, which were on a decline since the beginning of October, continues to be about 60 per cent higher compared to a year earlier.

With an intention to reduce volatility of margins and to increase operating levels, the company has entered into contracts with customers for supply of PAN on a formula basis.

Backed by better operating margins and higher asset turnover ratios the company, unlike its peers, has been able to withstand the vicissitudes of the commodity cycle.

Contract tie-ups are likely to translate into lower inventory levels and rein in the sluggish cash flows, which has been a concern.

More Stories on : Stocks | Recommendation | Chemicals

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