The Hindu Business Line : Bihar Caustic: Buy

Investors can consider taking exposure in the Bihar Caustic stock, which trades at about six times its trailing 12-month earnings. Attractive valuations and the company's cost-competitiveness make the stock an investment opportunity. Higher volumes and the shift to membrane technology are likely to scale down the impact of lower caustic soda prices on earnings.

Membrane technology

Bihar Caustic is among the cost-competitive producers in the chlor-alkali industry. The industry is a power guzzler with energy costs accounting for a chunk of operating expenditure. Thanks to a coal-fired captive power plant, the company's energy costs are lower than its peers.

The company is set to further increase its competitive advantage by shifting to the power-efficient membrane cell technology. Energy costs per unit of production are likely to lower by about 20 per cent compared to a year earlier.

Caustic soda and chlorine, by-products in the electrolysis of brine, find application in a range of industries such as organic chemicals, paper, aluminium, textiles and soaps and detergents. The diverse profile of its user industries provides the company a cushion against downturn in a particular industry. The hydrogen bottling facility provides an additional stream of revenue. Global prices of caustic soda have dropped by about 30 per cent from the peaks of December 2005. Although lower caustic soda prices are a cause of concern, volume growth is expected to soften the impact on revenues.

In February 2006, Bihar Caustic expanded its chlor-alkali capacity by about 50 per cent. The government's focus on education is likely to increase the demand for writing and printing paper which, in turn, would trickle down to the caustic soda industry.

Growth in the poly-vinyl chloride and paper industries is likely to translate into volume growth for chlorine. While better realisations from chlorine are expected in the long term, the company plans to foray into the manufacture of aluminium chloride, which is used in aluminium manufacture.

Though this foray is likely to increase Bihar Caustic's reliance on its holding company, Hindalco, it would be better equipped to face the vicissitudes in the chlor-alkali industry.

Compared to peers in the merchant business, Bihar Caustic enjoys better off-take prospects for caustic soda. Hindalco contributes about 65 per cent of its overall revenue. With Hindalco planning to set up an aluminium smelter plant, the prospects for volume growth for Bihar caustic in the long term appear bright.

Anti-dumping duty

Unlike in India, where caustic soda is the more significant of the two by-products, chlorine is the main product in developed countries. As a result, most countries seek to dump their excess caustic soda production in the export market. The domestic industry, however, enjoys the benefit of anti-dumping duty on imports from China, South Korea and eight other countries. A key risk to our recommendation is the phase-out of this duty, a review of which has been initiated.

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