Bihar Caustic: Buy

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Bihar Caustic, which is already among the cheaper producers of caustic soda plans to move to the energy efficient membrane cell technology platform at a cost of Rs 110 crore.

Alagappan Arunachalam

Price of caustic soda and chlorine unlikely to dip sharply
Capacity expansion, a positive
Assured offtake from Hindalco
Attractive valuation level

Investors may consider taking exposure in Bihar Caustic, which trades at about four times its trailing 12-month earnings. The stock appears to be undervalued compared to its growth prospects.

Bihar Caustic, which is among the larger producers of caustic soda and chlorine, also plans to expand capacity by about 50 per cent. It also plans to set up a hydrogen bottling plant to tap opportunities in the hydrogen gas sector.

Competitive edge

Commissioning of its coal-based power plant has reduced its power costs substantially and also improved its profitability. Bihar Caustic has over the past four years outperformed its peers on most financial parameters.

The caustic soda industry is a major power guzzler.Bihar Caustic's coal-based power plant gives it an edge over its peers, which draw power from state electricity boards and natural gas based-power plants. Bihar Caustic is likely to retain this edge on account of the high capital costs involved in a coal-based power facility and regulation in the coal sector.

Migration from the mercury to membrane cell technology would further reduce power consumption by about 20 per cent. This may also help neutralise higher raw material cost on account of logistics involved in transporting salt to its plant in Jharkhand.

A steep appreciation of caustic soda prices and chlorine has been a key driver of its earnings growth. Prices of caustic soda and chlorine often move in the opposite direction, but the current trend over the past couple of years has been supported by a healthy demand for both products from the user industries.

Though domestic prices of caustic soda have dropped, a further drop is unlikely, as domestic prices appear to be in line with global prices. A healthy growth in the user industries is expected to provide the additional offtake for the additional capacities, which are expected to come on stream in the near future. A buoyant trend in the aluminium sector is likely to further tighten the supply-demand situation in caustic soda.

Bihar Caustic has a parentage that will be the envy of its peers. With the Hindalco on a growth path, Bihar Caustic is assured of business through commodity cycles.

A key risk to our recommendation will be the removal of anti-dumping duty; a review has been initiated. At present, anti-dumping duty is imposed on imports from China, South Korea and eight other countries. Bihar Caustic is likely to generate healthy profits even if the anti-dumping duty is removed given its high operating margins.

(This article was published in the Business Line print edition dated April 23, 2006)
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