Himadri Chemicals’ ability to maintain strong margins and growth momentum, make its stock attractive for long-term investors
KOLKATA-BASED Himadri Chemicals (HCIL) has lost 45% of its market capitalisation in the past three months even though its future growth prospects continue to be strong. HCIL is a leading player in coal tar derivatives, which are vital inputs in the production of aluminium and steel. The company is now expanding its capacities as well as product portfolio which, considering its ability to maintain strong margins, makes the scrip attractive for long-term investors.
BUSINESS:
HCIL has a combined coal tar distillation capacity of 2,19,000 tonnes per annum (tpa). It manufactures derivatives of coal tar such as coal tar pitch (CTP), creosote oil and naphthalene. CTP is primarily used in the aluminium and graphite industries and HCIL holds over 70% market share in India. Its clients include Nalco, Balco, Hindalco, Indal and HEG among others.
HCIL is a leader in a market that is growing fast resulting in improved operating margins. HCIL has also drawn up an aggressive capex plan to quadruple its capacity by ’12 at a cost of Rs 1,600 crore. Recently, HCIL raised Rs 118 crore through preferential warrants allotment and the board has approved an $80-million FCCB issue to finance the expansion.
In January ’08, it commissioned its 120-tpa advance carbon material plant in West Bengal, which will be expanded to 4,500 tpa by ’12. This plant will produce special grade carbon required for manufacturing lithium ion batteries. Further, HCIL has acquired a company in Hong Kong to expand its geographical footprint. It has also opened a representative office in China to streamline its import activities.
GROWTH DRIVERS:
Under the current expansion plan, HCIL’s distillation capacity will double to around 0.5 million tonnes by the end of FY09. Similarly, its 50,000-tpa carbon black plant will be commissioned during the year, while the full benefits of the advance carbon plant commissioned in January ’08 will also be available to the company. These will drive HCIL’s sales growth during FY09. On the other hand, the margins will be maintained at the current levels, thanks to rising demand and new value-added products.
The aluminium industry, which consumes nearly 80% of the coal tar pitch produced globally, is expected to grow at a CAGR of 7.5% over the next 3-4 years and the production of steel representing around 13% of the CTP consumption, is growing at around 6%. This, in turn, will boost demand for coal tar pitch.
FINANCIALS:
Since FY01, HCIL’s net profits have increased at a CAGR of 110% to Rs 323.3 crore in FY07 while sales have posted a CAGR of 32.5%. In the same period, the RoCE improved from less than 10% to 30%. During the quarter ended December ’07, HCIL posted 30% growth in net profit despite a 3% increase in revenues. The sales growth appeared muted mainly because of a weak pricing scenario. However, HCIL improved its operating margins even as its other income came down sharply.
VALUATIONS:
As HCIL’s expanded coal tar distillation capacities come on stream over the next year, the company is likely to nearly double its operating profits. Taking into account the recent preferential warrant issue, HCIL’s equity on a fully diluted basis stands at Rs 34.27 crore. It is expected to post earnings of Rs 39.9 per share for FY09 — nearly 70% above the EPS of 23.4 projected for FY08. This provides an attractive opportunity for long-term investors.
KOLKATA-BASED Himadri Chemicals (HCIL) has lost 45% of its market capitalisation in the past three months even though its future growth prospects continue to be strong. HCIL is a leading player in coal tar derivatives, which are vital inputs in the production of aluminium and steel. The company is now expanding its capacities as well as product portfolio which, considering its ability to maintain strong margins, makes the scrip attractive for long-term investors.
BUSINESS:
HCIL has a combined coal tar distillation capacity of 2,19,000 tonnes per annum (tpa). It manufactures derivatives of coal tar such as coal tar pitch (CTP), creosote oil and naphthalene. CTP is primarily used in the aluminium and graphite industries and HCIL holds over 70% market share in India. Its clients include Nalco, Balco, Hindalco, Indal and HEG among others.
HCIL is a leader in a market that is growing fast resulting in improved operating margins. HCIL has also drawn up an aggressive capex plan to quadruple its capacity by ’12 at a cost of Rs 1,600 crore. Recently, HCIL raised Rs 118 crore through preferential warrants allotment and the board has approved an $80-million FCCB issue to finance the expansion.
In January ’08, it commissioned its 120-tpa advance carbon material plant in West Bengal, which will be expanded to 4,500 tpa by ’12. This plant will produce special grade carbon required for manufacturing lithium ion batteries. Further, HCIL has acquired a company in Hong Kong to expand its geographical footprint. It has also opened a representative office in China to streamline its import activities.
GROWTH DRIVERS:
Under the current expansion plan, HCIL’s distillation capacity will double to around 0.5 million tonnes by the end of FY09. Similarly, its 50,000-tpa carbon black plant will be commissioned during the year, while the full benefits of the advance carbon plant commissioned in January ’08 will also be available to the company. These will drive HCIL’s sales growth during FY09. On the other hand, the margins will be maintained at the current levels, thanks to rising demand and new value-added products.
The aluminium industry, which consumes nearly 80% of the coal tar pitch produced globally, is expected to grow at a CAGR of 7.5% over the next 3-4 years and the production of steel representing around 13% of the CTP consumption, is growing at around 6%. This, in turn, will boost demand for coal tar pitch.
FINANCIALS:
Since FY01, HCIL’s net profits have increased at a CAGR of 110% to Rs 323.3 crore in FY07 while sales have posted a CAGR of 32.5%. In the same period, the RoCE improved from less than 10% to 30%. During the quarter ended December ’07, HCIL posted 30% growth in net profit despite a 3% increase in revenues. The sales growth appeared muted mainly because of a weak pricing scenario. However, HCIL improved its operating margins even as its other income came down sharply.
VALUATIONS:
As HCIL’s expanded coal tar distillation capacities come on stream over the next year, the company is likely to nearly double its operating profits. Taking into account the recent preferential warrant issue, HCIL’s equity on a fully diluted basis stands at Rs 34.27 crore. It is expected to post earnings of Rs 39.9 per share for FY09 — nearly 70% above the EPS of 23.4 projected for FY08. This provides an attractive opportunity for long-term investors.
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