IOL Chemicals: Expansion to change fortunes

THE stock of Punjab-based IOL Chemicals has grossly underperformed the market in the past one year, falling nearly 50% despite a 65% jump in the Sensex — the primary reason being its weak performance in the first half of FY10. However, going by the company’s December ‘09 quarter results, there could be a change in fortunes. For the past couple of years, IOL Chemicals was implementing expansion and backward integration projects with a capex of Rs 256 crore, which it completed only recently. The company set up a 6,600-tonne per annum (TPA) plant to manufacture isobutyl benzene (IBB), which is the key intermediate in manufacturing ibuprofen. With a capacity of 3,600 TPA of ibuprofen, the company is already the second largest in the world and plans to raise its capacity to 6,000 TPA by mid-FY11 to emerge as the world’s largest producer of this anti-inflammatory drug. Over the past nine months, the company has set up plants for mono-chloro acetic acid (MCA) and acetyl chloride, which are the other key raw materials in the manufacture of ibuprofen and use IOL’s other products — acetic acid and acetic anhydride — as inputs. In addition, it has also set up a 13-MW captive power plant, using coal or rice husk as fuel. IOL Chemicals, earlier known as Industrial Organics, is a turnaround story. In FY03, the company’s net worth had turned negative. But thanks to equity infusion, there was a turnaround. Since then, its net worth has grown at a cumulative annualised growth rate (CAGR) of 87%. The debt-to-equity (D/E) ratio, which was 6.1 at the end of FY04 came down to 1.6 by the end of FY08. It moved up to 2.2 by end of FY09 due to the expansion project. The company is repaying close to Rs 35 crore of debt annually, which can reduce the D/E ratio to one by the end of FY11. IOL Chemicals’ performance during the first half of FY10 was impacted by low acetic acid prices, which forced it to run its 50,000-TPA acetic acid plant below capacity. The company was using nearly 80% of its acetic acid production for captive consumption in FY09, which could go up to 100% in view of the new derivative capacities commissioned. However, its December ‘09 quarter showed a multi-fold profit growth that went unnoticed by the market due to the weak sentiment. The company’s capital investment programme for the past couple of years is expected to bring in additional revenues and profits in the coming quarters. The prospects for the company’s scrip, which is trading below its book value and at a price-to-earnings (P/E) multiple of 7.7, appear to be reasonably bright.