Gujarat Alkalies & Chemicals Ltd - Rs 70.00

Established in 1973, Gujarat Alkalies & Chemicals Ltd (GACL) has emerged as the largest producer of caustic soda in India commanding a market share of 18% in domestic chlor-alkali industry. With Caustic-Chlorine being it's prime product, company has diversified into value added products like sodium cyanide, sodium ferrocyanide, chloromethanes, hydrochloric acid, potassium carbonate, phosphoric acid (85%), hydrogen peroxide etc. Its product portfolio of 26 chemicals provides dual benefit to the company by hedging against any cyclical fluctuations in the Chlor-Alkali Industry. Presently, company derives nearly 65% revenue from chlor alkali business and the rest 35% comes from the other value-added product. Thus company cater to host of industries like textiles, pulp & paper, soaps & detergents, alumina, water treatment, petroleum, fertilizers pharmaceuticals, agrochemicals, dyes & dyes intermediates to name a few. Besides company has made its presence felt across the globe by exporting products to USA, Europe, Australia, Africa, Far & Middle East countries, China and South Asian markets. Notably, GACL is accredited with IS/ISO 9001:2000, ISO 14001:2004 and IS 18001:2000 certifications and has been ranked among the top 25 listed Companies in respect of excellence in Corporate Governance by The Institute of Company Secretaries of India for last three consecutive years.

GACL is operating thru two manufacturing facilities located at Vadodara and Dahej which have dual advantage of proximity to the raw material suppliers and the end users. Notably, all its plants are running on Mercury free Membrane Cell Technology as company has converted from traditional mercury cell technology way back in 1989. On the back of regular expansion over the years, GACL now boast of having an installed capacity of 412,550 MT of caustic soda lye/caustic potash thereby enjoying the tremendous economies of scale and becoming one of the lowest cost producer of caustic soda. Despite such enormous capacity its plants are working at more than 100% capacity utilization against industry average of around 80%. Remarkably, most of the company’s plants are integrated in such a way that part of finished product of one plant is consumed input for the other plant. As power constitutes one of the major input costs, GACL has put up a captive co-generation power plant of 90 WM in Dahej which runs on cost effective natural gas. For this it has entered into contracts for supply of natural gas & regassified LNG with M/s. GAIL and GSPC. To meet its Vadodara complex power requirement, it has promoted a joint power generation company namely GIPCL and is also setting up captive renewable wind power facility in Kutch.

To maintain its growth momentum, last fiscal GACL successfully commissioned a new 12540 TPA hydrogen peroxide plant, 16500 TPA anhydrous aluminum chloride plant & 33000 TPA caustic flaking plant at Dahej. As a step towards achieving self sufficiency in energy requirements, company has recently set up 23.75 MW wind energy farm in Kutch. Maintaining its growth strategy, company is contemplating to commission sulphate removal system, set up another 330000 TPA caustic flaker unit and undertake expansion of caustic soda plant by 16500 TPA through de-bottlenecking of existing plant at Dahej in the current fiscal. It is also looking to add another 39 MW of wind power generation capacity at Kutch. Apart from all these GACL has signed a joint venture agreement with DOW Europe GmbH for setting up a 2,00,000 TPA Chloromethanes plant at Dahej at an estimated Cost of Rs.600 Crore with 50-50 equity partnership. A JV company with Dow-GACL SolVenture Ltd. has been incorporated on 1st July, 2008 in Gujarat. It is also considering putting up 90 MW captive power plant along with hydrazine, hydrogen peroxide & polyols project. The JV is expected to start its manufacturing operations by 2011 and will market its product in SAARC countries. To summarize, GACL has planned new projects involving investments of about Rs 2,500 cr over next 3 to 4 years, to diversify, add new products, enlarge portfolio and expand its existing capacities.

Despite being one of the lowest cost producers, performance of GACL depends a lot on the prices of its product which are quite volatile due to market dynamics. Secondly it also faces threat from cheap imports although anti dumping duty has been imposed on import of products like caustic soda lye/flakes and potassium carbonate from various countries. For H1FY09, GACL has reported encouraging set of nos as sales increased by 35% to Rs 729 cr but PAT grew marginally to Rs 138 cr due to substantial fall in other income. It has already clockedan EPS of Rs 19 for first half. Last fiscal, company had got Rs.16 crore compensation for CTC phase out under Montreal Protocol and Rs.16.50 crore against carbon credit. Considering all the factors, company may end the current year with sales of Rs 1250 cr and PAT of Rs 180 cr on conservative basis. This works out to an EPS of Rs 25 on current equity of Rs 73.40 cr. Although company has taken a hit due to mark-to-market loss on derivative exposure, still its not substantial and within company’s tolerance limit. Having an gross block of Rs 2200 cr, reserves to the tune of Rs 1000 cr (Book value Rs 147), low debt equity ratio of 0.3:1, EV/EBIDTA of approx 2x times, it’s a value buy at current market cap of merely Rs 500 cr. Long term investors can buy at current levels for 50% gain in 12~15 months.

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