Andhra Petrochemicals - Rs.14.20

Promoted by Andhra Pradesh Industrial Development Corporation and Andhra Sugars Ltd, Andhra Petrochemicals Ltd. (APL) was established as a joint sector company in 1984 with a licenced capacity to produce 30,000 MTPA of Oxoalcohols at Visakhapatnam. However, the company started commercial production from February 1994 only. Since then APL is almost the sole producer of Ox-Alcohol and its derivatives like N-Butanol, 2-Ethyl Hexanol and I-Butanol in India. Its products are used mainly for plasticizers, emulsion paints, adhesives, paper/textile processing, fuel additives, surfactants, mining, stabilizers, solvent extractions, agricultural chemicals, engine machinery lubrication etc. They are also used in rubber chemicals, printing inks, resins, pharmaceuticals, urethane catalysts, dyes, varnishes, nitro cellulose lacquers, acrylates, pesticides, etc.

APL’s manufacturing facility is located at Visakhapatnam (A.P) near the port and is equipped with imported technology supplied by M/s. Davy McKee Ltd., UK, now known as M/s. Davy Process Technology. It has an installed capacity of 39,000 MTPA but has been working above 100% capacity utilization since the last few years. In fact for FY06 it achieved an all time record production of 42,714 MTs, which will probably be beaten this fiscal. As APL is the only producer of oxo-alchohol in India, the rest of the demand is being met by imports. As per industry estimates, the demand for Oxo-Alcohols will continues to rise at 8% p.a. in coming years. This means that the company has a huge potential to expand. Although it has no such plans at present, it intends to do so in future to beat the competition form cheaper imports and increase its market share. Meanwhile, in order to bring down the power cost, the company has initiated steps to install an Uninterrupted Power Supply (UPS) system to feed all essential equipment drives, which will enable the captive D.G. sets to normally shut down and operate only as emergency generators during power failure.

Since crude oil prices were very high in FY06 and as Propylene/Naphtha are the main raw materials for APL, its financial performance was under severe pressure in FY06. This year, however, crude prices have fallen drastically below $60 per barrel and hence APL has made a strong turnaround. For the first nine months ending 31st December 2006, its sales improved by 35% to Rs.184 cr. but net profit increased by more than six times to Rs.20 cr. More importantly, its PBT stood at Rs.36 cr., which translates into an annualized EPS earning before tax of Rs.6. Accordingly, for the full year FY07, it may report a turnover of Rs.250 cr. with PAT of Rs.30 cr., which translates into an EPS of Rs.3.50 on its equity of Rs.85 cr. It may declare a maiden dividend of 7.5% for FY07, which amounts to a yield of more than 5% at CMP. Although APL is endeavouring for restoration of input tax credit on naphtha, the prospects of the industry are still dependent on the government policies concerning VAT and petroleum prices. Investors are advised to buy at current levels with a price target of Rs.24 i.e. 70% return in 15-18 months.