Thirumalai Chemicals Ltd - 175.00 Rs

Incorporated in 1972, Thirumalai Chemicals Ltd (TCL) was established by NS Iyengar group for the manufacturer of phthalic anhydride (PAN) with an initial installed capacity of 7500 MTPA based on the technology supplied by Ch.F.Von Heyden and Davy Power Gas, Germany. Today, TCL has world scale plants for manufacturing diverse products including phthalic anhydride (PAN), maleic anhydride (MAN), fumaric acid, pthalate esters, food acids etc. Incidentally, PAN is the main product of company as more 75 % of revenue comes from it. Plasticizers, pigments and resins have been the major sectors consuming PAN with plasticizers segment being the biggest. In short it manufactures and markets organic acids, anhydrides and derivatives for the plastics, paints, resin industries and additives for the food and feed industry. TCL also operates a shore tank terminal at Chennai, for storage and distribution of chemicals/solvents which is the first privately managed petrochemical terminal in South India

TCL manufacturing plant is located at Ranipet, Tamilnadu having an installed capacity of PAN - 100,000 tonne; MAN – 17,750 tonne; Food Acids - 17,000 tonne and Pthalate Esters – 6000 tonne. Despite having such large facilities, company was operating at 50% capacity utilization for so many years due to demand-supply mismatch. But off late demand for PAN has increased sharply from the pigment as well as resin sector. With no major additional capacities coming up, the situation has improved a lot and hence PAN prices have also shot up considerably. Accordingly company’s capacity utilization also improved to 75% for FY07. It is now targeting 100% capacity utilization for FY08. Interestingly, company has changed its marketing strategy by which customers are now offered contracts for regular supply on pre determined formula basis which has helped company to operate at higher levels. Due to this, while significant part of production is tied up, the balance of output is available for offer on spot basis as also for exports. TCL is also focusing on international market and has tripled its export in FY07 thereby contributing 20% of total revenue. As per industry reports, the demand of PAN is going outstrip supply in future which may lead to shortage of PAN. To cash on this situation, TCL has chalked out plans to increase productive capacity with little de-bottlenecking of existing PAN plant. It is also planning some capital expenditure to increase the PAN capacity by 40% to around 150,000 tonnes.

Unfortunately rampant dumping of MAN into the country from China at very low prices forced TCL to shut down its MAN plant to cater only to few loyal customers and for captive consumption. Although company has initiated actions for levy of anti dumping duty and is confident of being levied soon still cheap import of MAN is a cause of concern for the company. On the other hand, its Malaysian join venture company has almost completed the feed stock conversion from benzene to butane incurring major capital expenditure the new plant for manufacture of MAN from butane is expected to be commence production in few weeks by Aug 2007.

For FY07, company’s net sales jumped 50% to 543 cr whereas NP zoomed up 75% to 25 cr registering an EPS of 25 Rs on equity of 10.25 cr. On the back of better capacity utilization, for the June qtr its sales increased to an all time high of 180 cr up 25% and PAT improved by 15% to 11.40 cr i.e. EPS of 11 Rs for the quarter. Assuming a conservative OPM of 11%, it may end FY08 with sales of 675 cr and NP 33 cr. This works out to an EPS of 32 Rs on current equity. Investors are advised to accumulate this scrip at declines with a price target of 230 Rs in 9~12 months.