Chemfab Alkalies Ltd - 95.00 Rs

Incorporated in 1983 and promoted by Dr C H Krishnamurthi Rao, Chemfab Alkalies Ltd (CAL) is a reputed manufacturer of caustic soda, liquid chlorine, hydrogen gas, hydrochloric acid, sodium hypochlorite, bleach liquor and barium sulphate in south India. Infact, it boasts of being the first in the country to introduce pollution-free Membrane-Cell technology which became the trendsetter in the chlor-alkali industry. It is also the first company in India to manufacture barium sulphate from solid waste and even holds a patent for the same. It also produces industrial grade salt for captive consumption. The company’s products are consumed by variety of industries like aluminium, textiles, paper, soaps, PVC, water treatment, vanaspathi, etc. Post its amalgamation with Membrane Technologies Ltd in 2006, it now manufactures water purifying machinery & sells packaged drinking water under brand name “TEAM”. But most importantly, company has lately diversified into fast growing retail health care segment and has already opened ‘Team Health Shoppe’ in three locations at Chennai to market its own ‘Team Eubio’ care products as well as proven products from other manufacturers. Thru these outlets it offers a range of health care, body care, beauty care, skin care hair care and other nutritional food products. Its ‘Energy Herbal Water’ which can neutralize acidic wastes in the body and reduce weight has been a super hit and is witnessing strong demand. Presently, company derives 80% of revenue from chlor-alkali segment whereas balance 20% comes from water and heath care segment.

CAL plant is located on the east coast region about 500 mtrs from seashore at Kalapet in Pondichery. It has its own 110KV sub-station and receives power from Pondichery electricity department. Other than power and water, the key input for Chlor-Alkali plant is salt for which company has gone for backward integration and put up a salt field about 40 km from its manufacturing site. Notably, company has the lowest water consumption ratio for producing per ton of caustic soda. For FY07 it produced 41,027 MT of caustic soda against 38,725 MT in FY06. Incidentally, on its merger with Membrane Technologies, CAL has become the only manufacturer of multi bore hollow fibre ultra filtration membranes in India, the patents for which is held by Dr Rao Holdings - a Singapore based associate company. The international marketing of this special type membrane is done by global giant M/s Dupont. On the other hand, company has been successful in creating a good brand image and reputation as a quality bottled water manufacturer and is now spreading its marketing operations to Bangalore and Hyderabad as well. It is also getting lot of enquiries for franchise of ‘TEAM Health Shoppe’, but company prefers to have its own outlets and is looking out for suitable space, for additional outlets in Chennai and other important cities. On the manufacturing front, company has plans to increase its caustic soda capacity to 66,000 tonne a year in future. Besides, being the largest producer and seller of ultra pure hydrogen with 99.9999+ range, CAL has appealed to the government to employ compressed hydrogen gas as an automobile fuel, since it’s more safer, economical & environment friendly. In foreseeable future, it may also diversify into production of linear alkyl benzene, monochloro acidic acid, hydrogen peroxide and other chemicals from olefins.

Unfortunately, despite getting clearance from Pondichery govt, CAL’s desalination project is on hold due to protest from local fisherman. Also few months back, company has to suspend its production in caustic soda plant on account of some labor unrest. Accordingly, for the first six months the sales remain flat at 50 cr but NP declined by 25% to 8.25 cr. Hence the scrip hasn’t participated in this whole bullrun and is moving in a very narrow range. But it seems all the negatives have been factored in the share price and the risk reward now favors bulls. Secondly, with substantial additional caustic consumption coming up especially in the aluminium segment, the demand-supply scenario for caustic soda is expected to remain favorable in future. Also given the increasing distaste for synthetic products and high risk of side effects, people have started turning towards natural and herbal products for medicaments, cosmetics and nutrients, which augurs well for its health care division. To conclude, company can register sales of 110 cr and PAT of 16.50 cr for FY08 i.e. EPS of 18 Rs on equity of 4.59 cr having face value of 5 Rs per share. With a dividend yield of more than 5%, promoter holding 74%, P/E ratio at 5x times, gross block as 130 cr, the company is available fairly cheap at current enterprise value of approx 100 cr. Moreover it has the potential to register EPS of 22~24 Rs for FY09. Investors are strongly recommended to buy at current levels with expectation of 50% return in 12 months time.