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.

Tamilnadu Newsprint & Paper - 100.00 Rs

Incorporated in 1979, Tamilnadu Newsprint & Paper Ltd (TNPL) was promoted by the Government of Tamil Nadu who still hold around 35% stake in the company. Inspite of being a public sector company, TNPL pioneered the concept of producing paper from Bagasse, namely sugarcane waste thereby using as little wood as possible. Today apart from being one of the lowest cost manufacturer, company boast of having the world’s largest bagasse based paper mill with a capacity of 2,30,000 TPA. It is also the largest exporter of wood free paper from India. TNPL basically manufactures printing and writing paper comprising cream wove, copier and mapiltho paper for business stationery, classical writing, computer stationery and other commercial and quality printing. It offers a range of high-quality surface sized maplitho paper to suit any kind of printing - sheet-fed or web-offset. It is the undisputed market leader for computer stationery in domestic market. It also derives nearly 2% revenue from newsprint. Presently company’s product is exported to over 20 countries across Asia-Pacific, Australia, Middle East, the Mediterranean and the African subcontinent.

TNPL is acknowledged as the world leader in technology for the manufacture of paper from bagasse and has the most modern paper mill in the country with unique bagasse procurement, storing, preserving, handling, processing and pulping system. Ironically, due to this technology it actually avoids the chopping down of trees in about 30000 acres of forest land every year. However it maintains a relationship of 65:35 for bagasse and wood pulp in production to ensure high quality of the paper. To cater the increasing paper demand and become a global player, TNPL has implemented Phase-I of Mill Development Plan envisaging increase in captive pulp production capacity from 170,000 TPA to 260,000 TPA with element chlorine free (ECF) bleaching at a capital outlay of Rs 565 Crore. This will also increase the paper production capacity by 15,000 tonnes to 245,000 TPA and is expected to become operational from Oct 2007. Till now company has substantially raised pulpwood plantation in 19349 acres through farm forestry and captive plantation schemes to meet the growing needs of pulp wood. Importantly, TNPL is self-sufficient in power having in-house captive power generation capacity of 61.12 MW and another 35.50 MW thru wind farm. Still in the current year it will be increased to 81.12 MW by adding a new 20MW turbo generator and surplus power will be exported to the State grid.

Post completion of Phase-I of mill development plan, TNPL will start implementing Phase-II to hike to hike its paper production capacities to 400,000 TPA by Sept 2009 thru a capex of 680 cr. Besides, company has entered into the carbon trading by having got its Bio-methanation plant registered as CDM project with UNFCCC and is expected to get 37000 CER as carbon credit till 2013. Moreover it has plans to establish a mini cement plant with a capacity of 400 tpd for producing high grade cement using the lime sludge and fly ash generated in the process of manufacture of paper. TNPL is also contemplating to construct an IT Park measuring an office area of 4 lakhs sq. ft. on its surplus land.

Financially as well as fundamentally company is on a strong footing, but however has a huge debt of more than 550 crore. For FY07 it reported highest ever production and sales of 231,161 tonnes with more than 100% capacity utilization. Net sales grew by 10% to 855 cr buy PBT increased by 25% to 125. Due to higher tax provisioning NP rose only 7% to 86 cr. It reported an EPS of more than 12 Rs on equity of 69 cr and declared 40% dividend for entire year. On the back of robust paper prices, it reported encouraging nos for the June qtr and is expected to end FY08 with sales of 1000cr and PAT of 110 cr i.e. EPS of 16 Rs on current equity. Hence investors are recommended to buy at declines with a price target of 130 Rs in 9~12 months.

STOCK WATCH

Aro Granite(100.00) is one of the largest manufacturer and exporter of modular granite tiles and slabs with the share of more than 5% of India’s total export of granite products. Inspite of sharp rupee appreciation in last few months it managed to report satisfactory nos for the June qtr. Total revenue was flat at 25 cr but PAT declined by 10% to 3.70 cr registering an quarterly EPS of more than 5 Rs. To meet the increasing demand, company is increasing its tile capacity substantially to 5,40,000 sq mtr from 1,80,000 sq mtr, whereas slab capacity will be enhanced to 3,90,000 sq mtr from 2,95,000 st mtr. This expansion got delayed a bit and is now expected to get complete in current month only ie July 2007. So the revenue from the expansion will start kicking in from the third quarter of current year. Hence, it may clock a turnover of 150 cr and NP of 19 cr for FY08. This translates into EPS of 26 Rs on equity of 7 cr. At a modest discounting by 6x times, it should trade above 150 Rs. Moreover FY09 will be a bumper year for the company due to full impact of expansion. Hence, despite lack lustre performance for the June qtr scrip hasn’t fallen and is infact being accumulated by shrewed investors.

After encouraging nos for the March quarter GNFC (130.00) has once again announced excellent result for June quarter. Despite some disruption in its plant in early June, it reported net sales of 574 cr and PAT of 76 cr. Company is working towards converting its Ammonia Feed Stock from Low Sulphur Hay Stock (LSHS) to natural gas and will be the first company to do so. Secondly it is also planning a Nitrous Oxide (N2O) Abatement project under a clean development mechanism which will fetch additional 18 cr thru carbon credit. It is also gradually ramping up both its methanol plants at an investment of Rs 140 crore and is putting up a Precipitated Calcium Carbonate olant with a capacity of 100 MTPD. Accordingly for FY08 it may report a total revenue of 3000 cr and PAT of 400 cr i.e. EPS of 26 Rs on equity of 155.50 cr. Hence at a P/E ratio of 6x times share price can touch 150~160 Rs in short term. Moreover scrip is trading cum dividend of 4.25 Rs.

Artson Engineering (46.00) is basically engaged in business of manufacturing tanks and terminals for refineries and petroleum companies thereby specializing in petroleum storage and handling systems. Being a BIFR company and due to non-availability of bank guarantees and other funding facilities, it is operating at much reduced capacity. But recently its CDR has been approved and Tata Project is expected to take a controlling stake in the company around Sept 2007 by infusing fresh capital. As soon as this takes place, the share price will shoot up sharply on back of re-rating by the marketmen. Besides, considering its half yly nos company is expected to end FY07 (Sept ending) with a topline of 40 cr and profit of 5.50 cr i.e. EPS of 6 Rs on equity of 9.20 cr. Moreover, along with Tata Project it has already bid for around 300 cr contract in India and UAE combined. This means company is going to see a phenomenol growth in coming years and its better to catch the scrip young.

Recently, Torrent Cables (214.00) has once again come out with flying colours for the June qtr. Sales increased by impressive 30% to 56 cr but NP zoomed up 150% to 7.30 cr registering an EPS of 10 Rs for the quarter. Notably from the last three quarters its operating margin has stabalised around 20% which is quite healthy.With huge investments lined up for power sector, demand for power cables is expected to increase substiantially in future. In order to withstand the competion and sustain future growth company is increasing its market reach through its channel partners and is also contemplating some expansion plan. Meanwhile for FY08 it is expected to clock a turnover of 250 cr and NP of 27 cr which leads to an EPS 36 Rs on small equity of 7.50 cr. Having huge reserves of around 60 cr, company may even declare liberal bonus in future.A good bet for medium to long term.