Savita Chemicals Ltd - Rs 140.00

Incorporated in 1961, Savita Chemicals Ltd (SCL) specializes in manufacturing of petroleum specialty products like transformer oil, liquid paraffin, petroleum jelly, white mineral oil, automotive and other industrial lubricants. With 40% market share, it is the leading supplier of transformer oil in India. It is also India’s largest exporter of petroleum specialty products to South Africa, Australia, Middle East & South East Asia. SCL also operates wind power plants in Maharashtra, Karnataka and Tamil Nadu. Presently, company derives 98% of revenue from petroleum products whereas the rest comes from wind power. Of the total petroleum products sales, transformer oil constitutes around 45% of sales, white oil & liquid paraffin’s around 35% and lubricating oil around 20%. Hence company caters to several varied industries as transformer oil is predominantly used in transformer, utilized in power industry and liquid paraffins/white oils are used in cosmetics, pharmaceutical, personal care products, printing & plastics. While automotive sector and industrial units are major markets for its lubricants. In short company’s fortune is not dependent on one particular industry. Its clientele includes several SEB’s and almost all major power equipment manufacturers like ABB, BHEL, Crompton Greaves, Areava T&D, Bharat Bijlee, Reliance Power etc, FMCG players like Johnson & Johnson, HLL, Dabur, Marico etc and Pharma companies like Pfizer, GSK and others.

SCL’s ultra modern manufacturing facilities are located at Navi Mumbai and Silvassa where it has been regularly expanding its capacity to cater more efficiently to the growing domestic as well as foreign demand. Presently, it has a total installed capacity of 216,000 KL per annum against which it made a production of 205,122 KL for FY08, representing 95% of capacity utilization. As a part of its growth strategy, SCL is working on a Greenfield project with an investment of Rs. 15-20 crore for petroleum products to augment the capacity by around 25~30%. Last year it introduced a new brand named SAVSOL in lubricating division which is doing very well and is expected to generate sales revenue of more than Rs 100 cr in the current year. It also has a tie-up with Idemitsu, Japan to market its “Idemitsu”range of automotive lubricant and “Daphne” range of industrial lubricants which rated one of the best in the world. On the other hand, to avail tax benefits along with good realizations for power being sold to SEBs after captive consumption, SCL, last fiscal increased the installed capacity for wind energy generation to 26.3 MW from 21.8 MW. Further it has planned a capex of Rs 40 crore, so as to augment the capacity to 34.9 MW in the current year.

With ambitious targets set for the power sector and massive investments lined up in generation, transmission and distribution segment, the demand for transformer oil will continue to grow substantially in coming years. Automotive lubricant being a consumable item is expected to do well as the number of vehicles on road has shot up significantly in past few years. Similarly, the market for liquid paraffins and white oils will also grow in line with the growing importance for personal hygiene amongst the masses. However despite the promising future ahead, SCL’s profitability mainly depends upon the price of base oil which is the major raw material for all its petroleum products and is a refined fraction derived from crude oil. Hence, company’s margin was under tremendous pressure when crude oil price shot up to US$ 130 per barrel. But with the recent fall in crude oil prices to below US$ 50 levels, company is expected to report improved margin and healthy bottomline in coming quarters. Accordingly it may clock a turnover of Rs 1000 cr and NP of Rs 45 cr for FY08 which leads to an EPS of Rs 31 on equity of Rs 14.60 cr. Having a healthy book value of Rs 171, promoter holding of 71%, dividend yield of around 6~7% & very low debt equity ratio of 0.14x this company is available fairly cheap at a market cap of less than Rs 200 cr. Investors are recommended to buy at current levels and add on declines for a 50% return in 9~12 months.

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