Aditya Birla Chemicals

Considering its strong financial fundamentals, Aditya Birla Chemicals stands out as a value buy for long-term investors

 

THE valuation of Aditya Birla Chemicals has historically remained low, despite its strong profit margins, a healthy track record of cash generation and an improved balance sheet. Although the company is operating in an industry that is currently in a downturn, long-term investors can consider the stock to benefit from the next upturn.

BUSINESS:

Aditya Birla Chemicals (India) (ABCIL), which was earlier known as Bihar Caustic, is a 51.3% subsidiary of Hindalco Industries with other promoter group companies holding additional 5%. The company is a leading producer of inorganic chemicals, such as caustic soda, chlorine, hydrogen and their derivatives including hydrochloric acid, aluminium chloride and bleaching powder. The company has its 105,000 tonne per annum (TPA) caustic soda plant along with 30MW captive power plant in Jharkhand. Caustic soda is used in industries such as pulp and paper, textiles, aluminium and detergents and the company has leading players like Hindalco, Balco, SRF, HUL and JK Paper as its clients.

GROWTH DRIVERS:

The company has emerged an integrated player in chlor-alkali space with investments in downstream chemicals to utilise the chlorine produced. The company has regularly expanded caustic soda capacities from 51,000 TPA in FY05 to 105,000 TPA by FY09 and plans to expand it further. Last year, the company also commissioned 17,000 TPA bleaching powder plant.Being a commodity chemical, caustic soda prices are cyclical in nature. The capacity addition reached a peak in FY09 when demand growth slowed down. As a result, the prices of caustic soda fell around 20% in FY10 against the year-ago period. However, with the worst over, the demand as well as prices of caustic soda is expected to stabilise and improve in the coming years. 

   Improving capacity utilisation and capacity addition in the pulp and paper, textiles and aluminium industry is expected to improve demand for caustic soda as global economic recovery picks up.

FINANCIALS:

ABCIL's net profit grew at a cumulative annual growth rate (CAGR) of 45.7% between FY03 and FY08, but has stagnated in the past two years. Though the company posted a 45.8% rise in profits in the first half of FY10, it fell 67% in the quarter ended December 2009 as the company was closed for a planned maintenance. 

   In the past five years, the company has maintained its operating profit margin above 40% and the net profit margin above 23%. Its return on capital employed (RoCE) also has consistently remained above 20% in the past five years. 

   The company has consistently brought down its debt for the past four years, which if adjusted for cash, fell below one-tenth of its net worth for FY09. Considering its strong operating cash flows, the company could end up with more cash than its outstanding debt when it closes its accounts for FY10.

VALUATIONS:

ABCIL's shares are currently trading at 3.8 times its earnings for the past 12 months. The scrip is trading at 25% discount to its FY09 book value. The company has historically distributed less than 10% of its profits as dividends, which was Rs 1.5 per share for FY09. At the current market price, this gives a yield of 1.9%.

RISKS:

The company's profit growth could get prolonged if the global economic growth stagnates. Higher coal prices or a jump in cheap imports could keep the industry outlook negative for a while.