Stock Review: Thirumalai Chemicals

This is a Chennai based company that has their plant in Tamil Nadu. This company manufactures Phthalic Anhydride. It is the largest manufacturer of Phthalic Anhydride in the country with a total capacity of about 1.4 lakh tonne per annum and it is incidentally also one of the largest producers of Phthalic Anhydride in the world.

Phthalic Anhydride is a chemical which is used mainly by the paint industry. Besides paint, the other industry segments which use this chemical are dyes and chemical, other PVC and polyester resin. If you look at the background and financials of the company, it has been making healthy profits for the past 20 years, except for one-two years when it made a loss. It has been paying dividends for the past 20 years and the dividend payout ratios have been extremely generous.

In fact, if you look at past track record of the company, this company's payout ratio is to the extent of about 25-30% with dividends as high as 90-100% also in FY07-FY08. Then FY09 came where the company made a huge loss of about Rs 46 crore. The Rs 35 crore loss, was mainly on account of forex hedging which the company suffered and there was loss from operations of about Rs 9 crore.

The company has recouped from that loss in FY10 and it has posted a profit of about Rs 26 crore. Out of this Rs 26 crore, around Rs 9 crore is on account of forex gains, which means that profit from operations is about Rs 17 crore. In the first half of the current financial year, this company has made a turnover of close to Rs 400 crore which is up by about 45%. Profits have more or less been flat at about Rs 10 crore for half year.

This company has a 20 year track record of payment of dividend, EPS on trailing 12-month basis is about Rs 25 which means that at the current price of about Rs 125, the stock is available at a P/E multiple of about 5. Last year the company paid a dividend of 50% which means a dividend yield of around 4% at the current price.

This is an industry where China has been a net importer of Phthalic Anhydride, which the industry people say that at least till 2014-2015 the possibility of China dumping the chemical is not there and there are very few players in the industry because of high entry barriers on account of high capital cost, which are required for setting up the projects.

It recently expanded its capacity from 1.1 to 1.4 lakh tonne per annum, the benefits of which will start accruing to the company from this financial year. It is an extremely investor friendly company where dividend payouts have been extremely generous for the minority investors and it is available at extremely reasonable valuation of P/E multiple of just about 5-6.

The downside from these levels look restricted. Of course, the short-term concern is increasing oil price but given the position of the company, it maybe able to pass on the increased cost onto the customer. Of course the short-term concern is there, but the stock price has been hammered down because of this concern and at about Rs 120-125 this stock warrants a buy.