Stock Review: Kanoria Chemicals

 

The scrip of commodity chemical manufacturer Kanoria Chemicals hit the upper circuit of 20% on Monday in the wake of its decision to sell its chlor-alkali chemicals business for . 830 crore to Aditya Birla Chemicals. The sum will not only retire its entire debt, but will leave it with around . 375-400 crore to invest in its other business for organic and inorganic growth. The deal appears exceedingly positive for the company, but what the retail shareholders will derive out of it will depend on how the company utilises the funds.

Chlor-alkali and their derivatives have been a growing business for Kanoria Chemicals, contributing nearly three-fourth of total revenues during the 12-month period ended December 2010 from just about twothird in FY08. The deal will cover 115,000 tonnes per annum (TPA) caustic soda plant with associated chlorine derivatives, 50 MW captive power plants with coal linkage and salt works at Gandhidham, Gujarat. The deal values the fully integrated chlor-alkali business at about 2.1 times its revenues for the 12-month period ended December 2010. However, considering the just 11.1% PBIT margins, the deal size is 18.8 times the profit before interest and tax, which appears expensive.

Post the deal, Kanoria Chemicals will be left with its alcohol derivatives business in Ankleshwar, which manufactures products such as acetic acid and pentaerythritol. During the 12-month period ended December 2010, this business generated revenues of . 140 crore with profit before interest and tax at . 6.1 crore.

The company recently set up a 105,000 TPA formaldehyde plant in Vizag based on imported methanol and is in the process of setting up a 5,600 TPA hexamine capacity as forward integration.

While the deal is set to complete by end of next month, Kanoria Chemicals is yet to decide on what to do with the money. Earlier examples of companies selling chunks of their businesses on a slump sale basis such as Gwalior Chemicals or Piramal Healthcare show that retail investors do not benefit much out of such deals.

It needs to be seen if Kanoria Chemicals will reward shareholders directly or by creating a larger assetbase for higher future profits. The last thing a shareholder would like to see . 400 crore invested in liquid instruments earning 8% a year is.