Stock Review: Punj Alkalies

The Punjab government has actually come out with a disinvestment process and there are 14 companies, of which 12 are qualified bidders for the company. The company is sitting on capacity of 99,000 tonne, the second largest capacity in caustic soda in India.

The expression of interest will come for financial bids. I expect at least Rs 55-58 per share from the bidders. I feel at that price, the value of the company under the current stance is totally justified from a replacement cost basis.

This is one company which is being sold to these players on expression of interest, on inviting bids. So, I do not see any reasons why the company should not be paid replacement cost. There might be even a premium. Players like Grasim, Bhushan Steel and Power and Nirma are bidding.

If I look at the financial of the company, it is into distress for sure because the company is posting negative earnings per share (EPS) for almost three-four quarters. Why? This is because they do not have a captive power plant. So, a capacity of one lakh tonne will, if I try to replace with the new plant, cost me close to Rs 350-425 crore.

If I take a stance from what has happened in three-four years into the caustic soda space and similar kind of businesses, Meghmani Organics' subsidiary Meghmani Finechem announced the chlor alkali plant for Rs 500 crore odd partnering with international finance corporation for a total of 1.1 lakh tonne. That means for 99,000 tonne, without the power plant, the valuation should come around Rs 270-280 crore.

If I trace back Bangladesh event of T.K group, through their subsidiaries, Samudra Chemical, they have actually gone for a Greenfield expansion. The company actually invested 2.1 billion taka for 100 tonne per day. Punjab Alkalies' capacity is 300 tonne per day. If I take 330 working days for the company, that gives me a valuation of Rs 387 crore. By subtracting that Rs 100 crore odd, it gives me Rs 280 crore on a replacement cost basis.

If I take the announcement from Nirma, they actually announced that they wanted to expand 240 tonne per day plant in 2007 in a place called Kala Talao for Rs 170 crore. Nirma is one of the bidders for the company. I think for the enterprise value the company should be bided at least at Rs 175-180 crore. The company is sitting on a Rs 80 crore debt, and Rs 100 crore should be the market cap for the company, that should be paid.

Apart from this, if I look into the company's balance sheet, the company is sitting on a freehold land of Rs 30 crore odd and also Rs 20 crore are recoverable in cash and kind in terms of advances. So, if I take all this maths, the total should come around Rs 230 crore odd. The 45% offer from the government will trigger a fresh open offer of 90%. The market is playing that it should come around that Rs 50 odd mark for the expression of interest. But I would be surprised if it comes below Rs 55 on any conservative side. If I take a calculation, 40% of your shares would be definitely acceptable.

If a plant of this size is actually given a co-gen plant, power plant, the company can save upto Rs 5-6 EPS. I expect even a Brownfield expansion onto the existing plant to the tune of 40,000 tonne.

If I see Gujarat Alkali, which is sitting on an enterprise value of closer to Rs 1,200 odd mark, with the largest capacity of 4.5 lakh tonne and this is almost one-fourth of the capacity, I think the company can trade with an enterprise value of Rs 300-400 crore in days to come.

I would like to see who is actually going to take this particular company. I have not gone through the entire profile of all the bidders. But if it is Nirma, they have already gone for the delisting of their own shares, so they would definitely go for the delisting of this particular company. Thus, I feel even the residual stake from the public can be taken at Rs 55-57.

I think this is one stock which can be bought at today's opening because the stock was at down circuit yesterday. People are feeling that Rs 50 is what they will get for the share. I think this stock from two-three years perspective, if at all it will be listed, can be true multi-bagger. Thus, I have recommended the same to our clients.