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Monday, August 22, 2016

Chemfab Alkalies - ROI @ 175% within 12 Months

Dear Reader,

We are pleased to inform you that our Hidden Gem stock of August 2015 - Chemfab Alkalies Ltd (BSE Code: 506894, NSE Code: CHEMFALKAL) which was released on 6th Sept'15 has given absolute returns of 175% to our Hidden Gems members within period of 1 year. Our team suggested Buy on Chemfab Alkalies Ltd at average price of Rs. 90.80 on 06 Sept'15 with a target price of Rs. 170, stock has already achieved its target price in matter of 10 months and we suggested our members to continue to hold the stock. Chemfab Alkalies stock made its 52 week high of Rs. 253 today and currently trading at Rs. 250 giving absolute returns of 175% to our Hidden Gems members within period of 12 months.

Company has posted strong set of numbers in June 2016 quarter, net profit of Chemfab Alkalies rose 294.27% to Rs 6.19 crore in Jun'16 as against Rs 1.57 crore during the previous quarter ended June 2015. Total income from operations rose 32.87% to Rs 30.48 crore in the quarter ended June 2016 as against Rs 22.94 crore during the previous quarter ended June 2015. 

We suggested our members to continue to hold the stock in our Hidden Gems Flash Back report released on 1st August 2016.

Below is the summary of Chemfab Alkalies Ltd shared by our team under Hidden Gem stock of August'15 released on 06th September 2015.

Note: This report is shared only for the purpose of information and not an investment advice. Kindly carry out your own due diligence in case of investment in Chemfab Alkalies. 

Company Background:

A Chennai based company Chemfab Alkalis Ltd (CAL) was incorporated in 1983. The company was promoted by M/s Titanium Equipment and Anode Manufacturing Company Limited. CAL manufactures chemicals for industrial applications. In June 2009, chlorates division has been closed permanently due to frequent power problems and labor unrest. Company established India’s first Membrane Cell Caustic Soda Plant and commenced production from July, 1985.

CAL is the first Indian company to use the power saving ion exchange membrane cell technology to manufacture caustic soda. Chemfab Alkalis (CAL) also produces Sodium Hypochlorite and sodium Chlorate and the bye products of caustic soda like chlorine and hydrozen. Chemfab Chlorates, a group company was amalgamated with Chemfab Alkalies Ltd during the year 2001-02 on the approval from High court of Madras.

The company has also takenover the management of Salt fields by the way of backward integration. The salt fields are situated at marakanam 25 kms from the factory of the company. Chemfab Alkalis was selected for the 1988 award of excellence in Environment Preservation and Pollution Control by the Federation of Indian Chambers of Commerce and Industry for its membrane cell technology which totally eliminated the use and disposal of mercury.

Products
  • Caustic Soda Lye in two grades (33% & 48%)
  • Liquid Chlorine
  • Hydrogen Gas
  • Hydrochloric Acid 
  • Sodium Hypochlorite / Bleach Liquor 
  • Barium Sulphate

The above products are completely free from mercury and are used in food processing industries as well.

The first ever pollutant free caustic soda in the country was from CAL. The quality of the products matches the requirements of BIS and meets international specifications.

CAL commenced the operation with the production capacity of 25 TPD and now operates at 100 TPD. The features of the plant recently revamped it’s with the latest-state-of-the-art BiTAC technology, and looking forward to double its production capacity to 200 TPD.

Chlor alkali market in India has witnessed healthy growth in recent years, largely driven by increasing demand from end user industries due to higher output from the chemicals sector. Chlor alkali market is broadly categorized into three segments, namely Caustic Soda, Chlorine and Soda Ash. Caustic Soda finds major application in diverse industries, such as soap & detergents, pulp & paper and textile processing among others. Chlorine is produced as a by-product during caustic soda production and is widely used during PVC manufacturing, drinking water disinfection and pharmaceutical production. Soda Ash is used mainly during glass, soap & detergent and silicate production.

With strong growth anticipated in all these end use industries, the market for chlor alkali in India is forecast to grow considerably in the next five years.

According to India Chlor Alkali Market Forecast & Opportunities, 2019, the market for chlor alkali in India is projected to exhibit a CAGR of around 7% during 2014-19. The market is expected to witness high penetration rate in the Western and Northern regions of the country. The market, though highly fragmented at present, is gradually moving towards consolidation, particularly with the entry of foreign players and expansion in distribution network of existing players. Among the three market segments, caustic soda held the highest revenue share, followed by chlorine and soda ash segments.

Soap & detergent is the main end user industry in the chlor alkali market, followed by glass, pulp &paper, alumina and other industries.

Research & Development

The Company has an in-house Research Development Department, where the main areas of focus are Energy Conservation, Process Upgradation and Environmental Preservation. The Ministry of Science and Technology, Department of Scientific and Industrial Research, Government of India, has recognized the Company’s inhouse R & D facilities, which is valid upto 31st March, 2017. The Company has a sophisticated Quality Assurance (QA) Laboratory recognized by DuPont, USA for the analysis of Chlor- Alkali brine.

The Brine from various Chlor- Alkali Industries in India is being analyzed at CAL-QA Laboratory. The Company continues to take all possible steps to conserve energy in every area of its operations recognized by DuPont, USA for the analysis of Chlor- Alkali brine. The Brine from various Chlor- Alkali Industries in India is being analyzed at CAL-QA Laboratory. The Company continues to take all possible steps to conserve energy in every area of its operations.

The company continues to use hydrogen gas instead of conventional fuel reducing the carbon footprint. The company has also installed solar street lightings and also the Bio Gas plant for replacing conventional energy sources by making investment of Rs. 10 lakhs.

2. Recent Developments: (as on 6th Sept'15)

i) Replacement of old plant with Bipolar BiTAC Electrolysers Plant from CEC, Japan.

In 2014, company introduced a new BiTAC® Electrolysers from CEC, Japan for the first time in the Country. The new Plant was commissioned during August 2014, and is operating well within the agreed operational parameters and will result in savings in energy consumption to the tune of 30% to 40%.

Company has also replaced the old Caustic Concentration plant with a new Plant and this was commissioned in the month of March 2015. This will also result in improved operational efficiencies.

ii) Ongoing Expansion Plans to drive Revenue Growth & Profitability

Company awaits the statutory clearances for its expansion plans and a favourable decision on its appeal before the National Green Tribunal. Company has also made plans for venturing into newer areas for Chlorine utilisation.

The Company is in the process of developing 632 acres of salt fields and the production of salt is expected to commence post completion of the development activities.

The new Salt fields which were acquired are slated to commence production shortly. With all these measures, management is confident that company is poised for a great leap ahead and achieving good results in the forthcoming years.

3. Financial Performance:

Chemfab Alkalis standalone net profit declines 51.69% in the June 2015 quarter

Net profit of Chemfab Alkalis declined 51.69% to Rs 1.57 crore in the quarter ended June 2015 as against Rs 3.25 crore during the previous quarter ended June 2014. Sales declined 25.78% to Rs 22.92 crore in the quarter ended June 2015 as against Rs 30.88 crore during the previous quarter ended June 2014.

Chemfab Alkalis standalone net profit declines 6.08% in the March 2015 quarter

Net profit of Chemfab Alkalis declined 6.08% to Rs 1.39 crore in the quarter ended March 2015 as against Rs 1.48 crore during the previous quarter ended March 2014. Sales rose 4.83% to Rs 25.60 crore in the quarter ended March 2015 as against Rs 24.42 crore during the previous quarter ended March 2014.

For the full year, net profit declined 37.81% to Rs 10.23 crore in the year ended March 2015 as against Rs 16.45 crore during the previous year ended March 2014. Sales declined 1.97% to Rs 109.85 crore in the year ended March 2015 as against Rs 112.06 crore during the previous year ended March 2014.

Company performance was impacted in FY 2014-15 mainly due to the fall in international caustic prices which averaged during the year between USD 320 – 340 per MT CIF. However, we believe that international caustic prices will remain in the range of USD 350-380 per MT CIF in the short term which will have a positive impact on company’s realizations.

Moreover, we believe company to post significant improvement in operating margins considering replacement of old caustic concentration plant with a new plant which was commissioned in the month of March 2015.

4. Peer Group Comparison:

5. Key Concerns & Risks:

i) The Rupee depreciation during the year will make imports cheaper, resulting in increased flow of caustic soda imports into the country thereby impacting company’s product realizations.

ii) International caustic prices were at USD 330-380 per MT CIF levels during the year and are expected to remain in this band in the short to medium term, any drop in prices below USD 330 will have a negative impact on company’s realizations. On the chlorine utilization front, slow demand growth continued to have an adverse impact on the Industry.

iii) Dependence on the grid power continues to be a risk though the Puducherry power scenario remains reasonably stable but with the cost of power continuing to be a concern. The Company is working with the Puducherry Government for the implementation of open access which would help de-risk our power sourcing.

6. Saral Gyan Recommendation: (as on 06 Sept'15)

i) Chlor-Alkali is the basic Heavy Chemical Industry, manufacturing Caustic Soda, with Chlorine, Hydrogen, Sodium Hypo Chlorate and Hydro Chloric Acid as by-products. Overall, the Financial Year 2014-15 was an average year for the Industry, primarily due to the fall in international caustic prices which averaged during the year between USD 320 – 340 per MT CIF. International caustic prices have now moved to USD 360-380 per MT CIF levels and are expected to remain in this band in the medium term which will have a positive impact on company’s realizations.

ii) Caustic Soda finds major application in diverse industries, such as soap & detergents, pulp & paper and textile processing among others. Chlorine is produced as a by-product during caustic soda production and is widely used during PVC manufacturing, drinking water disinfection and pharmaceutical production. With the rebound in the country’s GDP, the demand for caustic is likely to grow strong which will help company to boost its revenue growth with higher capacity utilization. However, slower chlorine demand is expected to continue to impact the capacity utilisation of the company.

iii) In 2014, company introduced new BiTAC® Electrolysers from CEC, Japan for the first time in the country. The new Plant was commissioned during August 2014, and is expected to result in savings in energy consumption to the tune of 30% to 40%. Company has also replaced its old caustic concentration plant with a new plant which was commissioned in Mar’15. These initiatives will help company to improve its profit margins significantly with increase in revenues going forward.

iv) With the rebound in the country’s GDP, the demand for caustic is likely to grow strong. However, slower chlorine demand is expected to continue to impact the capacity utilisation of the industry. The investments and efforts taken by the Company during last financial year are expected to result in significant savings in its manufacturing costs, especially power cost.

v) Company’s EBITDA and PAT margins are expected to improve significantly considering investments and efforts taken by the Company during last financial year which will result in significant savings in its manufacturing costs, especially power cost.
vi) Chemfab Alkalis is virtually debt free with reserves of Rs. 125 crores in its books which is much more than the company’s current market capital of Rs. 87 crores. Promoter’s shareholding is at 75% without pledging any shares and rest is held by non-institutional investors. FII and DII shareholding is nil in the company.

vii) Company awaits the statutory clearances for its expansion plans and a favourable decision on its appeal before the National Green Tribunal. Company has also made plans for venturing into newer areas for Chlorine utilisation. The new Salt fields which were acquired are slated to commence production shortly. With all these measures, management is confident that company is poised for a great leap ahead and achieving good results in the forthcoming years.

viii) Management has rewarded shareholders by paying regular dividend in the past. For FY 14-15, company has declared dividend of Rs. 1.25 per share.

ix) As per our estimates, Chemfab Alkalis Ltd can deliver bottom line of 13.5 crores for full financial year 2016, annualized EPS of Rs. 14.7 with forward P/E ratio of 6.4X for FY16. Valuation looks attractive for a debt free company with expected expansion in its profit margins.

x) On equity of Rs. 4.59 crore, the estimated annualized EPS for FY 15-16 works out to Rs. 14.7 and the Book Value per share is Rs. 142.86. At current market price of Rs. 94.40, stock price to book value is 0.66.

Considering recent initiatives taken by the management in terms of improving operational efficiencies and company’s expansion plans to drive business growth, Saral Gyan team recommends “Buy” on Chemfab Alkalis Ltd at current market price of Rs. 94.40 for target of Rs. 170 over a period of 12 to 24 months.

Buying Strategy:
  • 70% at current market price of 94.40
  • 30% at price range of 82-85 (in case of correction in stock price in near term)
Portfolio Allocation: 3% of your equity portfolio

To Read / Download Saral Gyan Hidden Gem - Aug'15 Research Report - Click Here

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Regards, 

Team - Saral Gyan