Clariant India: Buy on declines

Recommendation: Buy on Declines

Anup Menon

THE stock of Clariant India may be a good investment option for a portfolio with a moderate risk profile.

Trading at around Rs 87, the stock is valued at a price earnings multiple of around 5 times its latest annualised earnings per share.

The company's earnings performance for fiscal 2002 first quarter was fairly impressive, especially given the overall state of the specialty chemicals industry. The growth prospects are likely to be subdued over the next few quarters. On a relative basis, the stock valuation seems to be in line with the fundamentals. In this backdrop, the shareholders can use any decline in prices to take fresh exposures in the stock.

Earnings performance: The earnings performance of the company for the first quarter of fiscal 2001-2002 was fairly impressive. For instance, a significant indicator of both future prospects and the present state of the company is the topline growth. For the first quarter this fiscal, Clariant India managed a 12.58 per cent growth to Rs 72.96 crore compared to Rs 64.81 crore the previous year.

The topline growth rate is commendable given the state of the specialty chemicals industry. With most user-industries, such as textiles and leather, going through a sluggish phase, the growth rates in this fiscal were not expected to be high. However, Clariant India managed to clock reasonably good growth rates in different segments including masterbatches and paper chemicals which helped improve the topline. A similar performance can be expected over the next three quarters.

Operating performance: The company's operational efficiency can best be appraised from the operating margin clocked during the quarter. It improved marginally from 10.66 per cent in the previous year to 11.54 per cent. The total operating expenditure during this period rose 11.73 per cent to Rs 66.02 crore compared to Rs 59.09 crore the previous year.

Obviously, the company has been keeping its operating costs on a tight leash. Realising that given the conditions in the economy, the topline growth could be constrained, the company has kept its costs under check in order to prevent a slide in profitability. The company has managed this for the first quarter and the trend is likely to sustain over the next few quarters.

Financial and other expenses: Investors need not worry over the financial expenses. The debt portion in the capital structure is minuscule and, therefore, no major spike in cash outflow on account of financial expenses is expected. The company plans to invest Rs 3 crore to expand and strengthen its distribution network. But this is not likely to impact the company's financial risk profile, which is sound at the moment.

Post-tax earnings: The post-tax earnings have improved around 24 per cent to Rs 5.02 crore against Rs 4.06 crore the previous year. On the equity base of Rs 11.93 crore, the annualised earnings per share works out to around Rs 17.

Prospects: Though the near-term prospects for the industry are bleak, the outlook for the company is relatively good. Given the state of the economy, the full-year performance may show reasonable improvement. The company plans to introduce 64 new products this year. Though it may take some time for these products to start contributing to the bottomline, this strategy will help the company at least maintain its topline growth. Further, the investment to improve the distribution network should work in the company's favour. In this backdrop, the company's performance for the full fiscal may be moderately good.