The Hindu Business Line : Atul: Hold/buy on declines

SHAREHOLDERS can retain their holdings in Atul, a member of the Lalbhai Group, taking into consideration the improved growth prospects, its eminent position in the dye segment and the company's increased focus on value-added products. Fresh exposures can be considered on declines as the stock has run up sharply in the past one month. It now trades at Rs 70, six times its trailing twelve-month earnings.

Atul makes dye and dye intermediaries, organic chemicals, aromatics, epoxy resins and pharma intermediaries. The company's largest division — colors — accounts for 43 per cent of its revenues; the supplies are mainly to textile, leather, paper, wool and silk industries. The company is also one of the largest manufacturers of cresol and its derivatives in Asia, which is supplied to pharma and cosmetic manufacturers.

Firm price trends: The prices of most of Atul's finished products have been firm for the past three months. For instance, those of cresol derivatives, gamma acid and caustic soda flakes have risen; prices of sulphanilic acid and H-acid, which had dipped in the first half of FY2004, are now firming up. If the firm trend in most of its products persists, then Atul is in for a good show in the coming quarters.

Pressure on margins: The cheaper imports from China and the intense competition from the small-scale industries have taken a toll on the company's performance. For the half-year ended September 2003, Atul's top line fell 10 per cent and operating margins by 200 basis points to 12 per cent.

However, the company's focus on value-added specialty products has helped contain the erosion in profit margins to some extent. Atul has added higher value-added dyes such as Vatbrown and XBN Green to its product portfolio. It has also been leveraging on its well-recognised brand name — Atul — to maintain market share in the highly competitive dye segment.

Revival in end-users: The company's prospects hinge on the demand from its end-user segments. The revival in the textiles industry (the largest consumer of dye and dye intermediaries) and the increased focus on synthetic fibres would fuel Atul's performance.

The improvement in the US economy and the heavy demand from China would also be a driving factor. Atul has subsidiaries in the US and China, helping it cash in on the rising demand for its bulk chemicals and dyestuffs. About 40 per cent of its production is now exported mainly to the US, Europe and China.