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Alagappan Arunachalam

INVESTORS with a long-term perspective can buy the stock of Gujarat Alkalies. Firm trends in caustic soda price and the likely price stability at higher levels, a likely boost to revenues from capacity expansion, debt restructuring that has led to lower interest costs, and the possibility of a further decline in energy costs leading to margin expansion are all likely to drive growth in earnings.

At Rs 130, the stock trades at a price-earnings multiple of about 10times its likely earnings for FY-05. Gujarat Alkalies is India's largest and one of the more competitive producers of caustic soda. Its products — caustic soda and chlorine — find application in a wide range of industries such as paper, aluminium, textiles and soaps and detergents. The buoyant trend in the user industries is likely to lead to continued robust demand for caustic soda.

The diversified nature of its customer base provides a cushion against a decline in demand from any particular industry. The removal of quotas in the textile sector and the capacity expansion in the paper industry are expected to ensure healthy demand growth. The capacity expansion plan that is under implementation is likely to enable the company capitalise on the likely increase in demand and also enhance its market share. As the company has consistently operated at levels in excess of 100 per cent, the expansion plans are critical as they would remove a constraint on revenue growth.

Given the spurt in earnings over the few quarters, it should be well-placed to finance the expansion out of internal accruals and debt.

Gujarat Alkalies' initiatives to reduce energy costs are a positive as the manufacture of caustic soda is power-intensive. The company meets a part of power requirements from captive facilities and from Gujarat Industries Power Corporation in which it is a joint promoter. Gujarat Alkalies' plans to pick up a stake in the proposed 2,000 MW power plant in Surat, to be promoted by Gujarat Industries Power Corporation, is likely to provide a stable source of energy supply at competitive prices.

The restructuring of its debt burden has also had a beneficial effect. It cut down a part of its debt by using the funds raised through a rights offer last year. A debt-restructuring programme accepted by the lenders has lightened the pressure on interest and principal payments; the repayment period has been extended.

At the global level, for the chlor-alkali industry, chlorine is the main product and not caustic soda, unlike in India. The global product pattern has led to threat of imports of caustic soda.

Gujarat Alkalies' earnings have increased significantly in the first three quarters of FY-05, backed by lower feedstock and energy costs, higher caustic soda prices and low-base effect. As the industry environment appears conducive, steady rise in earnings levels is likely to create scope for gains.

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