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Alagappan Arunachalam

AN INVESTMENT can be considered in the stock of Thirumalai Chemicals, which quotes at about nine times the annualised earnings for FY-05.

While its competitors in the industry have reported insipid performance, the company has registered profits, with earnings and revenues growing 150 per cent and 57 per cent respectively in the nine months ending December 2004, helped by better capacity utilisation and strong offtake of these products.

The domestic prices of phthalic anhydride (PAN) are ruling high and are expected to remain firm; a similar trend is expected to prevail for maleic anhydride (MAN) too.

Thirumalai Chemicals is among the major manufacturers of PAN in India; it derives about 70 per cent of its revenues from this stream. PAN is used in paints, plastics, dyes and by textile industry.

The company also makes MAN and food acids, deriving about 20 per cent and 10 per cent respectively from these streams.

Key raw materials such as orthoxylene and benzene are derivatives of crude oil.

The rise in crude prices by 30 per cent over the past year has led to a concomitant increase in PAN price. Prices of MAN are ruling higher by 80 per cent.

Strong demand may bolster volume sales for these products, even if prices soften in tandem with crude prices.

IG Petrochemicals, an EoU — the other large manufacturer of PAN — derives a chunk of its revenues from exports; this leaves Thirumalai Chemicals to dominate the domestic market.

The other players in this industry are not in a good shape financially and may not be a near-term threat to Thirumalai Chemicals.

The company has been consistently profitable through the ups and downs of the petrochemical price cycle. Most other players in the PAN-MAN industry have a negative net worth.

Unlike the other players, Thirumalai Chemicals has a low debt-equity ratio; which reins in the interest cost. It has a joint venture in Malaysia, which produces MAN.

At this plant, the company proposes to shift from benzene as a raw material to butane, a relatively cheaper input; given the strong demand environment, this should aid margin expansion.

While the margins have been sluggish, the company has posted a jump in operating profits of about 70 per cent, due to higher volumes on the back of better capacity utilisation.

Despite an unscheduled 30-day shutdown of its plant in December 2004, it has reported a revenue growth of 37 per cent in the third quarter.

To reduce its dependence on PAN, Thirumalai Chemicals has been increasing contribution from the MAN and food acids businesses, which are less cyclical.

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