The Hindu Business Line : Atul: Book profits

INVESTORS may consider divesting their holdings in the stock of chemicals manufacturer Atul. Though at current market prices, the value of its equity portfolio accounts for more than half of stock's price of Rs 120, the valuation levels are still steep. Debt swap and other measures have helped Atul report positive earnings despite the drop in operating profits. However, the scope for a substantial improvement in earnings appears limited. A weakening rupee could provide a boost to its profitability; its effect, would only be marginal, as Atul has been covering its positions. Atul's earnings in the first quarter of FY-06 had soared manifold on a year-to-year basis on account of profit on sale of its investments.

Though revenues have nearly doubled over an eight-year period, lower margins have significantly eroded its operating profits. Despite product diversification measures and volume growth, Atul has not been able to improve its earnings. It has not been able to pass on rising raw material prices, which accounts for about 50 per cent of its manufacturing cost, to its customers. The operating margin stands at about 9 per cent, way below its high in a decade. This is the situation across its business segments including dyes and dye intermediates and epoxy resins.

Volumes at its colours division have been sluggish; a drop in realisations, coupled with higher raw material costs in the preceding two fiscals, has taken its toll on this division. Atul appears to have failed to capitalise on the growth in the textile sector, which is among the larger consumers of dyes and pigments. Revenue growth at its colours division was marginal in the first half of FY-05. Its EBIT (earnings before interest and tax) margin dropped sharply. Though opportunities for volume growth appear bright due to capacity expansion in the textile sector, domestic dye manufacturers continue to face pricing pressures from Chinese manufacturers.

The larger specialty and other chemicals division — comprising its agrochemicals, pharmaceuticals, polymers and aromatic chemicals businesses — has improved its performance in the first half of FY05. Its margins, however, continue to remain low. Aided by higher offtake, this division reported a 50 per cent rise in earnings during the first half of FY-05.

Atul's epoxy division, part of its polymer business, has been reporting a steady rise in volumes backed by higher realisations. Margins, however, remained flat as raw material costs also increased. Better realisations in the last fiscal appear to have been driven by global prices; Atul, among the larger producers of epoxy resins, faces a threat of cheaper imports from Thailand post the Free Trade Agreement. A similar situation prevails in its other major businesses of aromatic chemicals. Despite a robust growth in volumes, the profitability continues to remain low at this division.

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