The Hindu Business Line : GHCL: Hold

Investors can consider retaining their exposures in the GHCL stock, which trades at about 14 times its standalone trailing 12-month earnings on a fully diluted basis. The stock has appreciated by about 40 per cent since our `Buy' recommendation in July. Driven by the construction boom, GHCL's soda ash business is on a growth path. The company has adopted both the organic and inorganic routes to pursue expansion. Overseas acquisitions of textile suppliers and marketers provide growth opportunities for its textiles business.

Soda Ash

GHCL, which is among the larger players in the soda ash industry, is well-poised to tap opportunities in the dense soda ash business. Its soda ash division contributes about 65 per cent of revenues. Completion of the first phase of expansion in the business (scheduled for completion in March 2007) would raise its domestic capacity by about 40 per cent. GHCL plans to further increase its domestic capacity by about 2.5 lakh tonnes to 11 lakh tonnes in the second phase. Buoyed by the boom in the realty sector, a major consumer of float glass, the soda ash industry is likely to maintain a healthy growth in the medium term.

GHCL makes dense soda ash, a key raw material used in the manufacture of float glass. The company also manufactures light soda ash, which is used in the detergents and chemical industries. Captive lignite mining provides GHCL an edge over other domestic soda ash manufacturers. The company also has a presence in Europe through its subsidiary in Romania.

Textiles

GHCL's textiles arm contributes about 15 per cent of its revenue. Overseas acquisitions of Dan River of the US and Rosebys of the UK augur well for the growth prospects of the textiles division. These acquisitions serve as marketing arms for the home-textiles business. In December, the company had acquired assets of H. W. Baker Lenin, a supplier of home textiles in the US for $6.8 million (about Rs 30 crore).

This acquisition would further expand its presence in the US hospitality and healthcare segment. GHCL's domestic textile division is on an expansion spree. The company is ramping up capacity of its spinning division by about 50 per cent. Though the spinning sector appears to be facing a downturn, captive power generation would help its spinning division tide over the crisis.

The company's forward integration into fabrics would also soften the negative impact. The company's Vapi facility houses the home textiles capacity. The overseas acquisitions in the textiles business and commencement of production at the Vapi facility are likely to spur earnings growth in the long term.

Concern

The company's rapid expansion spree appears to be funded by overseas borrowings convertible into equity. Though the business prospects appear bright, funding through convertible borrowings is likely to stifle returns to shareholders. GHCL has also been allotting convertible equity warrants to its promoter companies on a preferential basis.

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