Gwalior Chemical Industries (GCIL) is one of the producers of niche chemical products in India, which find use in a variety of industries such as agrochemicals, pharmaceuticals, dyes, flavours and fragrances. The company is one of the largest producers in the world of chlorotoluenes and thionyl chloride. It has set up an integrated facility at Nagda in Madhya Pradesh and Ankleshwar in Gujarat to manufacture the first stage of products.
Catering to a widespread clientele of over 500 customers across nearly 40 countries, GCIL derives nearly 30% of its revenue from exports, which is expected to go up as it expand capacities. Similarly, the company derives nearly 40% revenue from the agrochemical industry, 14% from the flavors and fragrance industry, and 10% each from the pharmaceutical and dyes and paint industries. The clients of GCIL include Bilag Industries (a subsidiary of Bayer Crop Sciences AG), United Phosphorous, Grasim Industries, Gharda Chemicals, Gujarat Insecticides, Shasun Chemcials and Drugs, Dr. Reddy's Laboratories, Divi's Laboratories, Matrix Laboratories in India, while the international clients include Bayer AG (Germany), Clariant Gmbh (Germany), L.G Life Science Limited (Korea), Dooyang Industries Corporation Limited (Korea), Thor Specialties Limited (United Kingdom), A & F Limited (United Kingdom), Symrise AG (Germany), Pentagon Limited (United Kingdom), Kao Corporation (Spain) and Sika AG (Germany).
To go for forward integration and expand into the second stage of value-added downstream products, which will have better margin, GCIL has planned a capex programme of Rs. 90.10 crore, out of which it is raising Rs. 80 crore through its initial public offer (IPO). The company hopes to complete the expansion programme by December 2007 after which it will have 43% more capacity for its existing products such as benzyl chloride, benzal chloride, benzaldehyde, benzyl alcohol and thionyl chloride at 99,600 tonnes per annum besides a total of 6,000-tonne capacity for different new value- added products.
GCIL also plans to set up captive power plant at Nagda to fulfill its need for power as well as steam, which will lead to considerable savings in the cost of production. Being a specialty chemical manufacturer, the company has enjoyed pricing power and maintained its operating profit margin (OPM) around 20% in the past despite significant fluctuations in the raw material prices.
Strengths
- No new plants are coming up in the west to manufacture chlorinated compounds, which is expected to boost the outsourcing opportunities for Indian players. GCIL is expected to benefit by supplying high quality molecules at competitive costs.
- With the expansion into high margin products, pursuing forward integration, and setting up a captive power plant, OPM is expected to move up.
- A de-risked business model with broad customer base.
- Expected to benefit from in-house R&D team, which has helped to reengineer processes and cut costs.
Weaknesses
- Since the pricing of the products is based on import parity, any reduction in customs duty will have an adverse impact on margin.
- Important raw materials – toluene and chlorine – have witnessed wide fluctuations in pricing in the past and may continue fluctuating in the future.
- Largely dependent on single suppliers for its key raw materials such as Reliance Industries for supply of toluene and Grasim Industries for chlorine at the Nagda facility.
- Promoters Ashwin Kothari and Harisingh Shyamsukha had also promoted four listed companies: Aroni Chemical, Jacquart Chemical, Winro Commercial and Saraswati Commercial. Last year, Sebi had forced the promoters to make open offer for all these companies due to violation of guidelines related to inter-se transfers and acquisition of shares. All these companies are very thinly traded. Notably, GCIL has been trying to come out with an IPO for the past many months. But the issue got delayed. As a result, there is almost 15 to 18 months' delay in project implementation compared with the original schedule.
Valuation
GCIL has set a price band of Rs. 71 to Rs. 85 for its IPO to raise Rs. 80 crore, which translates into a PE of 11.9X to 13.2X EPS for FY 2006 and 10.5X to 11.6X annualised EPS for FY 2007 based on the results in the quarter ended June 2006. There is no listed company in India with a similar product profile. However, the company can be broadly classified as Specialty Chemicals-Large company. This group is presently trading at a PE of around 12 on the basis of trailing 12 months.