TGV SRAAC Ltd – Buy for short to medium term
TGV SRAAC Ltd (TSL), formerly known as Sree Rayalaseema Alkalies has presence in Chlor-Alkali industry with the installed capacity of 1,56,950 MTPA of Caustic Soda; 23,100 MTPA of Potassium Hydroxide and 41,250 MTPA of chloromethane. The chlor-Alkali industry is on upswing with the increase in caustic soda prices across the globe. The prices have risen by 45% over the last one year. The same can be seen from the last few quarters’ performance of the company. TGV SRAAC, has posted impressive numbers for Q3FY18 and 9MFY18. However, the share price has corrected sharply (fallen by nearly 40% from recent highs) in the ongoing correction and offers good investment opportunity in short to medium term.
TSL has three business segments namely Chemicals, Oil & Fats and Power which is mainly used for captive requirements. Chlor-Alkali products are basic chemicals used as raw materials in many process industries like paper, aluminium, soaps to detergents, pharmaceuticals, dye etc. The company deals in Caustic Soda, Chlorine, Sodium Hypochlorite, Hydrogen, Potassium Hydroxide and Potassium Carbonate under Chemicals/chlor-alkali division. Company at the end of FY16 has started the production of Chloromethanes unit which manufactures Methyle Chloride, Chloroform, Carbon tetrachloride.
Total installed capacity of caustic soda is expected to grow from 36.62 mt as of FY17 to 40.03 mt in FY19. On the demand front, while caustic soda consumption increased 4.9 per cent per annum during FY12-FY17, it slowed down to 1.6 per cent in FY2017 from 3.9 per cent demand growth in FY16 following moderation in the economy in the second half the year due to demonetisation. However, surge in caustic soda prices following supply cut and healthy global demand resulted in improved profitability of domestic producers in the first nine months of current financial year.
One of major reasons for this was due to the European Union decision in December 2013 to discontinue mercury process for chlor-alkali units, which control nearly 26 per cent of total Europe capacity, beyond December 2017. The chlor-alkali plants in China, the largest player globally, are running at reduced capacity following poor chlorine realisation, besides stricter environmental norms being enforced by Beijing. Additionally, the growing demand globally on the back of economic recovery has led to buoyancy in caustic soda prices
Both global as well as domestic prices have risen by a sharp 35-45 cent during the first nine months of the current fiscal year following healthy demand growth and lower supplies due to plant closures in Europe and China. According to the industry reports, the prices are expected stabilize around Rs.35000-38000/ton over the short to medium term.
TSL which derives 50% of its revenues from Caustic Soda has posted good numbers for Q3FY18 and 9MFY18. Company’s revenues have grown by 10.5% yoy to Rs.273.4cr led by increased realizations. EBITDA has increased by 56.5% yoy to Rs.52.2cr from 33.4cr. The operating margin has seen uptick from 13.5% in Q3FY17 to 19.1% Q3FY18 led by low raw material costs and high margin chloromethane products. The PAT has grown by more than 2x yoy to Rs.10.6cr Q3FY18 from Rs.3.3cr in Q3FY17.
Even 9MFY18 performance has been robust with PBT of Rs.69cr against Rs.28cr YoY showing a growth of 147% which is by far one of the best performance from listed company in Chlor Alkali Industry. Recently India Ratings has also upgraded credit rating of the company, by improving outlook to ‘Positive’ from ‘Stable’. The rating firm has cited the reasons such as Improvement in EBITDA margins over 18% from sub 14% in FY16, increased share of revenues from higher margin chemical segment, increase in price of caustic soda and addition of higher margin products post the completion of the debt-funded chloromethane plant. The oil & fat division which consists of castor oil and fatty acids is expected to break even during FY19.
Company has achieved PAT of Rs.36.5cr for 9MFY18 as against 11.5cr in 9MFY17 leading an EPS of Rs.4.47. We believe that the momentum in the performance to will continue over the medium term. We expect the company to post an EPS of Rs.6 for FY18 and Rs.8 for FY19. At the CMP of Rs.57, the stock is trading at attractive valuations of 9.5xFY18E PE /7.1xFY19E PE while EV/EBITDA is at 5.2x. Promoters have recently increased stake in the company from 54.79% to 57.05% which shows their confidence in the business. Investors can buy the stock at the current market price for the period of six to nine months.