praveen
24-12-2007, 12:05 AM
Himadri Chemicals is engaged in the distillation of coal tar to produce coal tar pitch and several other value-added coal tar by-products. The company has its manufacturing units in Andhra Pradesh and West Bengal. Coal tar pitch is used as binding material for manufacturing anodes required for smelting of alumina into aluminium and for the manufacture of graphite electrodes. India is one of the leading producers of aluminium in the world with large bauxite reserves. Himadri Chemicals & Industries Ltd. is the largest supplier of coal tar pitch in the country. The domestic market has shown positive growth in terms of overall consumption of coal tar pitch. The company is in a position to cater not only to the growth of the aluminium industry in India but also to exports to Europe and Middle East. During the financial year 2006-07 the Company entered into the wind energy segment and installed two windmills with a capacity of 2.50MW in Maharashtra. Further, the Company, with a view to expand its presence in the global market, has acquired a company in Hong Kong as a 100% subsidiary. It has opened a representative office in China in the previous year to liaison its import activities.
Industry
The major users for coal tar pitch comprise aluminium and graphite electrode industries, both of which are witnessing substantial growth. All major players in these industries have charted out aggressive expansion plans, resulting in rapidly increasing demand for coal tar pitch.
Demand for coal tar pitch is directly related to the production of aluminium as coal tar pitch accounts for 11.50% of finished aluminium in volume terms and 3% in value terms. Rise in Indian aluminium production capacity will strengthen the demand for coal tar pitch. With the requisite capacity in place, Himadri is poised to capture
emerging opportunities.
Aluminium
In FY 2007, aluminium production grew 19.2% y-o-y to 10,49,210 MT from 6,14,770 MT in FY2001 to 10,49,210 MT in FY2007. Strong demand from construction, electrical, white goods, packaging and automobiles industry provided impetus to the aluminium industry.
India is endowed with large bauxite reserves and enjoys the lowest cost of resource production. However, the country's per capita aluminium consumption is quite low at 0.6 kg as compared with the global average of around 20 kg. Per capita consumption is expected to increase rapidly with increasing consumption in the areas of construction, automobiles and packaging.
Global demand for aluminium is estimated to rise to 65 million tons by 2020. Aluminium production in China is expected to reach 19.27 million tons by 2010. By 2020, India is likely to have an aluminium production capacity of 17-20 lakh tonnes p.a. Coal tar pitch consumption in Asia is likely to increase exponentially over the next decade due to a demographic shift in aluminium production from Europe to the Middle East, China and India.
Graphite
The estimated global capacity for the manufacture of graphite electrodes is around one million MT. Graphite electrodes are consumed in electric arc furnaces and are primarily used in the steel industry. With higher spends on infrastructure and construction, coupled with strong demand for automobiles and white goods, steel output/ production is on the rise – correspondingly the graphite electrodes demand is on a roll. Increase in demand of coal tar pitch from the graphite industry is likely to push earnings more aggressively, as out of the total demand from graphite industry, around 40% is for value added ‘Zero QI pitch’, which sells 1.50 times the price of normal (binder) pitch.
The global demand for graphite electrodes, estimated at 1.02 million MT in 2001, is set to increase to 1.34 million MT by 2010. This would enhance the demand for QI as well as binder pitch because the graphite industry consumes both types of pitch.
Company
Himadri Chemicals & Industries (HCIL) was incorporated in July 1987 to manufacture coal tar derivatives. Coal tar pitch is used in manufacturing aluminium and graphite. Coal tar pitch is produced by way of distillation of coal tar, which yields coal tar pitch along with by- products such as oils and naphthalene. Its plants are strategically located (in West Bengal and Andhra Pradesh) to cater to user industries and its main clients include HEG, Graphite India, Nalco, Balco, Hindalco and SAIL. They have also forayed into exports and have DUBAL, one of the largest single-site aluminium smelters in the world, among its clientele. Himadri Chemicals is India’s largest coal tar pitch manufacturer with a 70% market share. The flexibility in raw materials usage and the capability to set up capacity at a low cost due to in-house fabrication reinforces its competitive advantage. Himadri Chemicals has the capability to commission capacity at the lowest cost in India. It is also the leader in coal tar pitch manufacturing technology and offers the widest product basket with highest purity levels, to its customers.
Apart from consolidating and strengthening its leadership in the Indian market, Himadri is also looking beyond boundaries to transform itself into a global company. It had set up a representative office in China in FY06. In future, Himadri plans to set up a large manufacturing base in China to capitalize on abundant raw material availability and a large consumer potential.
Himadri has four state-of-the-art coal tar distillation plants in India with a combined coal tar distillation capacity of 4,38,000 MTPA. Two plants are in Howrah, West Bengal, one in Hooghly, West Bengal and one in Vishakhapatnam, Andhra Pradesh.
Himadri also manufactures coal tar based pipe coating materials including primer, outer-wraps and tapes at its Vishakhapatnam plant. The basic raw material for coal tar based coating products comes from Himadri’s own distillation plant. This gives the Company the advantage of producing customized products of different specifications
suited to customer requirements and maintaining consistently high quality.
Himadri’s plants use modern cutting edge technology to produce coal tar pitch and enamel. This includes an efficient vacuum system and a special heating configuration for controlled heating, supported by strict process and quality control measures resulting in products of superior quality.
Key Investment Arguments
Himadri has a market cap of Rs. 2016.50cr, average daily volume of 28422 shares for the last six months and net sales of Rs. 352cr during the trailing twelve months ended September 2007.
It’s EBITDA and Net profit margins were at 31.1% and 17.8% resp. in FY07. EBITDA and Net profit margins have subsequently improved in 1st Half of FY08 to 32.0% and 23.6% resp.
The company has achieved a 5-year CAGR of 36.7% in Net Sales, 84.1% in EBITDA and 143.4% in Net Profits.
Himadri trades at a PE multiple of 28.1 based on trailing twelve month (TTM) earnings, Price to Book ratio of 8.4 on FY07 book- value and Price to Sales ratio of 5.7 based on TTM net sales.
Debt-equity ratio of Himadri Chemicals was at 1.1 for FY07, falling sharply from 2.1 in FY06. The fall was due to a substantial increase in net worth of the company following a preferential issue of shares in FY07 at a premium of approx. Rs. 219 per share.
Himadri has long term tie-ups with all major Indian steel plants and international suppliers for the supply of coal tar. The Company has a raw material storage capacity of around 40,000MT. This, combined with tie-ups with various suppliers, enables Himadri to supply material on time and honour its commitments. Using raw materials of a different mix enables Himadri to customize its products as per customer requirements and deliver products of consistent quality.
The company is planning to buy a coal tar company which has a capacity of about 1.5 lakh TPA. The deal size is close to Rs. 300 crore. The acquisition will be funded through internal accruals and debt. The aforesaid buy will result in vertical integration for Himadri helping it to ensure a reliable supply of coal tar, its principle raw material, at competitive prices.
Himadri also plans to set up a green-field project in China. It is targeting a capacity of 10 lakh TPA by 2010 and wishes to add international clients like Alcoa and Alcan, post its China foray. Its existing clients include Hindalco, Nalco, Balco and Graphite India.
Himadri is one of the three players in the world to have developed impregnating QI coal tar pitch, which is used in the graphite industry. Prior to its development by Himadri, this was entirely imported in India. The company has also developed MCMB (micro- carbon meso beads), which is used in lithium ion batteries.
One of the key arguments in Himadri was the success of advanced carbon materials project with its contribution to earnings and upside to overall valuations. Company has manufactured and sold 1.2 MT of its advanced carbon material ‘Mesophase Pitch’ to Osaka Gas (Japan) for Rs. 14 lakhs/ton. This event is a big positive, since it has signaled the entry of Himadri in the high value and high growth advanced carbon materials market. The company is
confident of scaling up the production quantity of advanced carbon material in the subsequent quarters and of commercializing its full scale capacity in FY2009.
Key Concerns
The main source of coal tar, Himadri’s principal raw material, is steel plants, which are spread across the country. Of late, the Company has witnessed considerable volatility in the supply and prices of coal tar. Transportation costs have also increased. It had to depend heavily upon imports to meet its coal tar requirements in FY07. However, the proposed acquisition of a coal tar company of capacity 1.5 lakh TPA will go a long way in reducing Himadri’s
dependence on coal tar from steel plants as well as imports. _ Any downturn in the commodity cycle, particularly aluminium, might result in lower demand for the company’s product and adversely affect the growth of the company going ahead. However, we expect the demand for the company’s products to be robust as aluminium production shifts from Europe to China and India.
Latest Developments
Joint venture in China - The Company is in the process of entering into a joint venture for the acquisition of an existing coal tar distillation plant in China, which will be of global standards. Following the implementation of this project the Company will achieve the status of an Indian multinational.
Himadri Chemicals has decided to issue 27.62 lakh warrants convertible into an equal number of equity shares of face value Rs. 10 each, at a price of Rs. 426 per share (including premium of Rs 416 per share) to promoters/ promoter group (23.5 lakh warrants) and Citigroup Venture Capital International Growth Partnership Mauritius Ltd (4.12 lakh warrants) on preferential allotment basis. Approval for the same has been obtained at the EoGM held on 8th December 2007.
Conclusion
On the basis of our research, we feel that Himadri Chemicals is a good stock to buy at the current market price of Rs. 665. If everything goes well, the price is likely to appreciate to Rs. 858.0, within 12 months, translating into a gain of about 31%.
Compiled by dD
Industry
The major users for coal tar pitch comprise aluminium and graphite electrode industries, both of which are witnessing substantial growth. All major players in these industries have charted out aggressive expansion plans, resulting in rapidly increasing demand for coal tar pitch.
Demand for coal tar pitch is directly related to the production of aluminium as coal tar pitch accounts for 11.50% of finished aluminium in volume terms and 3% in value terms. Rise in Indian aluminium production capacity will strengthen the demand for coal tar pitch. With the requisite capacity in place, Himadri is poised to capture
emerging opportunities.
Aluminium
In FY 2007, aluminium production grew 19.2% y-o-y to 10,49,210 MT from 6,14,770 MT in FY2001 to 10,49,210 MT in FY2007. Strong demand from construction, electrical, white goods, packaging and automobiles industry provided impetus to the aluminium industry.
India is endowed with large bauxite reserves and enjoys the lowest cost of resource production. However, the country's per capita aluminium consumption is quite low at 0.6 kg as compared with the global average of around 20 kg. Per capita consumption is expected to increase rapidly with increasing consumption in the areas of construction, automobiles and packaging.
Global demand for aluminium is estimated to rise to 65 million tons by 2020. Aluminium production in China is expected to reach 19.27 million tons by 2010. By 2020, India is likely to have an aluminium production capacity of 17-20 lakh tonnes p.a. Coal tar pitch consumption in Asia is likely to increase exponentially over the next decade due to a demographic shift in aluminium production from Europe to the Middle East, China and India.
Graphite
The estimated global capacity for the manufacture of graphite electrodes is around one million MT. Graphite electrodes are consumed in electric arc furnaces and are primarily used in the steel industry. With higher spends on infrastructure and construction, coupled with strong demand for automobiles and white goods, steel output/ production is on the rise – correspondingly the graphite electrodes demand is on a roll. Increase in demand of coal tar pitch from the graphite industry is likely to push earnings more aggressively, as out of the total demand from graphite industry, around 40% is for value added ‘Zero QI pitch’, which sells 1.50 times the price of normal (binder) pitch.
The global demand for graphite electrodes, estimated at 1.02 million MT in 2001, is set to increase to 1.34 million MT by 2010. This would enhance the demand for QI as well as binder pitch because the graphite industry consumes both types of pitch.
Company
Himadri Chemicals & Industries (HCIL) was incorporated in July 1987 to manufacture coal tar derivatives. Coal tar pitch is used in manufacturing aluminium and graphite. Coal tar pitch is produced by way of distillation of coal tar, which yields coal tar pitch along with by- products such as oils and naphthalene. Its plants are strategically located (in West Bengal and Andhra Pradesh) to cater to user industries and its main clients include HEG, Graphite India, Nalco, Balco, Hindalco and SAIL. They have also forayed into exports and have DUBAL, one of the largest single-site aluminium smelters in the world, among its clientele. Himadri Chemicals is India’s largest coal tar pitch manufacturer with a 70% market share. The flexibility in raw materials usage and the capability to set up capacity at a low cost due to in-house fabrication reinforces its competitive advantage. Himadri Chemicals has the capability to commission capacity at the lowest cost in India. It is also the leader in coal tar pitch manufacturing technology and offers the widest product basket with highest purity levels, to its customers.
Apart from consolidating and strengthening its leadership in the Indian market, Himadri is also looking beyond boundaries to transform itself into a global company. It had set up a representative office in China in FY06. In future, Himadri plans to set up a large manufacturing base in China to capitalize on abundant raw material availability and a large consumer potential.
Himadri has four state-of-the-art coal tar distillation plants in India with a combined coal tar distillation capacity of 4,38,000 MTPA. Two plants are in Howrah, West Bengal, one in Hooghly, West Bengal and one in Vishakhapatnam, Andhra Pradesh.
Himadri also manufactures coal tar based pipe coating materials including primer, outer-wraps and tapes at its Vishakhapatnam plant. The basic raw material for coal tar based coating products comes from Himadri’s own distillation plant. This gives the Company the advantage of producing customized products of different specifications
suited to customer requirements and maintaining consistently high quality.
Himadri’s plants use modern cutting edge technology to produce coal tar pitch and enamel. This includes an efficient vacuum system and a special heating configuration for controlled heating, supported by strict process and quality control measures resulting in products of superior quality.
Key Investment Arguments
Himadri has a market cap of Rs. 2016.50cr, average daily volume of 28422 shares for the last six months and net sales of Rs. 352cr during the trailing twelve months ended September 2007.
It’s EBITDA and Net profit margins were at 31.1% and 17.8% resp. in FY07. EBITDA and Net profit margins have subsequently improved in 1st Half of FY08 to 32.0% and 23.6% resp.
The company has achieved a 5-year CAGR of 36.7% in Net Sales, 84.1% in EBITDA and 143.4% in Net Profits.
Himadri trades at a PE multiple of 28.1 based on trailing twelve month (TTM) earnings, Price to Book ratio of 8.4 on FY07 book- value and Price to Sales ratio of 5.7 based on TTM net sales.
Debt-equity ratio of Himadri Chemicals was at 1.1 for FY07, falling sharply from 2.1 in FY06. The fall was due to a substantial increase in net worth of the company following a preferential issue of shares in FY07 at a premium of approx. Rs. 219 per share.
Himadri has long term tie-ups with all major Indian steel plants and international suppliers for the supply of coal tar. The Company has a raw material storage capacity of around 40,000MT. This, combined with tie-ups with various suppliers, enables Himadri to supply material on time and honour its commitments. Using raw materials of a different mix enables Himadri to customize its products as per customer requirements and deliver products of consistent quality.
The company is planning to buy a coal tar company which has a capacity of about 1.5 lakh TPA. The deal size is close to Rs. 300 crore. The acquisition will be funded through internal accruals and debt. The aforesaid buy will result in vertical integration for Himadri helping it to ensure a reliable supply of coal tar, its principle raw material, at competitive prices.
Himadri also plans to set up a green-field project in China. It is targeting a capacity of 10 lakh TPA by 2010 and wishes to add international clients like Alcoa and Alcan, post its China foray. Its existing clients include Hindalco, Nalco, Balco and Graphite India.
Himadri is one of the three players in the world to have developed impregnating QI coal tar pitch, which is used in the graphite industry. Prior to its development by Himadri, this was entirely imported in India. The company has also developed MCMB (micro- carbon meso beads), which is used in lithium ion batteries.
One of the key arguments in Himadri was the success of advanced carbon materials project with its contribution to earnings and upside to overall valuations. Company has manufactured and sold 1.2 MT of its advanced carbon material ‘Mesophase Pitch’ to Osaka Gas (Japan) for Rs. 14 lakhs/ton. This event is a big positive, since it has signaled the entry of Himadri in the high value and high growth advanced carbon materials market. The company is
confident of scaling up the production quantity of advanced carbon material in the subsequent quarters and of commercializing its full scale capacity in FY2009.
Key Concerns
The main source of coal tar, Himadri’s principal raw material, is steel plants, which are spread across the country. Of late, the Company has witnessed considerable volatility in the supply and prices of coal tar. Transportation costs have also increased. It had to depend heavily upon imports to meet its coal tar requirements in FY07. However, the proposed acquisition of a coal tar company of capacity 1.5 lakh TPA will go a long way in reducing Himadri’s
dependence on coal tar from steel plants as well as imports. _ Any downturn in the commodity cycle, particularly aluminium, might result in lower demand for the company’s product and adversely affect the growth of the company going ahead. However, we expect the demand for the company’s products to be robust as aluminium production shifts from Europe to China and India.
Latest Developments
Joint venture in China - The Company is in the process of entering into a joint venture for the acquisition of an existing coal tar distillation plant in China, which will be of global standards. Following the implementation of this project the Company will achieve the status of an Indian multinational.
Himadri Chemicals has decided to issue 27.62 lakh warrants convertible into an equal number of equity shares of face value Rs. 10 each, at a price of Rs. 426 per share (including premium of Rs 416 per share) to promoters/ promoter group (23.5 lakh warrants) and Citigroup Venture Capital International Growth Partnership Mauritius Ltd (4.12 lakh warrants) on preferential allotment basis. Approval for the same has been obtained at the EoGM held on 8th December 2007.
Conclusion
On the basis of our research, we feel that Himadri Chemicals is a good stock to buy at the current market price of Rs. 665. If everything goes well, the price is likely to appreciate to Rs. 858.0, within 12 months, translating into a gain of about 31%.
Compiled by dD