Tripling of its capacity and moving up the coal tar pitch value-chain should help Himadri Chemicals meet demand and maintain margins.
Funds infusion to the tune of Rs 252 crore by private equity player Bain Capital is expected to help Kolkata-based Himadri Chemicals to expand its coal tar pitch capacity to half a million metric tonne per annum (MTPA) from 1.69 MTPA currently. The Rs 648 crore expansion is being financed by equity infusion, internal accruals and debt.
Adding capacity
Himadri Chemicals has a 70 per cent share of the Indian coal tar pitch market with plants at Howrah, Hooghly, Visakhapatnam and Korba. All the company’s products (coal tar pitch, creosote oil, naphthalene) are derived from the distillation or processing of coal tar. The first phase, of the company’s expansion, which is under implementation and expected to get completed by the end of March 2010, will improve capacity to 2.5 lakh MTPA. The second phase to be completed by the end of 2010-11 will help improve its domestic capacity to 4 lakh MTPA. On the demand side, the company expects the domestic aluminium capacity to increase from 1.1 MTPA to 3.5 MTPA by 2012-13 and this will require coal tar pitch to the tune of 4.65 MTPA.
While the expansions are ensuring scale for the company, Himadri has also been moving higher up in the value-chain. Though the company’s core product continues to be coal tar pitch, it has started a process of forward integration enabling it to make carbon black from creosote oils and sodium naphthalene formaldehyde (SNF) from naphthalene. Earlier, the company sold oils to carbon black manufacturers and made naphthalene for the dyestuff and pharma sectors. Instead of naphthalene, the company is now focussing on manufacturing SNF which is used as an input in ready mix concrete.
Further, the greenhouse gases that result during the manufacture of carbon black are now being used to produce power. From the current capacity, company wants to nearly double its carbon black and power capacity to 90,000 MTPA and 24 MW, respectively in the current fiscal. The company also wants to expand its advance carbon (used in the making of lithium ion batteries), which is at the upper-most in the value-chain, capacity from the current 240 MTPA to 1,000 MTPA by mid-2011.
Conclusion
The improvement in the company’s revenues and margins over the last two fiscals (see graph: Upward curve) has been a result of a change in product mix and savings on fuel costs. While the company has reported ebidta margins of 42 per cent in the first half of 2009-10 on the back of low-cost raw material inventory, these have come down to about 36 per cent in the December quarter on expected lines. Analysts believe that margins will stay at the mid-30 levels as the company focuses on its value-added range of products.
At Rs 395, the stock is trading at a P/E of 13.6 times its estimated 2010-11 EPS of Rs 29 and should fetch about 25 per cent returns over the next one year.