PICK OF THE WEEK:

Gujarat Alkalies and Chemicals Ltd

BSE Code: 530001

CMP: Rs.120

EPS: Rs.20.83

P/E: Rs.5.79

Industry P/E: 13.92

Dividend Yield: 2.49%

Introduction: Gujarat Alkalies and Chemicals Ltd (GACL) was set up in the year 1973. From an initial capacity of 37,425 TPA Caustic Soda, it has grown to be the largest producer in India. Spread over 2 complexes at Vadodara and Dahej GACL has already started to diversify and expand its existing infrastructure to consolidate it's supremacy in Chlor-Alkali and other integrated downstream products. The location of both the plants 'Vadodara' and 'Dahej' has dual advantage of proximity to the raw material suppliers and the end users.

While the capacity utilization is about 70% in the Caustic Soda Industry, GACL's plants are working at almost 100% capacity.... thereby utilizing the assets to the fullest extent. Further the company takes pride in having honoured it's commitments without fail.

The company has made its presence felt across the globe even against stiff competition by exporting products to USA, Europe, Australia, Africa, Far & Middle East countries, China & South Asian Markets. GACL has adapted to the age of information technology for fast and uninterruptible information exchange. Both plants of Vadodara and Dahej are connected by VSAT and lease lines. This provides on-line information at any given point of time.

Shareholding Pattern: The promoters hold 36.72% while the general public holds 63.28%. Among the promoters, Gujarat Industrial Investment Corporation Ltd holds 9.69% of the shares of the company.

Shareholding belonging to the category "Public" and holding more than 1% of the Total No.of Shares
Sl. No.	Name of the Shareholder	No. of Shares	Shares as % of Total No. of Shares
1	Life Insurance Corporation of India	6,560,594	8.93
2	Sundaram BNP Paribas Mutual Fund	4,681,473	6.37
3	Lok Prakashan Ltd	2,239,142	3.05
4	SBIMF Magnum Comma Fund	1,744,844	2.38
5	Gujarat State Fertilizers & Chem. Ltd	1,655,040	2.25
6	Shreyans Shantilal Shah	1,195,790	1.63
7	General Insurance Corporation of India	1,150,329	1.57
8	Gujarat Industries Power Comapy Ltd	1,103,360	1.50
	Total	20,330,572	27.68

Financials: For FY10, the total income of the company came out to be Rs.1, 339.91 Cr as against Rs.1,430.07 Cr in the same period previous year. In the same period what is encouraging is that the interest cost decreased to Rs.17.48 Cr as against Rs.24.59 Cr in the same period previous year. The net profit of the company for FY10 came out to be Rs.171.84 Cr as against Rs.192.27 Cr in the same period previous year. The EPS of the company for FY10 came out to be Rs.23.40 as against Rs.26.18 in the same period previous year. The EPS of the company is quite good for the current market price of the scrip, which means the scrip is undervalued if we consider the FY10 EPS of the company.

For Q1FY11, the total income of the company came out to be flat at Rs.329.90 Cr as against Rs.335.36 Cr in the same period previous year. The profit before tax in Q1FY11 came out to be Rs.22.12 Cr as against Rs.50.29 Cr in the same period previous year which is mainly due to market conditions and impact of erosion in price realizations for Caustic Soda and Caustic Potash Group products in Particular. The net profit of the company for Q1FY11 came out to be Rs.19.01 Cr as against Rs.37.91 Cr in the same period previous year. The EPS of the company decreased to Rs.2.59 as against Rs.5.16 in the same period previous year.

Triggers:

• The financial ratios improved at the end of the first quarter as compared to the year ended 31^st March, 2010:

(i) Price earning ratio—12.09 times from 5.27 times.

(ii) Debt equity ratio—0.14:1 from 0.17:1 and

(iii) Book value per share---Rs.187.98 from Rs.185.38

• In FY11, the company plans to commission 50 TPD Calcium Chloride Unit at Vadodara Complex and 50 TPD Stable Bleaching Powder Project and expansion of Hydrogen Peroxide Unit from 38 TPD to 80 TPD at Dahej complex, so as to improve upon the top line and bottomlines of the company.
• The company is committed to utmost customer satisfaction, which is the driving force for progress. Adhering to international standards, with no laxity in any sphere, it is a favoured supplier for its range of products. To consolidate this and to gain international credibility, it had earlier obtained quality system certificate under IS/ISO 9001:2000, ISO 14001:1996 and IS 18001:2000.
• The mercurial nature of the chemical industry demands continuous invention and innovation. The company has a well-equipped R & D centre, recognized by the department of Science and Technology, Government of India, working on new and safer processes/ technologies, value added products and import substitutes.
• It has started marketing toluene based products like Benzyl Chloride, Benzaldehyde, etc. The expansion activity of of Aluminium Chloride, is under pre-Commissioning and is expected to be on-stream by Mid-September, 2010. This will enable the Company to meet additional exports requirements. GACL aims to be a major player in the world with this expansion.
• Ethical and transparent operations have contributed to a very great extent in bringing a turnaround at GACL. Excellent labour relationship helped the company in achieving very high manpower production turnover per employee per annum. This is also a result of a thin and lean workforce, which is lead by the professional management.
• Caustic-Chlorine being its prime product, the company has diversified into value added products like Sodium Cyanide, Chloromethanes, Hydrogen Peroxide, Potassium Carbonate, Phosphoric Acid, etc. These value added products provide dual benefit to the organization by hedging against cyclical fluctuations in the Chlor-Alkali Industry. GACL sells 26 products today, maintaining it's leadership in Caustic-Chlorine industry with 16% market share and has emerged as a major player in the segment of value added products.
• Various factors that influence the success of any corporation, the self-sufficiency ranks the foremost. GACL has worked effectively in this direction. Cost effective natural gas was substituted as fuel in place of Naphtha for Captive Power Plant. The plant load factor has increased and surplus power is supplied to State grid. This has helped achieve economies of operations.
• Power, being a major input to the electrolytic Caustic Soda process, it promoted a joint captive power plant, Gujarat Industries Power Company Limited to meet its energy requirements for Vadodara Complex. Its complex at Dahej is also integrated with a captive co-generation plant of capacity of 90 MW.
• This state promoted unit has further developed three wind farms in Kutch with capacity of 84 MW to generate power from renewable source of Power wind, to broaden its view towards green environment. In the beginning of this year it sold second lot of 83000 CER's to a European buyer and has earned revenue of Rs.5.9 Cr in addition to revenue of Rs.16.5 Cr earned earlier by sale of CER's. The company expects cumulative revenue of about Rs.100 Cr from various projects in hand in next couple of years.
• GACL, the leader in Caustic – Chlorine in the country with a basket of 26 diversified products, and Dow Europe GmbH, have signed a Memorandum of Understanding for exploring a long term and strategic business relationship in the area of chlorinated organics based on the inherent strength of both the Companies.
• The company announced that projects viz, 90 MW captive power project, 600 TPD Chlor-Alkali expansion project, Hydrazine project and Polyols project involving an investment of about Rs.2, 600 Cr are progressing as scheduled and are expected to go on stream by FY 2013-14.

Chart-check and Conclusion: From the charts it has been found that most of the parameters are in buy mode. The scrip has made a very strong bottom at Rs.117-118, which will be difficult to break on the downside, unless there is a market crash. One can buy the scrip for a short term target of Rs.135, in view of the rise in Caustic prices due to short supply. Caustic soda prices rose by Rs.50 per 50 kg in New Delhi on account of firm demand from consuming industries amid short supply. Caustic soda flake rose by Rs.50 to Rs.950-1,000 per 50 kg. Marketmen said apart from good demand from detergent makers, tight supplies from producing belts also pushed up caustic soda prices in the wholesale chemicals market here. For short term play and in case of market sell off, one should keep a strict stop loss of Rs.116.4.

Disclaimer: Though due care has been taken while preparing this report but no responsibility will be assumed by the author for the consequences what so ever, resulting out of acting on these recommendations or after reading the report.

The calls made herein are for informational purposes and are not recommendations to any person to buy or sell any securities. The information is derived from sources that are deemed to be reliable but its accuracy and completeness are not guaranteed. The author does not accept any liability for the use of this column for buying and selling of securities. Readers of this column who buy or sell securities based on the information in this column are solely responsible for their actions. The author, his acquaintances, his company or his family members may or may not have positions in the Scrips mentioned in this column. Investors should take their own decisions while buying and selling the shares/securities.

Note: This scrip was recommended to the Paid Groups on 22nd August, 2010 and the scrip already gave some returns to the subscribers of the Paid Service.