IGI Logo

Our Take:

Dhrangadhra Chemical Works Ltd (DCW) is one of the pioneers in chloro-alkali industry in India and is a leading multi-product chemical company with presence across Caustic Soda, Soda Ash, PVC, CPVC and SIOP (Synthetic Iron Oxide Pigments). On the specialty chemical side, in 2016, the company had commenced operations of SIOP in its Sahupuram facility with technological help from Huntsman pigments while in 2017, it entered into a niche, margin accretive CPVC business with technical license from Arkema and became the first and only manufacturer of CPVC in India.

Apart from this, the company has self-sufficiency with respect to major raw materials (Salt, Liquid Chlorine, Hydrogen, Hydrochloric Acid, Leach Liquor etc) which are sourced in-house and it has a cogen power plant with an installed capacity of 58MW with 12 MW DG sets for backup at its Sahupuram facility. The SIOP division had taken quite a long time to stabilize; also this being in the specialty chemical segment its validation process was slow and tedious. Post commencement of operations this division got finally stabilized by 2019 which resulted in continuous low utilization levels resulting in stress in companies operating performance.

In order to ensure smooth functioning of its operations, the company in Mar 2019 had issued 1.58Cr convertible warrants at Rs. 19/share to promoter group and its associates aggregating Rs. 30Cr. Also in Q4FY21, DCW was able to manage a fund raise from Kotak Special Securities Fund(KSSL) of Rs. 410cr via NCDs of Rs. 350Cr and OCDs of Rs. 60Cr (optionally convertible into 3.33Cr @ RS. 18/share before Dec 2022 – resulting in ~11% stake in the company).

Through these transactions, the company extended its debt stack maturities and added additional liquidity to the balance sheet. Going forward, we believe, the recent fund raise will address the company’s liquidity related issues and will reduce overall finance cost post conversion of warrants. The chemical industry upswing will benefit DCW. DCW could benefit out of upswing in the prices of PVC, Caustic Soda and Soda Ash in Q2FY22 and the entire FY22 while its utilization in CPVC and SIOP could rise leading to higher revenues and margins.

Valuations & Recommendation:

We expect, with the required capital infusion, the company’s operations are likely to stabilize and there will be an end to the turbulent phase which it had experienced since last 2-3 years. DCW is one of the oldest company in the commodity chemical space and scale-up in its margin accretive speciality chemical side along with constant de-leveraging and no large capex lined up for next 2 years will result in strong cash flow generation and improvement in its return ratios which would the key drivers for the stock to get re-rated.

We think DCW can post a revenue/EBITDA and PAT growth of CAGR 16/22/480% over FY21-FY23E. We believe the base case fair value of the stock is Rs.44 (4.4x FY23E EV/EBITDA) and the bull case fair value is Rs.48 (4.7x FY23E EV/EBITDA). Investors can buy the stock in the band of Rs. 38-41 and further accumulate on dips at Rs.33.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.hdfcsec.com/article/disclaimer-1795

SEBI Registration number is INZ000171337

Above views are of the author and not of the website kindly read disclaimer