A stock from a leading business group available at an attractive PE of just 3.96 !

Aditya Birla Chemicals Limited [ ABCL ]is engaged in the production of five major chemical groups, namely, chlor-alkali products, epichlorohydrin, epoxy resins, phosphates and sulphites. These chemicals find application across a wide range of industries including food, food processing, personal consumer products, coating, civil engineering, wind energy, composites, electrical, pulp and paper, detergents, water treatment and metal treatment.

Products of ABCL are exported to 58 countries across the globe. The products are manufactured at ten units — four in India, five in Thailand and one in China. The chemicals produced at these factories are recognised the world over for their high quality.

Sales/Revenues for fiscal 2009-10 was Rs.224 crores as compared to previous years fiscal of Rs.205 crores, an increase of roughly 9.02 per cent. However, PAT increased by 30.4 per cent –it was Rs. 46 crs for fiscal 2008-09 which increased to Rs.60 crores in 2009-10. The promoters stake in ABCL is 56.31 per cent whereas institutional holding [ including FII’s ] is a paltry 0.11 per cent.

The best part of ABCL’s business model is that the Operating Profit margins have been hovering in the range of 36-46 per cent for the past six years. Net Profit margins are impressive too – it’s in a range of 21-27 per cent.

ABCL ‘s scrip having a Face Value of Rs.10 is currently trading at Rs. 99.90, up by 1.27 per cent over yesterdays close. Currently the EPS is Rs.25.97 and hence the PE works out to 3.96 only. This company with a market capitalization of Rs.233 crores has a Debt Equity ratio of less than 0.25 and an Interest Cover of 14 times!

Now, one should really wonder why a company which sells its products to a wide range of industries, strong profit margins and a low P/BV of 0.77 should be trading at a low PE of 3.96 only and that too when the bulls have been roaming on Dalal Street for over a year! The leader in this industry is Tata Chemicals which has a PE of 18 and now if we consider a conservative PE of around 9 or even a bit lower, then too ABCL has potential to rise on pure fundamentals. The 52 week range was Rs.104/50.

Conclusion : Those who own the stock may continue to hold the stock. And those who don’t have ABCL in their portfolio, may consider adding a small portion of this stock on sharp corrections if one is extremely patient since such stocks are not the “buzzing” type of stocks. But, if for some reason the alco/chloro chemical industry gets re-rated by the big brothers [ read institutional/FII’s ] then this will be the first stock to go through the roof and then the rewards can be great. As they say ” patience will give you keys to the kingdom.”

But, unfortunately in the world of stocks, the ruthless impatience exhibited by investors in making quick gains and big bucks far outweighs the patience in embracing slow and steady returns that leads to the kingdom of wealth and happiness.

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd