Gujarat Heavy Chemicals - A Report

Gujarat Heavy Chemicals (GHCL) was established in 1987 jointly by GIIC and the Dalmias, through their companies - GTC Industries and Dalmia Dairy Corporation. Over the years, it has diversified into the manufacture of Industrial Chemicals and Textiles, with products catering to both the domestic and international markets. In the soda ash business, the company is expanding its horizon with acquisitions in Romania and charting new growth in the home textiles segment.

Textiles quota removal, an opportunity for GHCL

The dismantling of the quota regime has come as a breather for the US$ 342 bn global textile trade, resulting in aggressive realignment of production and outsourcing facilities globally. In home textiles, we anticipate Indian exports to surge 4 times to US$ 8 bn in FY2010 from US$ 2 bn currently, entailing a capex of US$ 15 bn. To capitalize on this burgeoning opportunity, GHCL has charted out a well thought strategy, both in India and abroad, through massive expansion plans.

Capex to cater to the swelling market demand

GHCL has envisaged capex of Rs 6343 mn over the next 18 months. This would include a brownfield expansion of soda ash capacity by 200,000 tonnes by March 2007 at a cost of Rs 3,100 mn. With the phasing out of the textiles quotas, the company has planned a capex of Rs 3243 mn; firstly to increase its production of yarn by 55,000 spindles to 140,000 spindles in a two-phased expansion, expected to be fully completed by March 2007 and secondly for setting up a state-of-the-art home textile manufacturing facility for bed-linen, curtains, duvet covers and other Top-Of-the-Bed products at Vapi in Gujarat, to be operational by April 2006.

Spate of acquisitions abroad to expand geographical reach

GHCL has recently signed an agreement to acquire over 90 per cent stake in US textiles major Dan River Inc. With this, we expect GHCL to amass tremendous benefits of expanded market reach and branding power and to eventually shift the production base of the acquired company to India on account of the domestic cost competitive advantage. In soda ash, it has already acquired a majority stake in SC Bega Upsom in Romania and has entered into an MoU with another player there.

Valuations

At the current market price, the stock discounts its FY07E earnings of Rs11.6 by 9.9x and FY08E earnings of Rs14.4 by 7.9x. In view of the earnings visibility in FY07E and FY08E and attractive valuations, we would recommend an Outperformer with price target of Rs173 discounting FY08E earnings by 12x, within 12-months time. However, we have not factored the acquisition made recently in Romania for soda ash and of textiles major Dan River in US, which could give an upside to our earnings.