DCW Ltd

Industry

Chemical industry is one of the oldest industries in India. It not only plays a crucial role in meeting the daily needs of the common man, but also contributes significantly towards industrial and economic growth of the nation.

The global chemical industry, estimated at US$ 2.4 trillion, is one of the fastest growing sectors of the manufacturing industry. Despite the challenges of escalating crude oil prices and demanding international environmental protection standards now adopted globally, the chemicals industry has still grown at a rate higher than the overall-manufacturing segment. As per industry reports the pharmaceutical segment contributes approximately 26% of the total industry output and the petrochemical segment dominates by 35-40%.

Commodity chemicals is the largest segment in the chemicals market with an approx. size of $ 750 billion while the specialty and fine chemicals segment accounts for $ 500 billion. Some of the major markets for chemicals are North America, Western Europe, Japan and emerging economies in Asia and Latin America. The US consumes approximately one-fifth of the global chemical consumption whereas Europe is the largest consumer with approx. half the consumption. The US is the largest consumer of commodity chemicals whereas Asia Pacific is the largest consumer of agrochemicals and fertilizers.

Chemical Industry is one of the oldest industries in India, which contributes significantly towards industrial and economic growth of the nation. It is highly science based and provides valuable chemicals for various end products such as textiles, paper, paints and varnishes, leather etc., which are required in almost all walks of life. The Indian Chemical Industry forms the backbone of the industrial and agricultural development of India and provides building blocks for downstream industries.

Chemical Industry is an important constituent of the Indian economy. Its size is estimated at around US$ 35 billion approx., which is equivalent to about 3% of India's GDP. The total investment in Indian Chemical Sector is approx. US$ 60 billion and total employment generated is about 1 million. The Indian Chemical sector accounts for 13-14% of total exports and 8-9% of total imports of the country. In terms of volume, it is 12th largest in the world and 3rd largest in Asia. Currently, per capita consumption of products of chemical industry in India is about 1/10th of the world average. Over the last decade, the Indian Chemical industry has evolved from being a basic chemical producer to becoming an innovative industry. With investments in R&D, the industry is registering significant growth in the knowledge sector comprising of specialty chemicals, fine chemicals and pharmaceuticals. 

The Indian Chemicals Industry comprises both small and large-scale units. The fiscal concessions granted to small sector in mid-eighties led to establishment of large number of units in the Small Scale Industries (SSI) sector. Currently, the Indian Chemical industry is in the midst of a major restructuring and consolidation phase. With the shift in emphasis on product innovation, branch building and environmental friendliness, this industry is increasingly moving towards greater customer orientation. Even though India enjoys an abundant supply of basic raw materials, it will have to build upon technical services and marketing capabilities to face global competition and increase its share of exports.

As the Indian economy was a protected economy till the early nineties, very little large-scale R&D was undertaken by the Chemical industry to create intellectual property. The Industry would, therefore, have to make large investments in R&D to successfully counter competition from the international chemicals industry. India has a number of scientific institutions and the country’s strength lies in its large pool of highly trained scientific manpower.

India also produces a large number of fine and specialty chemicals, which have very specific uses and are essential for increasing industrial production. These find wide usage as food additives and pigments, polymer additives, anti-oxidants in the rubber industry, etc.

Company Background

Incorporated in 1939, DCW was taken over by the present promoters led by the late Sahu Shriyans Prasad Jain. The company manufactures soda ash, caustic soda, PVC resins, soda bicarbonates, trichloroethylene, synthetic rutile, titox, utox, bromine, bromide and a few other chemicals. The company had also introduced a range of home products like packaged spices, flour and iodised salt. However, later, it sold its Captain Cook brand of home products to International Bestfoods. The soda ash plant is at Dhrangadhra, whereas the chlor-alkali and PVC plants are located at Tuticorin in Tamil Nadu. The company was incorporated in 1939 as Dhrangadhra Chemical Works Ltd. In 1987, the name was changed to the present one. The company’s entire shareholding in DCW Home Products Ltd has been transferred to Crescent Finstock Pvt Ltd following a Gujarat High Court approval. After this, DCW Home Products` best-selling Captain Cook brand has been sold to Corn Products Company, a 74% subsidiary of the US-based Bestfoods Inc.

Financials

DCW Net profit rose 117.82% to Rs 13.81 crore in December quarter of 2007 as compared to Rs 6.34 crore in the QOQ of December 2006. Sales rose 71.80% to Rs 208.91 crore in December quarter of 2007 as compared to Rs 121.60 crore in the QOQ of December 2006.

Valuation

DCW Ltd has a well-diversified product portfolio with its divisions of Chlor alkali, PVC and Soda ash on growth trajectory. Firm prices across product categories will provide significant boost to revenues and margins in the coming quarters. At the current market price the stock trades at 6x PE of its FY09E. At the current level the stock is attractively valued.

Outlook

Production of caustic soda is highly power intensive - 2/3rd of total cost. On account of shortage of power in China and rise in demand (both domestic and international) for chlor-alkali products the prices have firmed up significantly compared to that in the previous year. DCW, which has 15% market share for caustic soda in southern India, is well placed to take the advantage of this price hike with its captive power plants, power efficient membrane cell technology and firm orders from Aluminium producers (its major customers). The prices will remain firm in the current fiscal and that would provide a boost to the revenues and margins in the coming quarters.

Various manufacturers in the country have announced plans to add capacity of 4 lakh tonnes (in next 4 years) to the existing production capacity of 8.8 lakh tons. It is expected that even after such a capex, India would remain net importer on back to increasing domestic demand. DCW’s PVC division mainly caters to pipe industry, cables and films and is venturing into supplies to construction industry. The company is in the process of replacing its existing glass lined reactors with that of Stainless steel. This would help to add 10000 tons to the existing production capacity of 80000 TPA.

By replacing the old carbonators with 3 carbonation towers the company has increased the production 7000 MT and the new capacity stands at 1.03 Lakh TPA. Salt, the major salt raw material is produced at the company’s own salt works - just 22 kms away from plant. The company’s detergent manufacturing capacity consumes the captive soda ash production (close 10% of soda ash produced). Prices of products in this division (soda ash, sodium bicarbonate) have been above the previous years average prices and are expected to remain firm in the coming quarters.