We expect Thirumalai Chemicals' near term volume growth to come from increased capacity for food acids, fine chemicals, the improved operations from Malaysian subsidiary, followed by increased capacity for Phthalic Anhydride (+60,000 MT in 2019).
Continuing with our effort to review our portfolio to reflect basket of high conviction ideas with better earnings outlook, we make one change in our Diwali Portfolio - replacing Axis Bank with Thirumalai Chemicals. The portfolio since its inception in October 2017, has delivered 17% return against 2% rise in the benchmark Nifty.
For our earlier updates on portfoilo: Pls refer moil to replace IRB and Moneycontrol portfolios
Why are we replacing Axis Bank?
We maintain our long-term conviction that Axis Bank will emerge as a winner from the banking sector clean-up exercise and hence accumulating the weakness has been recommended by our team. However, post the RBI’s circular on bad asset recognition, we expect elevated provision to impact near-term earnings.
Thirumalai Chemicals: Improved outlook backed by both volume & pricing
Looking at companies with improving earnings outlook, available at reasonable valuation, Thirumalai Chemicals caught our attention.
Thirumalai Chemicals (Market cap: 2038 cr) is the second‐largest manufacturer (Capacity: 140,000 MT) in the domestic Phthalic anhydride market (Size: 350,000 MT) used as a key ingredient for PVC (Poly Vinyl Chloride) having application for varied industries viz. construction, medical and electrical insulations. Additionally, company’s Malaysian subsidiary (~25% of Sales) manufactures maleic anhydride (Capacity: 45,000 MT) used for food acids, oil additives and polyester resins.
We are encouraged by company’s recent earnings traction in domestic business and the turnaround in Malaysian subsidiary. Domestic business has fared well in recent times due to improving pricing trend, supply tightness and subdued raw material cost (ortho xylene).
We expect near term volume growth to come from increased capacity for food acids, fine chemicals, the improved operations from Malaysian subsidiary, followed by increased capacity for Phthalic Anhydride (+60,000 MT in 2019).
Based on recent quarterly results, we had upgraded our earnings expectations. Currently stock is trading at a multiple of 10.1x 2019e earnings, which is reasonable and at a discount compared to peers in the chemical universe.
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