Thursday, December 31, 2009

>Pondy Oxides & Chemicals Ltd (HDFC SECURITIES)

Company Background: Pondy Oxides & Chemicals Ltd (POCL) incorporated in 1995, is one of the India's leading metals, metallic oxides and plastic additives producers. POCL has broad based operations, manufacturing of Lead, Litharge Red lead, Zinc oxide, Lead sub Oxide, and solid and liquid stabilizers of PVC.

POCL has two subsidiary companies - M/s Baschem Pharma Ltd (100% subsidiary) at Maraimalai Nagar in Tamilnadu to manufacture liquid stabilizers, Epoxy oil and paint driers (manufacturing facilities since closed) and M/s Lohia Metals Pvt Ltd (51% subsidiary), which has an annual capacity of 12,000 tonnes of metal refining. Baschem Pharma Ltd is currently, solely engaged in trading activities and hence does not contribute any significant revenues/profits to the consolidated financials of POCL.

POCL has four different product divisions:

  • Metallic Oxides Division
  • PVC Stabilizers Division
  • Smelter Division
  • Zinc Division

POCL also had a battery-producing unit, which was sold off in 2007, as it did see scope in that segment of business.

POCL has its manufacturing facilities in Pondicherry and Tamilnadu. The factories for Metallic Oxides Division and Plastic Additives Division are situated in Pondicherry while the factories for Smelter Division and Zinc Refining Division are located in Tamil Nadu. It has a capacity of 12,000 Tonnes p.a. for Metallic Oxides, 6,000 Tonnes p.a. for PVC stabilizers, 5,000 Tonnes p.a. for oxides & refining and 14,400 Tonnes p.a. for Smelter division. A part of the production of lead oxide is used captively by plastic additives unit. Similarly Zinc and Lead are used captively for manufacture of oxides and alloys.

POCL earns ~ 60% from metals division, 20% from the oxides division and another 20% from the plastic additives division out of its overall sales. In the metals division lead metal forms ~80% of the sales while zinc forms the remaining 20%.

The products of the company are consumed by various industries namely, Tyres & Ceramics (Zinc Oxide), Cable sheeting (Lead oxides), Galvanizing units (Zinc).

POCL has large clientele which includes big names like Amara Raja Batteries, Exide Industries, J K Tyres, Supreme Inds, Kisan, Shriram EPC, Chemplast and MRF Ltd to name a few.

POCL is a recognized export house and mainly exports lead metal. Even though plastic additives are also exported, they form a small part of the total exports of the company. The export margins of the company are higher and stabler than the domestic margins.

Stability in the metal prices (especially lead) could lead to better volumes and consistent profits.
The business of POCL to a large extent is dependent on the metal prices especially lead as huge fluctuations in the metal prices create pressure on the margins of the company. Lead is a very corrosion-resistant, dense, ductile, and malleable bluegray metal. The metal prices have been quite unfavorable for POCL during FY09 and therefore led to fall in its overall margins during the period. The metal prices have stabilized since the start of this fiscal and hence has led to high volumes. POCL is also dependent on Zinc to some extent though lead is its main product.

Higher focus on exports could lead to better margins and efficient working capital management
POCL is also into export sales, mainly of lead metal. The exports have not been very high till now, for instance the first half of FY10 saw export sales of ~Rs 10 crores. The company is in H2FY10 focusing on improving on this front and increasing its exports sharply. POCL expects exports to form 50% of the total revenues in H2FY10. Exports form a key to the overall business structure of POCL. The robust export situation in H2FY10 could lead to better topline and bottomline for FY10. Export realizations are based on LME prices, while domestic prices at times quote lower than LME prices. Further export sales are made against sight L/C and receivables are realized faster.

Higher utilization of capacities to lead to economies of scale and spread of fixed costs
Till H1FY10, POCL did not utilize its plants to its full capacity. At the end of FY09, POCL had installed capacity of 33,460 MT of Metals and Metallic Oxides and 6,000 MT for Plastic Additives. It manufactured 10,104 tonnes of metals & metallic oxides and 4105 tonnes of plastic additives in FY09. Post H1FY10, it has started to utilize almost 100% capacity in the metals and metallic oxides segment. This will enable the company to reduce its per unit cost and also lead to a spread of fixed costs which could eventually lead to better margins for the company.

Shift to LME based pricing for sales and purchases to help POCL earn stable profits
Earlier, POCL used to make its sales and purchases on a spot market basis and hence there was no assurance of maintainable profits, as the raw material price fluctuation could not always be passed on to its customers. In FY09, POCL took a hit on its profits because of this reason, as, the huge volatility in the raw material prices especially lead metal could not be passed on to its customers leading to a fall in its profits.

To read the full report: POCL