Improved product mix, margins make Atul a good long-term bet

Ahmedabad-based Atul Ltd, which started operations in 1947 with just a handful of dyestuffs, has emerged into a big business house with interests in chemicals and textiles. Its manufacturing facilities are located in Ankleshwar, Gujarat and Tarapur, Maharastra.
Business: Atul operates through seven business divisions — agrochemicals, aromatics, bulk chemicals & intermediates, colours, pharmaceuticals & intermediates, floras and polymers.

The agrochemicals division started manufacturing phenoxy herbicides in 1967. Subsequently, it added fungicides, insecticides and various intermediates. Phosgene, a vital raw material, is produced by this division, which contributed 20.4% to company’s revenues in FY09. International markets, comprising 35-plus countries, absorbed 58% of the division’s total production in FY09.

The aromatics division caters to cosmetics, flavours & fragrances, bulk drugs, dye intermediates and plant & animal micronutrients industries. The division contributed 26.1% to the company’s total revenues and 66.2% of the produce was exported in FY09.

The bulk chemicals and intermediates division was started in 1960 with manufacture of only bulk chemicals. In 1963, the division started manufacturing intermediates. The division contributed 10.7% to Atul’s revenues in FY09 and 22.2% of the division’s production was exported.

The colours division, which is the largest for Atul, manufactures dyestuffs for textile, paper, wool and silk industries. It contributed 22.3% to the company’s revenues in FY09. 45% of its produce is exported.

The pharmaceutical and intermediates division initially supplied sulpha drug intermediates to Ciba-Geigy, but later diversified into various products. This division contributed 6.3% to the company’s revenues, while 79.7% of the division’s products were exported.
The polymers division produces epoxy resins and hardener systems and contributed 16.9% to Atul’s revenues in FY09 and 18% of the produce was exported.

Investment rationale: Atul undertook major capacity expansions in FY09. It increased agrochemical capacities by 1500 mt (14%), fragrance intermediate capacities by 2,400 mt (40%), chemical intermediate by 1,000 mt (71%) and composite intermediate by 540 mt (68%).

The agrochemical division plans to expand herbicide capacities by 50%. It also plans to expand its business brands and increase contract manufacturing. Strategic alliances are being sought for contract manufacturing. Atul also plans to introduce new products coming off patent. The division has now come out of the red.

Atul plans to introduce six products with global potential in the colour’s division.
Captive phosgene production offers advantages to the pharmaceutical and intermediates division for manufacturing phosgene-based intermediates and chemicals. Closure of some phosgene-based intermediate manufacturers in Europe, US and China offers opportunities to Atul. Some Indian companies have already started buying. Atul has also hinted at capacity expansion in all pharma plants.

The company has also been adding value-added products, too. These measures have led Atul to have a diversified customer base. It has also insulated the company from cyclicality of businesses. The introduction of value-added products marks a shift towards more profitable consumer pack business. Focus on branded products will add to margins, too.

Most expansions are on these lines and it is coming out with new off patent drugs and agrochemicals. The company is planning extensive brand-building programmes. It also aims to add three new subsidiaries overseas, apart from the five it already has in Europe, US, China and India. Atul’s planned capital expenditure in financial year 2009-10 will be Rs 72 crore. This will be used for ongoing expansions as well as doubling its resorcinal capacity to 5000 tpa in two years from 2,500 tpa currently.

Concerns: Exports contribute significantly to the Atul’s revenues. Moreover, foreign currency loans stood at Rs 150 crore at the end of FY09. Therefore, any fluctuation in exchange rates would have a bearing on profitability.

Valuations: Atul’s topline in the first quarter ended June 2009 fell 11.52% year on year. Topline at Rs 261 crore also slipped from Rs 295 crore in the same quarter of the previous fiscal. The declines were owing to a de-growth in bulk chemicals and colours business, lower export demand and a general slowdown in realisations. However, Atul’s operating costs declined and the company’s operating margins improved by 430 basis or 28.6% to Rs 36 crore.

Reduction in interest costs and no negative impact of forex fluctuations brought the company back into black. Atul’s net profits stood at Rs 12 crore, despite a de-growth in two of its business segments. Going forward, expansions coupled with improved product mix and margins, as well as signs of global recovery, make the stock a good medium- to long-term bet for investors.

Disclaimer: The writer does not hold any share in the company