Indian equities



Chemfab Alkalies operates in the heavy chemicals industry and is in the business of manufacturing Chlor Alkali products.

It primarily manufactures Caustic Soda Lye, comprising about 75% of revenues, which is used in various basic industries such as paper, aluminium, textiles, etc. It also produces chlorine (comprising 12%-13% of revenues), hydrogen, sodium hypo chlorate, and hydro chloric acid – also finding applications in various manufacturing industries.

The company reported reasonably stable (albeit somewhat declining) operating profits and revenues in the last five years – reporting about 16cr in operating profits on revenues of 77cr in the last financial year. It held cash and liquid assets of over 27cr as at 31st March, 2012

The business is very cyclical – dependent not only on international demand fluctuations (primarily from aluminium manufacturers) arising from global economic cycles but also global oversupply in its own industry arising from capacity additions by competitors. For e.g., the company operated only at 75-80% capacity in the previous year when excess supply was not fully absorbed by demand. This situation results in dampening of selling prices.

The business is exposed to increases in energy as well as raw material costs. This is usually passed through to customers but this appears to be more a function of industry practice than firm-specific competitive advantages.

It is also exposed to a weakening INR as it is generally a net importer of capital equipment.

The outlook for the chlorine business doesn’t appear to be promising and demand growth is slower than the caustic business – management foresees low capacity utilisation in this segment for the near future.

Management have adopted a niggardly dividend policy despite the abundance of liquid resources (see above). They have stated “lower volumes .. lower profitability .. need to conserve liquid funds” as reasons for not recommending ANY dividend for the year. Any equity shareholder reading this should forcefully challenge management on this reasoning – the extent of the policy is surely unreasonable considering the abundance of liquid assets available with the company.

Management of several listed companies have gotten away for far too long with such disregard for equity shareholders – it is time for equity shareholders to step up and take action to rightfully assert a more rational dividend policy concerning their equity shares.