Thirumalai Chemicals (Market cap: Rs 2226 cr) is the second‐largest manufacturer in the domestic phthalic anhydride (PAN) market after IG Petrochemicals. Phthalic anhydride is an ingredient for PVC (Poly Vinyl Chloride) and is also used in construction and electrical insulations. Further, Thirumalai’s value‐added product portfolio such as maleic anhydride (MAN), diethyl phthalate (DEP), and food acids has steady demand from the food and beverage, cosmetics, animal feed industries.
The company’s strong presence in a duopoly market (phthalic anhydride), a portfolio of value added products, capacity expansion plans and a healthy balance sheet makes it an interesting business to look at.
Phthalic Anhydride – Value chain
Phthalic anhydride (91 percent of FY 2017 standalone sales) is a downstream chemical, derived from oil derivative ortho xylene, used for the production of plasticizers, paints, pigments etc. Plasticizers, in turn are used in the production of polyvinyl chloride (PVC) and accounts for the majority of PAN demand.
Net import trends – domestic supply tightness
Phthalic anhydride’s domestic market size is about 350,000 MT, wherein Thirumalai Chemicals and I G Petrochemicals cater to more than 3/4th of the domestic requirements. Recently phthalic anhydride imports have significantly risen (33 percent CAGR 2015-17) and currently about 20 percent of demand is met through net imports. Further, capacity shutdown by Asian Paints (29,796 MT) in early FY 18 has added to the tightness in domestic supply tightness.
This provides an opportunity for existing Indian manufacturers to expand capacity.
Table: Phthalic Anhydride demand supply
Source: Ministry of Commerce, Ministry of Chemicals, Moneycontrol research
Additional capacity expansion
Thirumalai Chemicals (PAN capacity of 140,000 MT) is adding 60,000 MT of capacity in Dahej. It’s first phase is expected to be completed in 2019.
Further, the company has recently increased its food ingredients and fine chemicals production capacity by 40 percent and expects to ramp up capacity further in the current year (funded by internal accruals).
Extra leg of growth from the Malaysian subsidiary
Its Malaysian subsidiary, Optimistic Organic (~18 percent of FY 2017 consol. sales), has expanded the capacity of maleic anhydride to 45,000 MT (from 42,000 MT) in FY 17. Optimistic Organic is also establishing food ingredients and fine chemicals plants in Malaysia based on Thirumalai Chemicals’s technology.
Optimistic had to occasionally shut down plants for expanding capacity, leading to production losses. However, going forward, Thirumalai expects improved profitability from its Malaysian subsidiary as production stabilizes.
Interestingly, India itself is an important market for Malaysian operations as India imports majority of its requirement of maleic anhydride (market size: 52,000 MT) due to unavailability of raw material (En-Butene).
Improving return ratios
Source: Ace equity
The key reason for improving return ratios is subdued raw material prices (orthoxylene). Phthalic anhydride prices have also eased over the years, but companies in this segment have not passed on the full benefit to consumers. This indicates some pricing power as demand for phthalic anhydride has also risen.
The biggest use of ortho xylene (roughly 90 percent) is in the manufacture of phthalic anhydride . Typically, one ton of ortho xylene is required to produce about 1.08 ton of phthalic anhydride. India has a huge surplus capacity for ortho xylene after taking into account domestic production of phthalic anhydride. So medium term phthalic anhydride expansion plans of the industry (113,000 MT additional capacity) is well covered.
Infact, RIL has 562,000 MT installed capacity for ortho xylene and is one of the biggest producer of ortho xylene in the world.
Financials and valuations
Near term sales volume growth is expected to come from increased capacity for food acids, fine chemicals and the improved operations from Malaysian subsidiary.
In the medium term, company’s major volume growth is expected to come the expanded capacity for phthalic anhydride becomes operational.
Margin tailwinds are expected to continue, benefiting from subdued ortho xylene prices and improving demand scenario for phthalic anhydride. Further, company’s exposure to food acids, fine chemicals are expected to aid overall margins, as well.
Currently the stock is trading at a multiple of 13.8 times estimated 2019 earnings, which is reasonable and at a discount compared to peers in the chemical universe. Its significant presence in a key chemical intermediate and attempts to scale up the products value chain, positions it for a better margin profile which investors can consider.
Anubhavsays 