CRISIL maintains fair value of Rs 34 to Pondy Oxides

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CRISIL maintains fair value of Rs 34 to Pondy Oxides

CRISIL Research has come out with its report on Pondy Oxides & Chemicals (POCL). The research firm has maintained the fundamental grade of 2/5 to the company in its March 5, 2012 report.

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CRISIL Research has come out with its report on Pondy Oxides & Chemicals (POCL). The research firm has maintained the fundamental grade of 2/5 to the company in its March 5, 2012 report.

Pondy Oxides & Chemicals Ltd's (POCL's) Q3FY12 standalone revenues were in line while operating profitability was lower than CRISIL Research's expectations. Margins declined mainly due to consumption of high cost lead metal inventory procured in August and September 2011 and subsequent drop in finished product prices with the decline in lead prices post September. Lead prices have remained stable for the past four months; however, as the company remains susceptible to price volatility, we maintain our fundamental grade of 2/5.

Q3FY12 result analysis (standalone)
• Revenue declined by 1.5% y-o-y to Rs 630 mn due to 7% and 20% y-o-y de-growth in metal oxide and plastic additives, respectively. However, metal business revenue grew by 10.5 % y-o-y.

• EBITDA margin declined by 187 bps y-o-y to 2.9% mainly due to inability to pass on high cost raw material inventory. Raw material cost as a % of revenue increased to 87.7% in the current quarter from 85.6% in Q3FY11.

• The company holds inventory of ~40 days; lead prices, which averaged ~US$2,300 in September 2011 declined to ~US$1,980 during Oct-Dec 2011, and this led to decline in finished goods prices leading to contraction in margin.

• Metal segment EBIT margin declined by 300 bps y-o-y while for metal oxide and plastic additives, it improved by 103 bps and 274 bps.

• The company reported PAT of Rs 3 mn against Rs 11 mn in Q3FY11. Accordingly, EPS was Rs 0.3 vis-a-vis Rs 1.1 in Q3FY11.

Key developments
• Merger of Lohia Metals Private Ltd (LMPL, POCL's 51% subsidiary) with POCL is in advanced stage of completion in the Madras High Court and is expected to get completed in FY12.

• The company has acquired land in Andhra Pradesh for Rs. 4.5 mn and has applied for the required approvals for future expansion.

Earnings estimates revised downwards for FY12
Inability to pass on high cost raw material inventory lead to contraction in margin in the current quarter. Hence we are lowering our FY12 earnings estimates.

Valuation: Current market price has strong upside
We continue to use the discounted cash flow method to value POCL and maintain fair value of Rs 34. At the current market price of Rs 25, the valuation grade is 5/5.

To read the full report click on the attachment

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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