CRISIL maintains valuation grade of 5/5 to Pondy Oxides

Pondy Oxides & Chemicals Ltd’s (POCL’s) Q1FY13 revenues were in line but profitability was lower than CRISIL Research’s expectations. Revenues from the merger of Lohia Metals Private Ltd (Lohia), which was not part of the Q1FY12 financials, boosted total revenues by 21% y-o-y to Rs 822 mn. However, EBITDA margin contracted by 100 bps y-o-y to 4.1% due to declining lead metal prices and higher other expenses. Consequently, PAT margin declined by 99 bps y-o-y to 1.2% and EPS was Rs 0.9. We lower our FY13 earnings estimates and maintain our fundamental grade of 2/5, indicating that its fundamentals are moderate relative to other listed securities in India.

Segments record robust growth; margins contract
Revenues from the merger of Lohia and good demand supported growth across all the segments. Metal and metal oxide segments (85% of total revenues) registered 26% y-o-y growth each in Q1FY13. The plastic additive segment recorded the highest growth of 44% y-o-y backed by healthy demand. However, all segments reported margin contraction. The metal oxide segment’s EBIT margin contracted the most by 457 bps y-o-y to 7% followed by the plastic additive and metal segments’ 149 bps and 177 bps to 9% and 2% respectively.

Higher other expenses and declining lead prices pressurise margins
Other expenses (power and fuel, selling and distribution costs), as a percent of sales, increased to 10% in Q1FY13 from 5% in Q1FY12 due to a sharp increase in power tariff in Tamil Nadu. Also, lead metal price, at a peak of US$2,700 per tonne in the beginning of last year, has gradually declined to the current US$1,850-2,000 per tonne. We expect lead price to remain at this level which should improve margin though it would remain lower than estimated. POCL’s margins are susceptible to lead price movement and currency volatility as it imports 90% of its raw materials.

Reiterate our fair value estimate of Rs 36; CMP has strong upside
We continue to use the discounted cash flow method to value POCL and largely maintain our fair value of Rs 36 per share. At the current market price of Rs 25, our valuation grade is 5/5.

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.

© CRISIL Limited . All Rights Reserved. Published under permission from CRISIL"