Thirumalai Chemicals Q3 review: Raw material prices hurt; limited pricing power bigger worry

Black Rose Industries has gained 677 percent in the last 5 years. As of June 10, 2015, the share price was Rs 16.75 per share and now the current share price is Rs 130.10 with a market cap of Rs 664 crore.

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Thirumalai Chemicals, the second‐largest manufacturer of domestic Phthalic anhydride (PA), reported disappointing Q3 result. While sales dipped 16 percent sequentially, a sharp drop in gross margins spooked investors. Raw material costs surged 15 percent quarter-on-quarter (QoQ) and 63 percent year-on-year (YoY). This is similar to numbers witnessed in pre-FY16 phase when materials costs were nearly 80 percent of sales. Earnings before interest, tax, depreciation and amortisation (EBITDA) margin at 7.8 percent was impacted by higher fixed cost. Other expenses increased 5 percent QoQ.

Also read: We remain wary about the product price realization trend

Table: Standalone Q3 Financials

Source: Company

Table: Consolidated Q3 Financials

Source: Company

Consolidated numbers also were not encouraging. Sales and EBITDA of subsidiaries as implied by the consolidated numbers declined 19 percent and 47 percent YoY, respectively. This doesn’t augur very well for the Maleic Anhydride business which seems to have been impacted by a sharp surge in raw material costs.

In future, there could be some relief on raw material costs as crude oil prices have cooled off and even the Ortho-Xylene (raw material for PA) contracts have reportedly been finalized at lower levels. The bigger worry though is on the revenue front. PA demand has been soft and removal of anti-dumping duty on PA in the domestic market has expectedly intensified competition resulting in pricing pressure.

It’s noteworthy that DGTR in its anti-dumping sunset review investigation concerning imports of PA from Korea, Taiwan and Israel had recommended removal of duty.

Also read: Removal of anti-dumping duty intensifies competitive landscape

Further, PA is largely a commodity chemical, where 3-5 percent impact on product prices with everything else constant can adversely impact the operating profit by 15-25 percent. We expect competitive headwinds to continue for both the domestic PA majors - IG Petrochemicals and Thirumalai Chemicals. While these entities have been a beneficiary of revival in end markets of PVC (Poly Vinyl Chloride) and pigments and continue to diversify towards value added products, their higher exposure to PA (80-95 percent) makes them vulnerable to the pricing pressures.