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Monday, September 8, 2008

INDIA GLYCOLS (IGL) Small Cap Growth Stock

India Glycols is set to benefit from its aggressive expansion and diversification plans. The stock appears attractive for investors with a horizon of 2-3 years

Beta: 0.39
Institutional Holding: 9.1%
Dividend Yield: 2.0%
P/E: 3.7
M-Cap: Rs 567.1 cr
CMP: Rs 203.40


INDIA GLYCOLS (IGL) is Delhibased company which manufactures industrial chemicals — particularly derivatives of ethylene oxide and mono ethylene glycol (MEG) — from molasses. The company is aggressively expanding its manufacturing capacity and diversifying its product portfolio. Since the benefits of these investment projects will start accruing in the current financial year, investors with a horizon of 2-3 years can consider this stock.

BUSINESS:

IGL has over 1.2 lakh tonne per annum (tpa) capacity of ethylene glycol and 73,000 tpa of ethylene oxide derivatives. It is the only company globally to produce these chemicals entirely from molasses. It has also set up capacities for potable alcohol, industrial gases and guar gum derivatives. These are intermediate industrial chemicals that find usage in various industries, particularly textiles.

IGL has established itself as a producer of specialty grade ethoxylates and focuses on the export market. Last year, it derived nearly 20% of its revenues from exports. It has set up a subsidiary in Singapore to assist in its exports. The company has set up production facilities in Kashipur (Uttarakhand) and Gorakhpur (Uttar Pradesh). Recently, it acquired Shakumbari sugar mill in Saharanpur for Rs 47 crore, which has 3,200 tpd crushing capacity with 40 kilo litres per day (klpd) distillery for making ethanol from molasses or sugar juice.

The company has set up a state-ofthe-art R&D centre to develop innovative products for special customer requirements. Recently, it diversified into the field of herbal extraction through a 100% export-oriented unit (EOU) at Dehradun, Uttarakhand. The unit will feed the growing international market for high-value nutraceutical herbal extracts used as pharmaceuticals, food and food supplements.

The company’s main raw material — molasses — is a waste product generated by sugar mills. IGL has created huge storage for the feedstock, which can be procured in large quantities during the crushing season. Besides, it has set up an additional distillery in Gorakhpur to improve availability of feedstock.

GROWTH DRIVERS:

IGL has charted ambitious expansion plans to invest nearly Rs 500 crore in various projects in the next two years. It expanded its production capacity by around 20% in the quarter ended June ’08 through debottlenecking. A plant to produce 80 tonne per day (tpd) of carbon dioxide was commissioned recently at its Kashipur facility. A similar plant is being set up at its Gorakhpur unit.

At Shakumbari, IGL plans to enhance its crushing capacity to 5,500 tpd by December ’08 and distillery capacity to 240 klpd by March ’09. Ultimately, the crushing capacity will be raised to 10,000 tpd and distillery capacity to 300 klpd. At the same time, the company will add to its own power generation capacity from the current 11 mw to 55 mw across all of its three units.

In Noida, IGL has built nearly 2,70,000 sq ft of commercial space and plans to lease out 200,000 sq ft of the same. The average monthly rental is likely to be around Rs 75 per sq ft, which will generate revenues of around Rs 1.5 crore every month. FINANCIALS: IGL was growing at a compound annual rate (CAGR) of 17% till ’02, but has witnessed a CAGR of nearly 42% since then. Its operating margins have fluctuated during this period and stood at 22.4% for the year ended March ’08. The company has been carrying a debt-equity ratio in excess of 1 for the past several years. However, in FY08, this figure reduced marginally to 1.4. The return on capital employed has remained healthy in the past five years, peaking to 30% in FY08

. During the quarter ended June ’08, IGL had to shut down its plants for 21 days for debottlenecking and change of catalyst, which resulted in heavy erosion in profits.

VALUATIONS:
Based on the company’s expansion plans — which are being commissioned in phases throughout FY09 — we expect IGL’s profit to grow 25% to Rs 70 crore during FY09. At the current market price of Rs 203.40, the scrip is trading at 2.9 times its estimated FY09 earnings. The full benefits of the expansion in the current year will be available to the company only in FY10. Hence, the scrip appears attractive for long-term investors.

MEASURED DOSE
India Glycols manufactures industrial chemicals — particularly derivatives of ethylene oxide and mono ethylene glycol (MEG) — from molasses It is the only company globally to produce these chemicals entirely from molasses It has also set up capacities for potable alcohol, industrial gases and guar gum derivatives IGL has established itself as a producer of specialty grade ethoxylates and focuses on the export market It has set up a state-of-the-art R&D centre to develop innovative products for special customer requirements It has also diversified into herbal extraction through a 100% EOU at Dehradun The company has charted ambitious expansion plans to invest Rs 500 crore in various projects in the next two years It expanded its production capacity by around 20% in the quarter ended June ’08 through debottlenecking.

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