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Aaron Chaze
Atul has become a stock worth watching. First, there is the possible merger with its subsidiary Cibatul following Ciba Speciality Chemical's exit from that company. And second, the sale of the remaining Novartis and Ciba Speciality Chemicals stake will result in large cash flow to Atul. Cibatul has a strong product range in epoxy resins and bulk drugs, which will broadbase Atul's portfolio of bulk drugs and chemicals. The Atul stock has already gained around 30 per cent to Rs 22 in the last couple of weeks. But even then the market capitalisation is just Rs 86 crore, against a book value of Rs 231 crore. The stock is available at just a fraction of its net current assets of Rs 283 crore.
Merging with Cibatul makes sense as it is a profit making company with related businesses and can make a qualitative difference to Atul's balance sheet. Cibatul has already developed manufacturing processes for a new bulk drug called azithromycin in collaboration with Atul. Besides, operating margins at Cibatul are higher at 18 per cent than Atul's present average margins of 13 per cent.
Atul's own business has been improving with increased offtake in the domestic agrochemicals market and better margins in the export market for dyestuff. Despite the improved prospects the market had not been very enthusiastic about the stock. One reason was that for the last two years Atul has depended on extraordinary income to help report a profit. In 1996-97 it benefitted from a Rs 33 crore inflow from selling its right to export vat dyes except to the USA on behalf of BASF AG. Atul has already started exporting vat dyes under the brandname Novatic. In 1998-99 it benefitted from the sale of nine lakh shares of Novartis India which yielded a profit of Rs 31 crore. In the current year the company has sold off around another 1.2 million shares of Novartis stock for roughly Rs 70 crore. Atul still holds another 4 lakh shares of Novartis as well as shares of Ciba Speciality which are cumulatively valued at Rs 70-75 crore.
Operationally also the current year should be better. Atul has carried out a restructuring of its loss making bulk chemicals business in order to focus away from caustic soda and on speciality chemicals, which should improve margins. Further, a 18 MW power plant has stabilised operations which will reduce power costs for this power intensive business.
Now, only capital restructuring remains as Atul continues to be highly leveraged. The debt equity ratio was 1.55:1 in 1997-98. Debt repayment will make a huge difference to the profit earning capacity. Interest cost is the major contributor to losses accounting for 90 per cent of its operating profit. The extraordinary cash flows received over the last two years are being utilised for plugging losses. If Atul can throw up a book profit from its businesses after restructuring both its operations and capital structure, this year it will make a major difference to the stock.
Manugraph Industries; consistent performer
The half yearly performance from Manugraph Industries has been within the markets expectations. The change that has taken place in the stock also is a reflection of this fact. The stock price that not too long ago traded below par has nearly doubled in the past couple of months to Rs 14.5.
The company, which is India's leading printing machinery manufacturer, had undertaken a successful restructuring of both its operations as well as its capital structure. The first part of the restructuring was to reduce the cost of debt. This has already been accomplished to a great extent. The next and more important shift that has taken place is in marketing. Manugraph has consciously cut down its presence in the domestic market for high end printing presses. Instead it has concentrated on the export markets. For the last two years it has raised the proportion of export revenues to almost 65 per cent of its total revenues. Given the simultaneous reducing emphasis on domestic sales, overall revenue growth has remained flat, but the profit margins have improved tremendously.
This profit growth was a major development during 1997-98 when it managed to report an EPS of Rs 4. This trend has accelerated during the first half of the current year. Despite revenues remaining flat at Rs 39.5 crore for the current first half over the corresponding period last year the profit after tax has increased by 55 per cent. This was the result of operating margins improving to 16.5 per cent from 15 per cent and a reduction in interest cost by 10 per cent. Going by the growth trend being consistently displayed by Manugraph it is likely to end the year with a profit after tax of Rs 4 crore yielding an EPS of Rs 5.5.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
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