UNEXPLORED MULTIBAGGER SMALL CAP CHEMFAB ALKALIS

UNEXPLORED MULTIBAGGER SMALL CAP STOCKS
EQUITY RESEARCH REPORT
CHEMFAB ALKALIS LTD. BSE CODE: 506894
NSE CODE: CHEMFALKAL
Industry: Commodity Chemicals CMP: Rs. 94.40 (06/09/2015)
Market Cap: 86.66 (INR in Crore) Target Price: Rs. 170
Date: Sep 06, 2015 Time Period: 12 – 24 months
Saral Gyan Capital Services
An Independent Equity Research Firm
www.saralgyan.in | www.saralgyan.com

HIDDEN GEMS – AUGUST 2015
- 2 - SARAL GYAN CAPITAL SERVICES
TABLE OF CONTENT
S.No Content Page No.
1. Company Background 03
2. Recent Developments 06
3. Financial Performance 07
4. Peer Group Comparison 09
5. Key Concerns / Risks 09
6. Saral Gyan Recommendation 10
7. Disclaimer 12

1. Company Background
A Chennai based company Chemfab
Alkalis Ltd (CAL) was incorporated in
1983. The company was promoted by
M/s Titanium Equipment and Anode Manufacturing Company Limited. CAL
manufactures chemicals for industrial applications. In June 2009, chlorates division has
been closed permanently due to frequent power problems and labor unrest. Company
established India’s first Membrane Cell Caustic Soda Plant and commenced production
from July, 1985.
CAL is the first Indian company to use the power saving ion exchange membrane cell
technology to manufacture caustic soda. Chemfab Alkalis (CAL) also produces Sodium
Hypochlorite and sodium Chlorate and the bye products of caustic soda like chlorine and
hydrozen. Chemfab Chlorates, a group company was amalgamated with Chemfab
Alkalies Ltd during the year 2001-02 on the approval from High court of Madras.
The company has also takenover the management of Salt fields by the way of backward
integration. The salt fields are situated at marakanam 25 kms from the factory of the
company. Chemfab Alkalis was selected for the 1988 award of excellence in
Environment Preservation and Pollution Control by the Federation of Indian Chambers
of Commerce and Industry for its membrane cell technology which totally eliminated
the use and disposal of mercury.
Products
 Caustic Soda Lye in two grades (33% & 48%).
 Liquid Chlorine
 Hydrogen Gas
 Hydrochloric Acid
 Sodium Hypochlorite / Bleach Liquor
 Barium Sulphate
The above products are completely free from mercury and are used in food processing
industries as well.
The first ever pollutant free caustic soda in the country was from CAL. The quality of the
products matches the requirements of BIS and meets international specifications.

CAL commenced the operation with the production capacity of 25 TPD and now
operates at 100 TPD. The features of the plant recently revamped it’s with the latest-
state-of-the-art BiTAC technology, and looking forward to double its production capacity
to 200 TPD.
Chlor alkali market in India has witnessed healthy growth in recent years, largely driven
by increasing demand from end user industries due to higher output from the chemicals
sector. Chlor alkali market is broadly categorized into three segments, namely Caustic
Soda, Chlorine and Soda Ash. Caustic Soda finds major application in diverse industries,
such as soap & detergents, pulp & paper and textile processing among others. Chlorine
is produced as a by-product during caustic soda production and is widely used during
PVC manufacturing, drinking water disinfection and pharmaceutical production. Soda
Ash is used mainly during glass, soap & detergent and silicate production.
With strong growth anticipated in all these end use industries, the market for chlor
alkali in India is forecast to grow considerably in the next five years.
According to India Chlor Alkali Market Forecast & Opportunities, 2019, the market for
chlor alkali in India is projected to exhibit a CAGR of around 7% during 2014-19. The
market is expected to witness high penetration rate in the Western and Northern
regions of the country. The market, though highly fragmented at present, is gradually
moving towards consolidation, particularly with the entry of foreign players and
expansion in distribution network of existing players. Among the three market
segments, caustic soda held the highest revenue share, followed by chlorine and soda
ash segments.
Soap & detergent is the main end user industry in the chlor alkali market, followed by
glass, pulp &paper, alumina and other industries.

Research & Development
The Company has an in-house Research Development Department, where the main
areas of focus are Energy Conservation, Process Upgradation and Environmental
Preservation. The Ministry of Science and Technology, Department of Scientific and
Industrial Research, Government of India, has recognized the Company’s inhouse R & D
facilities, which is valid upto 31st March, 2017. The Company has a sophisticated Quality
Assurance (QA) Laboratory recognized by DuPont, USA for the analysis of Chlor- Alkali
brine.
The Brine from various Chlor- Alkali Industries in India is being analyzed at CAL-QA
Laboratory. The Company continues to take all possible steps to conserve energy in
every area of its operations recognized by DuPont, USA for the analysis of Chlor- Alkali
brine. The Brine from various Chlor- Alkali Industries in India is being analyzed at CAL-QA
Laboratory. The Company continues to take all possible steps to conserve energy in
every area of its operations.
The company continues to use hydrogen gas instead of conventional fuel reducing the
carbon footprint. The company has also installed solar street lightings and also the Bio
Gas plant for replacing conventional energy sources by making investment of Rs. 10
lakhs.

2. Recent Development
Replacement of old plant with Bipolar BiTAC Electrolysers Plant from CEC, Japan.
In 2014, company introduced a new BiTAC® Electrolysers from CEC, Japan for the first
time in the Country. The new Plant was commissioned during August 2014, and is
operating well within the agreed operational parameters and will result in savings in
energy consumption to the tune of 30% to 40%.
Company has also replaced the old Caustic Concentration plant with a new Plant and
this was commissioned in the month of March 2015. This will also result in improved
operational efficiencies.
Ongoing Expansion Plans to drive Revenue Growth & Profitability
Company awaits the statutory clearances for its expansion plans and a favourable
decision on its appeal before the National Green Tribunal. Company has also made plans
for venturing into newer areas for Chlorine utilisation.
The Company is in the process of developing 632 acres of salt fields and the production
of salt is expected to commence post completion of the development activities.
The new Salt fields which were acquired are slated to commence production shortly.
With all these measures, management is confident that company is poised for a great
leap ahead and achieving good results in the forthcoming years.

3. Financial Performance
Chemfab Alkalis standalone net profit declines 51.69% in the June 2015 quarter
Net profit of Chemfab Alkalis declined 51.69% to Rs 1.57 crore in the quarter ended
June 2015 as against Rs 3.25 crore during the previous quarter ended June 2014. Sales
declined 25.78% to Rs 22.92 crore in the quarter ended June 2015 as against Rs 30.88
crore during the previous quarter ended June 2014.
Chemfab Alkalis standalone net profit declines 6.08% in the March 2015 quarter
Net profit of Chemfab Alkalis declined 6.08% to Rs 1.39 crore in the quarter ended
March 2015 as against Rs 1.48 crore during the previous quarter ended March 2014.
Sales rose 4.83% to Rs 25.60 crore in the quarter ended March 2015 as against Rs 24.42
crore during the previous quarter ended March 2014.
For the full year, net profit declined 37.81% to Rs 10.23 crore in the year ended March
2015 as against Rs 16.45 crore during the previous year ended March 2014. Sales
declined 1.97% to Rs 109.85 crore in the year ended March 2015 as against Rs 112.06
crore during the previous year ended March 2014
1 2 3 4 5 6
Net Sales 24.42 30.88 25.55 27.82 25.6 22.92
Net Profit 1.48 3.25 2.11 3.48 1.39 1.57
24.42
30.88
25.55
27.82
25.6
22.92
1.48
3.25
2.11
3.48
1.39 1.57
0
5
10
15
20
25
30
35
RsinCrores
Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15
Last 6 Quarters Net Sales & Profit

Current & Expected Earnings
Quarterly Ended Profit & Loss Account
Company performance was impacted in FY 2014-15 mainly due to the fall in
international caustic prices which averaged during the year between USD 320 – 340 per
MT CIF. However, we believe that international caustic prices will remain in the range of
USD 350-380 per MT CIF in the short term which will have a positive impact on
company’s realizations.
Moreover, we believe company to post significant improvement in operating margins
considering replacement of old caustic concentration plant with a new plant which was
commissioned in the month of March 2015.
Particulars
(Rs in Crores)
Sep
2014
Dec
2014
Mar
2015
Jun
2015
Sep
2015 E
Dec
2015 E
Audited / UnAudited UA UA UA UA UA UA
Net Sales 25.55 27.82 25.6 22.92 25.83 30.51
Other Operating Income 0.13 0.16 0.2 0.04 0.15 0.17
Total Income - Operations 25.68 27.98 25.8 22.96 25.98 30.68
Raw Materials Consumed 0.74 1.94 1.58 0.65 0.84 1.62
Purchase of Traded Goods 0.02 -- 0.47 0.02 0.02 --
Increase/Decrease in Stocks -0.08 0.45 0.19 -0.94 -0.08 0.50
Power & Fuel 13.46 13.93 11.37 9.92 11.14 11.56
Employees Cost 2.31 2.33 2.51 2.82 2.64 2.56
Depreciation 3.24 2.38 2.13 1.98 2.94 2.67
Provisions And Contingencies -- -- -- -- -- --
Other Expenses 4.58 3.56 5.11 6.18 4.90 4.21
P/L Before Other Income 1.41 3.39 2.44 2.33 3.58 7.56
Other Income 2.01 1.37 1.04 0.27 1.11 0.84
P/L Before Int., E. Items & Tax 3.42 4.76 3.48 2.6 4.69 7.40
Interest 0.19 0.2 0.18 0.21 0.21 0.21
P/L Before E. Items & Tax 3.23 4.56 3.3 2.39 4.48 7.19
Exceptional Items -- -- -- -- -- --
P/L Before Tax 3.23 4.56 3.3 2.39 4.48 7.19
Tax 1.12 1.08 1.91 0.82 1.54 2.47
Net Profit/(Loss) 2.11 3.48 1.39 1.57 2.94 4.72
Equity Share Capital 4.59 4.59 4.59 4.59 4.59 4.59
Calculated EPS 2.29 3.79 1.52 1.72 3.20 5.14
Calculated EPS (Annualised) 9.16 15.16 6.08 6.88 12.81 20.56
No Of Public Shares Holding 0.23 0.23 0.23 0.23 NA NA
Public Share Holding (%) 25.01 25.01 25.01 25.01 NA NA

4. Peer Group Comparison
PEER GROUP
CHEMFAB
ALKALIS
KANORIA
CHEMICALS
LORDS CHLORO
ALKALI
PUNJAB ALKALIES
& CHEMICALS
CMP 94.40 44.55 30.65 16.70
52 W H/L 122.20/65.05 31.50/61.90 13.40/31.20 15.15/54.85
Market Cap 85.66 195.96 77.10 34.29
Results (in Crores) Jun-15 Jun-15 Jun-15 Jun-15
Sales 22.92 77.39 23.88 60.77
PAT 1.57 5.82 1.28 -0.67
Equity 4.59 21.85 25.15 20.50
EPS (TTM) 9.32 4.09 0.70 -7.87
P/E 10.02 10.99 43.79 0.00
5. Key Concerns / Risks
 The Rupee depreciation during the year will make imports cheaper, resulting in
increased flow of caustic soda imports into the country thereby impacting
company’s product realizations.
 International caustic prices were at USD 330-380 per MT CIF levels during the year
and are expected to remain in this band in the short to medium term, any drop in
prices below USD 330 will have a negative impact on company’s realizations. On the
chlorine utilization front, slow demand growth continued to have an adverse impact
on the Industry.
 Dependence on the grid power continues to be a risk though the Puducherry power
scenario remains reasonably stable but with the cost of power continuing to be a
concern. The Company is working with the Puducherry Government for the
implementation of open access which would help de-risk our power sourcing.

6. Saral Gyan Recommendation
Chlor-Alkali is the basic Heavy Chemical Industry, manufacturing Caustic Soda, with
Chlorine, Hydrogen, Sodium Hypo Chlorate and Hydro Chloric Acid as by-products.
Overall, the Financial Year 2014-15 was an average year for the Industry, primarily
due to the fall in international caustic prices which averaged during the year
between USD 320 – 340 per MT CIF. International caustic prices have now moved to
USD 360-380 per MT CIF levels and are expected to remain in this band in the
medium term which will have a positive impact on company’s realizations.
Caustic Soda finds major application in diverse industries, such as soap & detergents,
pulp & paper and textile processing among others. Chlorine is produced as a by-
product during caustic soda production and is widely used during PVC
manufacturing, drinking water disinfection and pharmaceutical production. With the
rebound in the country’s GDP, the demand for caustic is likely to grow strong which
will help company to boost its revenue growth with higher capacity utilization.
However, slower chlorine demand is expected to continue to impact the capacity
utilisation of the company.
In 2014, company introduced new BiTAC® Electrolysers from CEC, Japan for the first
time in the country. The new Plant was commissioned during August 2014, and is
expected to result in savings in energy consumption to the tune of 30% to 40%.
Company has also replaced its old caustic concentration plant with a new plant
which was commissioned in Mar’15. These initiatives will help company to improve
its profit margins significantly with increase in revenues going forward.
With the rebound in the country’s GDP, the demand for caustic is likely to grow
strong. However, slower chlorine demand is expected to continue to impact the
capacity utilisation of the industry. The investments and efforts taken by the
Company during last financial year are expected to result in significant savings in its
manufacturing costs, especially power cost.
Company’s EBITDA and PAT margins are expected to improve significantly
considering investments and efforts taken by the Company during last financial year
which will result in significant savings in its manufacturing costs, especially power
cost.
Key Financial Parameters Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015
Return on Equity (%) 10.37 9.73 23.54 14.02 7.13
ROCE (%) 10.58 9.87 23.54 13.13 6.32
Operating Profit Margin (%) 18.73 22.54 32.68 24.07 20.13
Net Profit Margin (%) 9.97 10.4 19.69 14.13 8.1
Debt to Equity (%) 0.0 0.0 0.0 0.2 0.18
Working Capital Days 198 229 215 248 220

Chemfab Alkalis is virtually debt free with reserves of Rs. 125 crores in its books
which is much more than the company’s current market capital of Rs. 87 crores.
Promoter’s shareholding is at 75% without pledging any shares and rest is held by
non-institutional investors. FII and DII shareholding is nil in the company.
Company awaits the statutory clearances for its expansion plans and a favourable
decision on its appeal before the National Green Tribunal. Company has also made
plans for venturing into newer areas for Chlorine utilisation. The new Salt fields
which were acquired are slated to commence production shortly. With all these
measures, management is confident that company is poised for a great leap ahead
and achieving good results in the forthcoming years.
Management has rewarded shareholders by paying regular dividend in the past. For
FY 14-15, company has declared dividend of Rs. 1.25 per share.
YEAR Mar'11 Mar'12 Mar'13 Mar'14 Mar'15
EPS 10.55 8.15 25.60 17.93 11.15
Dividend / Share (In Rs) 2.50 0.00 5.00 1.25 1.25
As per our estimates, Chemfab Alkalis Ltd can deliver bottom line of 13.5 crores for
full financial year 2016, annualized EPS of Rs. 14.7 with forward P/E ratio of 6.4X for
FY16. Valuation looks attractive for a debt free company with expected expansion in
its profit margins.
On equity of Rs. 4.59 crore, the estimated annualized EPS for FY 15-16 works out to
Rs. 14.7 and the Book Value per share is Rs. 142.86. At current market price of Rs.
94.40, stock price to book value is 0.66.
Considering recent initiatives taken by the management in terms of improving
operational efficiencies and company’s expansion plans to drive business growth, Saral
Gyan team recommends “Buy” on Chemfab Alkalis Ltd at current market price of Rs.
94.40 for target of Rs. 170 over a period of 12 to 24 months.
Buying Strategy:
 70% at current market price of 94.40
 30% at price range of 80-85 (in case of correction in stock price in near term)
Portfolio Allocation: 3% of your equity portfolio.

7. Disclaimer
Important Notice: Saral Gyan Capital Services is an Independent Equity Research Company.
© SARAL GYAN CAPITAL SERVICES
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Definitions of Terms Used:
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price keeping in mind the tenure and objective of the recommendation service.
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further update and not buy more of the stock at current market price.
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keeping in mind the objective of the recommendation service.
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