Pondy Oxides

Background

Pondy Oxides & Chemicals Ltd (POCL) incorporated in 1995, is one of the India’s leading metals, metallic oxides and plastic additives producers. POCL has broad based operations manufacturing of Lead, Litharge Red lead, Zinc oxide, Lead sub Oxide, and solid and liquid stabilizers of PVC. Lead smelting capacity is ~17000 tonnes per annum, Metal Oxides capacity is ~14000 tonnes per annum, while Plastic additives capacity is ~6000 tonnes per annum.

POCL has two subsidiary companies – M/s Baschem Pharma Ltd (100% subsidiary) at Maraimalai Nagar in Tamilnadu to manufacture liquid stabilizers and M/s Lohia Metals Pvt Ltd (51% subsidiary), which has an annual capacity of 12,000 tonnes of metal refining. Baschem Pharma Ltd is currently, solely engaged in trading activities and hence does not contribute any significant revenues/profits to the consolidated financials of POCL.


Main Products/Segments

POCL earns ~ 70% from metals & metal oxides division and another 30% from the plastic additives division. In the metals division lead metal forms ~80% of the sales while zinc forms the remaining 20%.


Main Markets/Customers

Automobile batteries industry (Lead, Lead-Antimony & Lead-Calcium alloys) is the major customer segment. Tyres & Ceramics (Zinc Oxide), Cable sheeting (Lead oxides), Galvanizing units (Zinc) and Plastics (PVC stabilisers) are the other customer industries POCl caters to.

POCL has a large clientele which includes big names like Amara Raja Batteries, Exide Industries, J K Tyres, Supreme Industries, Kisan, Shriram EPC, Chemplast, MRF Ltd, Tata Yuasa to name a few. There are also several top-notch clients in export markets like Korea, Indonesia, Malaysia, Srilanka & Vietnam.

POCL is a recognized export house and mainly exports lead metal. Even though plastic additives are also exported, they form a small part of the total exports of the company. The export margins of the company are higher and stabler than the domestic margins.


Bullish Viewpoints

  • Growth Potential driven by Lead Acid Battery Industry – Pondy Oxides is a good proxy play on the Lead Acid battery industry. There is a steady demand for lead acid batteries from Automotive OEM & replacement market, Telecom, Railways (AC coaches), Defense and the Power backup market, globally. Exide and Amara Raja have announced big capacity expansions in FY11 on the back of strong demand.
  • Stability in Lead prices – better volumes & margins: The business of POCL to a large extent is dependent on the metal prices especially lead as huge fluctuations in the metal prices create pressure on the margins of the company. The metal prices have stabilized since start of FY10 and hence has led to high volumes. POCL is also dependent on Zinc to some extent though lead is its main product. POCL buys/imports lead ore from Africa, Indonesia etc and also buys/imports lead bearing scraps. It converts this into pure lead metal and later part of it into lead alloys/lead oxide.
  • 51% subsidiary adds significantly to bottomline: Lohia Metals Pvt Ltd, its 51% subsidiary contributed significantly to Sales and profits in FY10, reversing the losses in FY09, again as a result of stabilising Lead prices and increase in volumes. Standalone EPS for FY10 is 5.71, whereas Consolidated EPS stands at 12.22.
  • Shift to LME based pricing for sales and purchases: This might help POCL earn stable profits. Earlier, POCL used to make its sales and purchases on a spot market basis and hence there was no assurance of maintainable profits, as the raw material price fluctuation could not always be passed on to its customers. In FY09, POCL took a hit on its profits because of this reason, as, the huge volatility in the raw material prices especially lead metal could not be passed on to its customers leading to a fall in its profits.
  • POCL has in FY10 started basing its pricing for sales and purchases based on the LME monthly average prices. This could lead to less volatility in the prices and profits. Currently one of the issues that POCL is facing is the quarter-to-quarter variation in the profits where in one quarter the company earns profits and the other it sees a fall. In order to prevent this from happening in future and to maintain sustainable profits going forward, it has taken up this initiative of linking its purchases and sales to the monthly average price on LME. This move seems to have enhanced the profitability of the company and the positive impact of this was seen in FY10.
  • Higher focus on exports : This could lead to better margins and improved working capital management. POCL is also into export sales, mainly of lead metal. POCL expects exports to form 50% of the total revenues in FY11. Exports form a key to the overall business structure of POCL. The robust export situation in H2FY11 could lead to better topline and bottomline for FY11. Export realizations are based on LME prices, further export sales are made against sight L/C and receivables are realized faster.
  • Valuations look good: Pondy oxides (CMP 35) is available at a dividend yield of ~3.5%, P/BV of 1.2 and P/E of ~2.86 on a consolidated basis. Sales grew at over 37% in FY10 over FY09
  • Recent performance is robust: Pondy Oxides registered 60 Cr in standalone sales in 1QFY11 compared to 27 Cr in the corresponding quarter of FY10. PAT grew to 1.4 Cr in 1QFY11 compared to 1Cr in corresponding quarter of FY10. Consolidated results are not available for 1QFY11

Bearish Viewpoints

  • Negative Operating cash flows: Operating Cash flows have turned negative for POCL in FY10. This is mainly due to huge increases in working capital requirements. Inventory days almost doubled to 42 days from the last 3 years average of 20 days. Debtor days also went up to 50 days. The company maintains this increase is due the sales mix shifting heavily towards metal exports. While there is increase in working capital requirements, on an absolute basis, 40-50 inventory/debtor days is not unusual for manufacturing firms.
  • Volatility in metal prices: Raw materials constitute 77-80% of Sales. One of the major concerns faced by POCL is the volatility in price of raw materials and finished goods. The adverse price fluctuation of the raw materials especially lead could negatively impact the margins of the company. Though POCL has tried to mitigate this risk by linking the prices of both to LME average prices, there is still some risk due to volatility
  • Slowdown in key customer Industries/economy: The products of POCL are consumed by various industries like automobiles, tyres & ceramics, plastics, etc. Any slowdown in these industries could impact POCL.
  • Environmental concerns: Lead metal industry is licensed and faces stringent environmental pollution norms. There is always a risk of environmental concerns with plant operations being asked to be shifted out/halted with norms getting tightened, environmental activism taking centrestage.

Barriers to entry

  • Lead metal refining/smelting needs licensing and environmental clearances. It is increasingly becoming tougher for new entrants to enter this market. More importantly lead scrap, ore, battery plates import licensing is also heavily restrictive.
  • Pondy Oxides in-house process design & fabrication skills have resulted in very low cost plants, at half the cost of other leading smelters, the company claims. For example, apart from the furnace, almost everything else in the Smelter plant is designed and manufactured in-house

Interesting Viewpoints

  • The company’s stated goal is to achieve a turnover of Rs. 500 Cr by FY13. One of the milestones towards this is increasing Lead smelting capacity from 2000 tonnes per month to ~6000 tonnes per month. The company is hopeful of closing the land acquisition in FY11 on the basis of application/bids put in by the company
  • The company is also considering moving into other metals like Aluminium to diversify operations. This is being considered on the basis of firm interest/prodding shown by top customers

Disclosure(s)

Donald Francis: No Holdings in the Company;


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