Recommendation from Chemicals company

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

TGV SRAAC: ON A GOOD FOOTING

HERE IS WHY
✓Established track record
✓Healthy cash flows
✓Long-term growth prospects

TGV SRAAC is engaged in the production of chlor-alkali products, chloromethane, castor derivatives and fatty acids. It is the flagship company of TGV Group which has a presence in industries such as healthcare products, aqua culture, real estate, pharmaceuticals, industrial chemicals and hospitality. Approximately 87 per cent of the company’s revenues came from its chemicals business for the period ending FY22. The segment of oil and fats generates the remaining revenue. Under its oil and fats segment it produces soap noodles, soap oil derivatives, hydroxy stearic acid and other products.

Products from the firm are utilised in several sectors including textile, pulp and paper, alumina, soaps and detergents, petroleum, fertilisers, medicines, agrochemicals and water treatment. The company has a long and established manufacturing track record of almost four decades in the manufacturing of chemicals. Over the years, TGV SRAAC has established long-term relationship with more than 200 clients. The company’s manufacturing facility is located in Kurnool, Andhra Pradesh, and features an integrated functioning plant for the production of chlor-alkali products. 

In order to fully maximise its production capability, TGV SRAAC’s activities are closely integrated, with the by-product of one process serving as the raw material for another. Due to the business’ diverse product offering, it is also somewhat less impacted from the effects of market cyclicality for its particular products. The company has a healthy operating cash flow. For FY22, the CFO was ₹213 crore. The company is in an expansion mode and is reinvesting most of its cash flows every year for future expansion.

The company is continuously strengthening its balance-sheet and has reduced debt equity ratio from 0.78x in FY21 to 0.59x at the end of FY22. Even other ratios for the company have improved on a yearly basis. A case in point is the operating profit margin that has increased from 9 per cent in FY21 to 17 per cent in FY22. For the latest quarter (Q1FY23) it was at 31 per cent. The increase in margin was due to better demand coupled with improving realisation. The company’s highest expense is power and fuel. For FY22, raw material expenses were at 26 per cent of sales, followed by power and fuel costs at 32 per cent. The company being power-intensive and to achieve reduction in power cost, it has taken effective steps for setting up a 20 MW solar power project adjacent to the factory. 

TGV SRAAC’s solid fundamentals have elevated its stock value. On a standalone basis, the company’s net sales in the most recent quarter, Q1FY23, surged by 137.78 per cent YoY to ₹596.07 crore. Due to a steady decrease in cost of goods sold, the PBIDT excluding other income increased by 361 per cent while the PAT increased by 1,391 per cent year over year to ₹147.80 crore. 

A one-year investment of ₹1 lakh in shares of this business would have turned into ₹4.15 lakh at the current stock price. The shares of the company are now trading at a TTM PE of 5.72x compared to the industry PE of 36.83x, which looks attractive. The firm generated ROE and ROCE of 19.88 per cent and 22.93 per cent in FY22, respectively. Strong fundamentals and the company’s valuation indicate overall attractiveness of the stock. Therefore, we recommend BUY.