Savita Chemicals

Riding the power boom

PENNY WISE

Ram Prasad Sahu / Mumbai December 24, 2007



Savita Chemicals is well positioned to benefit from new capacities
planned in power generation.

Savita Chemicals, a manufacturer of petroleum specialty products, is
expanding its transformer oil capacity to meet demand from transformer
manufacturers and power utilities.

The market for transformer oil, which is used as an insulator and as
coolant in transformers, is pegged at Rs 1,300 crore and is expected
to grow at an annual rate of 20 per cent for the next five years.

Savita Chemicals, which has a 40 per cent market share in transformer
oils, is expected to be a key beneficiary of the capacity additions
equivalent to 100,000 MW planned under the XI Five Year Plan. In pure
numbers, 1 MW of new power generation capacity requires 7 MVA of
transformer capacity.

Expanding to grow
The company is expanding capacities at its petroleum products
division, which comprise transformer oils, liquid paraffins/white oils
and lubricating oils. Liquid paraffins/white oils are used in
cosmetics, pharmaceuticals and personal care products, while
lubricants cater to automotive and industrial applications.

Transformer and specialty oils account for 65 per cent of Savita's Rs
812 crore annual revenues, while lubricants' share is 25 per cent. The
company is adding capacity of 50,000 kilo litres in the current fiscal
at a cost of Rs 10 crore, which will take the total capacity to 2.60
lakh kilo litres.

With the entry of new transformer manufacturers and the planned
capacity additions on the power generation side, demand for
transformer oil is expected to be strong.

Currently, the replacement market accounts for 70 per cent of the
sales, but this is expected to change with new transformer units
coming on stream.

In the liquid paraffins and white oils space, the company is the
market leader with almost 43 per cent share in the organised
segment.

With the FMCG sector expected to grow at 12 per cent every year for
the next three years this is expected to translate into steady demand
for its products in the domestic market.

In lubricants, the company is Idemitsu's distributor in India and is
the exclusive supplier of engine oils to Toyota India, Honda Motorcyle
and Scooters India and Honda Siel.

It has a 3 per cent market share in a segment dominated by HPCL, IOC,
BPCL and Castrol. With Savita's auto-customers experiencing robust
growth, the company's lubricants sales too is expected to grow
strongly.

Wind power
The company is also planning to add capacity at its wind power
division and has invested Rs 18.50 crore in expanding capacity from
21.80 MW to 25 MW in this fiscal. The company supplies a major part of
the power generated to SEBs.

Thanks to the tax breaks, this division has not only brought down its
effective tax rate to about 25 per cent but also ensured a return on
equity of about 15 per cent.

The company has so far registered 9.5 MW of projects with UNFCC, the
UN body that issues carbon credits, which can be encashed. For other
windpower projects, the company is already in process of registering
the same with the UNFCC.

Raw material spikes
A major concern for the company is the volatility in crude oil prices.
Since its portfolio of products in the petroleum division comes from
base oil, which is a crude oil derivative and 90 per cent of the raw
material is imported, higher crude prices mean higher base oil cost.

Though it has pricing power (Apar is the only other organised player),
analysts say that the company could not manage the steep increase in
prices (base oil prices were up by Rs 12,000 per tonne) and took a hit
in its operating margins, which dropped from 10.2 per cent in FY06 to
8.8 per cent in FY07.

The management says that for long term contracts, which constitutes
half of all orders, there is a price escalation clause.

For other orders the company charges its clients on the spot price.
While the demand for petroleum products in the domestic market is
strong, the company has been targeting the export markets to diversify
its revenue and customer base.

Exports
The company plans to enter into long term supply arrangements with
multinational customers for transformer oils and liquid paraffin.

While liquid paraffin, which is supplied to MNCs such as Johnson &
Johnson outside the country, contributes 60 per cent of the export
turnover, transformer oils account for the balance.

Analysts estimate that the contribution from exports will touch Rs 239
crore in FY09 and will constitute 20 per cent of the turnover from Rs
105 crore (13 per cent) now.

Valuations
The company expects sales and profits to grow by 25-30 per cent over
the next two years. At Rs 371.45, the stock discounts its FY08 and
FY09 estimated EPS of Rs 41 and Rs 58 by 9.1 and 6.4 times, should
deliver good returns.