By: Pearl Securities Limited
Rising power rates and slow demand have effected operations by Sitara Chemical Industries Ltd (SITC), the largest Chlor-Alkali producer in the country. Inability to pass on rising cost burden to end consumers has significantly downgraded gross margins while Top-Line has remained relatively stagnant. Performance in 1Q FY15 was salvaged by funds generated through sale of land. Primarily due to colossal other income, final earnings registered growth of 191% YoY to reach PKR 831mn (EPS: PKR 38.80) against PAT of PKR 286mn (EPS: PKR 13.35) in the same period last year.
35MW coal based power plant to mitigate rising power costs
Besides slow demand, the company’s main threat is deteriorating margins due to rising power rates. To counter this, management has initiated work on a 35MW coal based power plant which is expected to be commissioned by Jan’16. The company has already begun civil work on this project and LCs has been established to acquire plant equipment such as Boiler Turbine and Generators. The project is financed through Syndicated Diminishing Mushkara Finance Facility of PKR 2bn. The recent funds generated though sale of land of PKR 858mn will also be utilized to meet construction commitments.
Constrains on core operations through low demand and rising costs are expected to be maintained in the near terms. Without other income support in 2Q FY14, bottomline could show stressed earnings while chance of loss is also possible. A strong positive is that work on the 35MW coal based plant has started and is much needed to consolidate operations against macro stresses. However, positive impact will not be realized till 3Q FY16. If demand of Caustic Soda improves some product price rise can control pressured margins. Based on slow down in core earnings, the scrip is trading at premium as against TP of PKR286. Hold