Settling Down

Ciba Speciality Chemicals, formed by the demerger of Hindustan Ciba-Geigy was recently listed on the BSE and has been on a rollercoaster ride since then. A closer look at the company

On January 9, Ciba Speciality Chemicals made its debut on the BSE at Rs 125 and subsequently dropped by 12.4 per cent to 109.5 in the first trading session. Since then it has dropped further by 19.6 per cent to Rs 88. The effective drop from the highest level of Rs 135 to the lowest price of Rs 88 is 35 per cent. All this in a matter of five trading sessions. Although, the market has been shaky in the last one week, yet, it is worth looking at the valuations of the company.

 

A by-product of a demerger of Hindustan Ciba-Geigy (HCG), Ciba Speciality Chemicals (CSCL) is a 51 per cent subsidiary of the parent, Ciba Speciality Chemicals Holding Inc and its subsidiaries. The HCG shareholder got 5 shares of CSCL (Rs 10 face value) for every share of HCG (Rs 100 face value). Its equity capital is Rs 13.28 crore and 24.7 per cent is with the public. If the discounting of competitors is considered, that is, 17 for Clariant and around 12 for Colour-Chem, the scrip should be priced at around Rs 60. But, the company has shown a growth of 18.78 per cent in 1996-97 compared to 11 per cent of Colour-Chem and 12 per cent of Clariant. This however, is not a perfect scale of comparison since for CSCL, additives and performance polymers contribute 52 per cent to its turnover.

In its first year of operations, the company has restructured its business divisions. The dyestuff and chemicals division has been split into textile dyes and consumer care divisions. The APPC division or the additives, polymers, pigments and composites division has been divided into individual business areas. This was in aid of achieving core competencies and to strike alliances in these business areas.

One such alliance is a non-compete, 50:50 joint venture with Indian Dyestuff Industries (IDI) for textile dyes called Indo Swiss Textile Chemicals. This is a marketing outfit for dyes and auxiliaries in India including polyester and cellusoid dyes to be manufactured at IDI's Kalyan and Ranoli plants. A separate plant for the same will be set up in due course. In order to ensure the non-compete clause, CSClL has paid Rs 9 crore to IDI as non compete consideration. The tie-up draws IDI's strengths in textile dye business and Ciba's technological prowess. It has already given a boost to its sales. In 1996-97, the textile dyes division has shown a 56 per cent growth largely driven by exports to its group companies worldwide.

Earlier, it was sourcing its requirements from local intermediate units which faced closure due to pollution control norms so, exports suffered in 1995-96. However, in 1996-97 exports spurted, thanks to the international ban on specific azo dyes which has put pressure on local exporting units. Its focus is mainly on cellulose, wool, polyester and polyamide dyes and the textile industry has seen mixed results this year. Polyester is facing oversupply while cotton and yarn have experienced a boom. Since CSCL supplies to both the end users, this year will be well supported by cellulose dye demand. But the forthcoming year will not see the same performance in cotton due to unseasonal rains this year.

The largest contributor to its turnover is the performance polymer division led by its flagship product Araldite. This division has shown a marginal growth of 4 per cent and has been facing competition from local and international players. This has been accentuated by its erstwhile partner Atul Products in Cibatul, launching a competing product, Lapox, allegedly based on the same technology. Moreover, the domestic manufacturers of epoxy resins are struggling to keep the price at par with the landed cost as the import duty is down to 30 per cent. For key raw materials like bisphenol-A and epichlorohydrin, duty is 40 per cent putting the local players at a disadvantage vis-a-vis the exporters from Thailand, South Korea and Taiwan. The situation has eased in last two years with Tamilnadu Petroproducts (TPL) manufacturing both the raw materials.

Consequently, for CSCL's epoxy resins requirement, Ciba India Private Limited (CIPL), a 100 per cent subsidiary of the parent in India, entered into a joint venture with TPL, Petro Araldite Pvt. Ltd. The fact that the joint venture has been signed by CIPL and not CSCL, implies that the cost borne by CSCL in acquiring epoxy resins, will be partly transferred as profit to the parent. The reason behind routing this investment through a wholly owned subsidiary, is a point to be looked into.

CSCL's polymer division has been catering to the high-end electronic applications apart from civil, infrastructure and power sector. Since government investment in infrastructure is not forthcoming and the electronics industry is facing inventory problems, the demand for the product has been affected. By launching new products in the Araldite range it is expanding its usage. These will be catering to various household applications, civil engineering, transformers, windmills, automotive and packaging industries. Currently, it is the market leader and in coatings, electrical markets and tooling resins segment it holds around 40 per cent share. Although the volume growth is expected to improve, the margins will remain under pressure.

In its additives business, having achieved a growth of 17 per cent, the company is optimistic in spite of competition from cheaper imports and drop in prices. Additives have wide range of uses including plastics, elastomers, synthetic fibres, PVC stabilisers, lubricants etc. The recent completion of CSCL's antioxidants plant in Goa, will give it cost advantage, ensuring margins despite lower price realisations. If this is to become a global sourcing base for group companies, CSCL will earn a lot through forex.

In consumer care or speciality chemicals, the user industries of paper and leather have had a bad time in 1996-97, so the division has shown just a three per cent growth. Many tanneries in the east and the south were closed down due to environmental norms last year. These have reopened since then, sales are now expected to pick up. Here, it faces competition from players like Clariant and Colour-Chem for whom speciality chemicals form a large part of their business. But, in consumer products like detergents, its Tinopal CBS-X is an important optical brightener and a major revenue earner. With the installation of 1000 tonnes capacity for the same at Santa Monica, Goa, it has become an exporter to its group companies. This plant is technologically superior, so the division can look forward to better growth in future.

The pigment business is the smallest contributing 6 per cent to its turnover. It is purely a trading division and has been marketing IDI's products like Microsol pigments used for viscose staple fibre to its group companies and sells its parents products in India. CIPL has also entered into a tie-up with IDI called Pigment Specialities. The agreement involves transfer of technology from Ciba (Switzerland) to IDI, for which a royalty will have to be paid, while the JV will be just a marketing outfit. This will enhance the parent's presence in the domestic market, but the benefits will accrue directly to it since CIPL has 51 per cent holding in the JV. In fact, it will become a competitor to CSCL, which is another point to be clarified.

One years performance, is not a basis enough to judge its future prospects. CSCL has the inherent advantage of being a transnational, it has the technological edge and exports to group companies ensuring a constant cash flow. In the domestic market, new products with new uses will help enhance market share. The hitch lies in the patent laws in India which favour free copying of products. CSCL's net foreign exchange (NFE) is negative despite the parent's support in international operations (See financials). Like its competitor Clariant, trading of finished goods forms a large part of its turnover. A good number bought from the parent is marketed in India. This accounts for 68 per cent (Rs 46.59 crore) of the total imports. The NFE is expected to worsen with the recent depreciation of rupee.

CSCLs sales have shown volume growth but margins have been very low. Its strategy appears to be concentration on introduction of new products that is, broadening of product range. With international pressure on India to make patent laws more inventor-friendly, this move should pay off. Another year of operations and pending decisions on joint ventures, will make the picture clearer.