Date:24/04/2005 URL: http://www.thehindubusinessline.com/bline/iw/2005/04/24/stories/2005042400250800.htm

Back India Glycols: Buy

Alagappan Arunachalam

AN investment can be considered in the India Glycols stock, which quotes at about five times its expected 2005 fiscal earnings. India Glycols is the only manufacturer of monoethylene glycol (MEG) other than the Reliance group and is the largest producer of ethylene oxide (EO) derivatives in India. Its sales for the first nine months of the fiscal 2005 surged 40 per cent, backed by higher MEG prices.

The phase-out of the quota system in the global textile trade is expected to boost demand for MEG.

India Glycols produces MEG using the alcohol route, contrary to the global trend. Reliance Industries, vide its acquisition of SM Dyechem's Glycols division, has diversified into the alcohol route.

With the sharp rise in crude prices in the recent past, MEG prices have also shot up. India Glycols would benefit immensely from the further rise in crude prices. It has expanded the MEG capacity from 225 tonnes per day to 350 tpd, with a built-in capacity to produce 425 tpd. This expansion, commissioned in the third quarter, is expected to further increase its sales, which has been constrained by capacity.

For long, the company has been producing in excess of its capacity. India Glycols had announced plans to diversify into industrial gases.

The domestic price of MEG is determined by Reliance Industries, which is reflected upon other manufacturers. To discourage imports, Reliance prices MEG close to the landed cost of imported MEG. The price of MEG reached a 10-year high in October; it has been ruling close to the high ever since. MEG is used in the production of polyester.

With the removal of quotas in the global textile trade, the demand for polyester and, consequently, that of MEG is set to increase. This is expected to keep the price of MEG firm. With textile exports on the rise, producers of polyester would be able to absorb the higher cost of MEG.

India Glycols enjoys locational advantage, as it is the only manufacturer in North India with its factory in Uttaranchal, catering to the northern and eastern markets. India Glycols sources molasses from sugar mills; the heartland of sugar — Uttar Pradesh — is close by.

The textile sector, which absorbs close to 50 per cent of India Glycols' ethylene oxide derivatives sales, is on an uptrend. The proposal for the merger of its wholly-owned, relatively small, subsidiary — CDS International — with itself, is pending with the Karnataka High Court.