*Thirumalai Chemicals*
1. *About the company:* Manufacturer of Phthalic Anhydride (PAN) with capacity of 1.6 L tn (at Ranipet and Dahej).
2. *Usage*: PAN is used in Manufacturing of all PVC related products as plasticizer eg. Shoes, Wires & Cables, Pipes, Paints.
3. *Industry dynamics*: Thirumalai and IG Petro are the only two players controlling PAN supplies in India. Additionally, GOI has imposed Anti-dumping duty in August 2021 for the imports from China, Indonesia, Korea and Thailand. Domestic market meets 20-25% of demand from imports, hence IG and Thirumalai are running at +90% capacity for many quarters now.
4. *Maleic Anhydride (MAN) is the key differentiator for Thirumalai*: MAN is a derivative which comes out via adding wash water to PAN. It's used in Polyster Resins, Lubricants, water treatments, detergents, Personal care products. India's total domestic demand is 75,000 MT while IG Petro has only 7550 MT capacity (only producer in India). Thirumalai has 50,000 MT capacity in Malaysia and is adding same capacity in US in next 12months. Prices of MAN are 50-60% higher than PAN.
5. *Manufacturing process* is not easy to replicate and buyer usually doesn't shift given the longstanding relationships. Orthoxylene is added to the turbine and the Crude distillation process generated PAN. The PAN-OX spreads have rebounded to $300/Mt vs. lows of $80/mt. Management of Thirumalai has been vocal to guide for Rs 16-20/kg as EBITDA margin.
6. *Capacity addition is next trigger*: Thirumalai is adding 90,000 MT of PAN to the existing 1.6 MT capacity (higher by 56%) which is expected to come on-stream in next 12months. This will add at-least 45-50% additional EBITDA per qtr from Q2 FY24. Market has not priced this capacity addition in the current valuations.
7. *Balance sheet* remain strong (Net debt free) while both the capacity additions (India's PAN and USA's MAN) are being done via internal accruals. Its generating Rs 400 Cr of free cash flows per annum (has gone 2x since ADD has been imposed). It operates via negative WC cycle. Despite buying feedstock from RIL, it's payable days are 3-4months.
8. *Q1 results* were normalization of strong Q4. Avg EBITDA of Q4 & Q1 is Rs 117 Cr which equals to the EBITDA that company has been generating per qtr since March 2021. Higher crude feedstock prices led to fall from all time high EBITDA reported in Q4.
9. *Positive feedback from AGM meetings.* Company will be operating at 95% utilization until new capacity comes up. Co-Founder daughter, currently CFO, will be taking over day-to-day operations management activity.
10. *View & Valuation* Annual EBITDA of Rs 400 - 450 Cr as against the Mcap Rs 2300 Cr, trades at EV EBITDA of 5.75 - 5.5x. The current valuation has upside risk of new capacity addition and China re-opening leading to higher demand of PAN. With all the capacity pre-sold, there is limited downside at CMP ₹225/-