Alagappan Arunachalam

Negative cash flow from operations, thin operating margins and trading volumes are causes for concern.

Investors can consider giving the rights offer by Sunshield Chemicals a go by. Though the offer is priced at a discount to the secondary market, valuations appear steep for a stock in the chemicals sector.

Sunshield Chemicals operates on moderate margins. Though the company has staged a turnaround, negative cash flow continues to remain a cause for concern.

Business

Sunshield Chemicals manufactures ethylene oxide condensates, ethyoxylate, styrenated phenol, aminic antioxidants and emulsifiers.

It caters to diverse sectors including agrochemicals, fertilisers, paints, textiles, petroleum, lubricants, rubber and polymers.

Sunshield Chemicals supplies to multinational companies such as Bayer India, Owens Corning India and Ciba Specialties Chemicals India.

Despite a wide spectrum of user industries and an attractive client list, ten customers contribute 73 per cent to revenues.

The company enjoys locational advantages on the raw material front.

However, captive consumption of ethylene oxide and consolidation in the sector means pricing power of suppliers is high. Sunshield Chemicals' business is raw-material intensive with feedstock costs constituting about 71 per cent.

In November 2005, Sunshield Chemicals entered into a five-year global supply agreement with Altana Chemie of Germany for the supply of tris hydroxy ethyl isocyanurate (THEIC), which is used in the manufacture of wire insulation enamel.

The company plans to substitute its imports from China by integrating backwards to produce cyanuric acid — a key input in the manufacture of THEIC.

Risks

A key concern is the stock's thin trading volumes. A further deterioration in volumes could scale down valuations that the market attributes to the stock.

Further, with company having eroded its equity base it is unlikely to declare dividends in the medium term.

Offer details

Sunshield Chemicals is offering 36.7 lakh shares on a rights basis of one share for every one held at Rs 30 apiece.

With the offer proceeds meeting only about 30 per cent of its aggregate project requirements, the company plans to raise Rs 16.5 crore through term borrowings.

Sunshield will deploy sa significant part of its resources in its backward integration project.

SBI Capital Markets is the manager to the offer, which opened on October 30 and closes on November 28.

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