Sree Rayalaseema Hi-Strength Hypo Limited BSE Code:532842 NSE Id: SRHHYPOLTD

Water has become a highly precious resource. There are some places where a barrel of water costs more than a barrel of oil.

CMP (BSE): Rs. 52.20

CMP (NSE): Rs. 51.65

Industry: Commodity Chemicals

Sree Rayalaseema Hi-Strength Hypo Limited (SRHHL), is a part of the TGV group. It is the only Indian manufacturer of Calcium Hypochlorite. It is one of the few companies in the world that are dedicated to research and development of products in water treatment and purification.

SRHHL is internationally recognized as the provider of unmatched quality products through its world-class sodium process technology developed through highly skilled in-house research and development team. It has grown to become a global leader in exports too.

Industry:

Without water, life is impossible. I would rephrase it and put it as without CLEAN and SAFE water, life is impossible. However there is less and less of clean and safe water available per person. Water treatment is something that touches nearly every individual or industry in one way or another as the water treatment industry seeks to bring impure water up to potable standards or better. And as the human population continues to grow exponentially, the need for clean water will grow with it. Responding to this trend, water treatment has changed considerably in the last 50 years and new advances and developments continue to shape the market. However, there has been various regulations regarding providing clean water, but with each new regulation, there has been restrictions on the use of certain chemicals and increased use of others. And as population will increase, providing clean water will become an increasingly difficult problem. Thus even if the water treatment chemicals industry is considered as a mature market, it still is that one sector that adapts and expands in response to market opportunities.

The various chemicals that SRHHL manufactures are

(1)Calcium hypochlorite: Calcium hypochlorite is an extremely versatile sanitation and disinfection product. SRHHL's Aquafit is a high grade calcium hypochlorite which has very wide applications in swimming pools and drinking water treatments. It is one of the few in the world and the only in India to manufacture and export calcium hypochlorite of 65%- 70% min chlorine content. A state-of-art sodium process technology developed through in-house R&D efforts has helped SRHHL to manufacture the product with chlorine content of 65%-70%. It is one of the few in the world and the only one in India, to manufacturer and export Calcium Hypochlorite of 65% - 70 % Min Chlorine content. In addition to this, it proposed to expand its calcium hypochlorite plant with 3 streams of approximately 6600 MTs each. With its current capacity being around 10000 MT's, after expansion its total capacity would be almost 30000 MT's.

(2)Stable Bleaching Powder: Due to its multi-dimensional properties, it finds ready application in a range of industries such as textiles, paper, leather, aquaculture and sugar industry. It is even used for water and sewage treatment.

(3) Monochloro Acetic Acid: SRHHL is a front-ranking producer in this product. It is used by all the leading manufacturers of Non-Steroid Anti-Inflamatory Drugs, pharmaceuticals, pesticides, organic chemicals, etc.

(4) Sulphuric Acid: It is used in steel, heavy chemicals and fertilizer industry.

Oppurtunities:

• The demand of Calcium Hypochlorite is growing in the international market.
• Most of the raw materials are easily available locally thus saving their logistic cost. SRHHL has a distinctive edge in the manufacture of this product because of indigenous raw material availability and supply of some specialized chemicals by Sree Rayalaseema Alkalies and Allied Chemicals Ltd.

SRHHL has a small equity of just 10.45 crores. Companies with small equity and good business models and products are always a good buy. If you look at the book value SRHHL is quoting at almost its book value which again makes it a good buy. Its PE is 9.41 compared to the industry average of 15.32. There is one negative point and that is that it is a non-dividend paying company, however if you look at the extent of expansion prospects, the company seems to be retaining back the entire profit so that it could be deployed for the expansion plan. This seems good as after the complete expansion, its calcium hypochlorite capacity will triple, leading to higher sales and higher profits, thereby increasing profitability for its shareholders.

Now if you compare the sales and the market capitalization of SRHHL, the sales is almost 4 times the market cap. This makes it even more an attractive buy. In addition to this when the capacity expansion is complete, the sales will almost triple, which will makes the investment in this company at the current valuation even more attractive. The earnings for FY10 was Rs. 3.28 per share. However if you look at the the first quater results and its earnings it is Rs. 6.14 per share. Now thats almost double earnings in just one quater and with 3 more quater results left.

Today its CRUDE, tomorrow its going to be safe and clean WATER. This is one such sector that holds a lot of potential and opportunities in the coming future. I have already talked about the future demand for water infrastructure in my earlier post of Electrosteel Casting. Well, water treatment chemicals too can be included in the same sector which holds the same kind of importance and presents the same kind of prospects. It is definitely a good value pick for long term investment.

Happy Value Investing.