ET Intelligence Group: Shares of DCW, a Mumbai-based chemical company, have gained over 24% in the past one month following expectations of faster earnings growth once the company starts manufacturing speciality chemicals in the current quarter.

DCW, which mainly manufactures basic chemicals such as caustic soda, soda ash, and PVC, has invested over Rs 800 crore over the past four years to manufacture speciality chemicals including iron oxide, pigments used in paints, tiles and infrastructure, and chlorinated polyvinyl chloride (CPVC), used in pipe manufacturing.

It will manufacture red and yellow iron oxide pigments. It has developed red pigments in partnership with an MNC, Hunstman, while yellow pigments are developed inhouse. Huntsman will buy 30-40% of the production and the rest will be sold by DCW in the domestic and overseas markets.

DCW has a capacity of 32,000 tonnes per annum of iron oxide pig ment and 12,000 tonnes per annum of CPVC. At current prices of Rs 56,000 tonne for iron oxide and Rs 1.5 lakh tonne for CPVC, and assuming 70% capacity utilisation, revenue is expected to increase by 20% by FY18.

The contribution to the earnings will be much higher since speciality chemicals command higher profitability and major raw materials including chlorine and ammonia are obtained through internal processes as byproducts thereby reducing input cost.Analysts expect operating profit before depreciation (EBITDA) to improve by over 50% to Rs 240-250 crore in FY18 from Rs 153 crore in FY16.

Since both the products are imported at present, domestic demand shouldn't be an issue. However, the exact benefit will depend upon the prices of these chemicals. The new business will also help in reducing debt further, which dropped by 17% to Rs 605 crore at the end of September 2016 compared with that in March 2016.

At Tuesday's price of Rs 36.6, DCW's enterprise value was 5.5x its estimated FY18 EBIDTA versus peers' 9-17x.