CS has predominantly been in the business of manufacturing PVC, though in recent years the company has diversified into shipping. Until Reliance entered the PVC business in 1991, the then existing five players had only small capacities -- in the range of 25,000 to 60,000 tpa. One of the smaller players, IPCL graduated to the big league with the commissioning of its 1.5 lakh tpa Gandhar plant in1997. However CS could manage to increase capacities from 48,000 tpa to 60,000 tpa, which is way below the present minimum economic size of a 1.5 lakh tpa PVC plant.This is rather strange for a company which until 1995 has been steadily building its chemical business for the last three decades. The company acquired Mettur Chemicals in 1988.

Mettur Chemicals is located close to the PVC plant of CS, and it meets the entire requirement of chlorine for PVC production. Interestingly for PVC manufacturers, transportation of chlorine -- a hazardous chemical -- is a problem and also a major cost factor. Secondly, leaving aside ethylene, the company consciously completed its vertical integration programme. The first being salt-chlorine-ethylene di-chloride-vinyl chloride monomer-poly vinyl chloride and the second being clorine-cloromethane refrigerant liquid. Salt is also sourced from the company's own salt works. While 50 per cent of ethylene di-chloride is captively produced, the balance is imported. In anindustry which is power intensive, CS built its own captive power generation and meets close to 95 per cent of its total requirement at all four units.

Moreover, the company also enjoys a south-based locational advantage, compared to players like IPCL, RIL, Finnolex who are in the western region. This saves about 4-6 per cent on total costs, which is around $20 per tonne in servicing customers in the southern region, which is pretty good in a commodity market. Finally, CS mainly manufactures paste grade PVC, unlike RIL and IPCL which produce suspension grade PVC, which incidentally cater to two different markets.

Interestingly these are the advantages which have resulted in consistent profits. However, the steady reduction in import duties from 300 per cent in 1990 to 25 per cent in 1997, exposed the operational inefficiencies of plants with smaller capacities. Consequently net margins plummeted from 15 per cent in 1995-96 to around 6 per cent in 1996-97. Fiscal 1997-98 is expected to be no different.Today in India, there are only three plants (Reliance, IPCL and Finolex), with capacities about or in excess of the minimum economic size of 1.5 lakh tpa. The balance four players have small capacities.

Logically a capacity increase of CS to 1.5 lakh per tonne, would have made the operations of DCW located in the same region unviable in cost and hence even in the short term, there would not have been any problems of over capacity. Furthermore the expansion to 1.5 lakh per tonne requires an investment of Rs 150 crore, which is far less than the investment required of Rs 450 crore required for putting up a greenfield project of a similar size. Also raising the Rs 150 odd crore for a company like CS should not be a problem. Nevertheless, the chairman has gone on record saying that he cannot compete with the RIL and IPCL.

Probably the additional cost of Rs 2,500 for setting up an ethylene cracker has dissuaded the management from further expansions. Moreover, the promoters need cash for their other business.Hence CS presents a sound takeover target for any of the Indian players such as IPCL and RIL, as well as international players like Solvaj. For the local players the company offers a complementary business and also access to a captive southern market. For international players such as Solvaj the plant along with its the company's diversification into shipping would give the raider a toe-hold into the domestic market. Solvaj, has integrated PVC units in Italy, Spain, Netherlands. The ships both bulk products and petro products carrier would come in handy for exporting by-products of caustic soda and other finished products and importing raw materials like EDC and VCM depending on their prices and considerations of margins for conversion.