SUDARSHAN CHEMICAL, All hopes on demand revival
Call & Research Report by HDFC Securities
Sector: Dyes & Pigments
CMP Rs. 384, Target Rs. 435 (13% upside potential)
Target Period: 12 Months
We maintain ADD on Sudarshan Chemical (SCIL), with a price target of INR 435. The stock is trading at 28x FY24E EPS (RoE of 11% in FY24). Q3 EBITDA/APAT were 7/93% below our estimates, owing to a 3% fall in revenue, higher-than-expected other expenses, and higher-than-expected finance costs. We like SCIL, owing to its leadership position in the domestic market and two major global players shifting away from the pigment business. We believe SCIL is in a sweet spot to seize this opportunity through product offerings similar to those of the global players that exited.
● Financial performance: Revenue fell 12/0.1% YoY/QoQ to INR 5,280mn. EBITDA fell 44/3% YoY/QoQ to INR 416mn. Subdued demand across geographies and segments resulted in volume and pricing pressure. EBITDA margin came in at 7.9% (-439/-23bps YoY/QoQ), impacted by high raw material and utility costs. Other expenses include a foreign exchange loss of INR 94.9mn. The interest cost is up 129/18% YoY/QoQ to INR 110mn. APAT came in at INR 6mn, down 98/87% YoY/QoQ.
● Pigment segment (86% of the revenue mix): Revenue fell by 14% YoY to INR 4,832mn, and EBIT fell 85% YoY to INR 86mn. EBIT margin for the segment came in at ~2%, -836/-116bps YoY/QoQ. There has been a volume de-growth in Q3 in both domestic as well as export markets. In the domestic market, the plastics and coatings segment was affected the most as customers deferred their demand, owing to volatile polymer prices. Currently, domestic demand is witnessing an uptick. Export demand is subdued, given the geopolitical scenario and tightening monetary policy. The company’s European exports have been impacted by higher energy costs, resulting in demand contraction. The supply to China was low due to the lockdown and the imposition of anti-dumping duty on a few pigments imported from India.
● Con call takeaways: (1) Exports accounted for 48% of revenue for the pigment segment. (2) Speciality pigments constituted 70% of the revenue for the pigment segment in Q3. (3) The INR 750mn Capex project shall come on stream fully by end of FY23. Currently, ~85% of the said Capex is put to use. Revenue potential from this capex is ~INR 15bn at full capacity ramp-up. However, the revenue ramp-up of the project might be delayed, given the current global recessionary scenario.
● DCF-based valuation: Our target price is INR 435 (WACC 11%, terminal growth 4%). The stock is currently trading at 28x FY24E EPS.
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