Published on 13/07/2017 2:34:56 PM | Source: SPA Securities Ltd

Update On Bodal Chemicals Ltd - SPA Sec

Bodal Chemicals (BCL) is a leading manufacturer of dyes Intermediates/dyestuff and has diversified into speciality chemicals. Bodal has built an integrated model of dye manufacturing and has the cost advantage due to complete integration. BCL with leadership in domestic market and increasing presence in global market is expected to benefit from downfall of Chinese dyestuff industry and expected shift from unorganized to organized market in domestic industry due to GST. We initiate coverage on stock with target price of INR 294 valuing core business at 18x of FY19E earnings.


Market leader in domestic dyestuff/ intermediate segment

Bodal Chemicals is one of the largest dyestuff manufacturer in India. It has significant market share in domestic dye intermediate (~20%) and dyestuff (~10%) market. Company also has strong global reach with exports to 50+ countries and 5% market share in global intermediates market. BCL has integrated manufacturing plants of Basic Chemicals (190000 MT), Dye intermediates (30000 MT) and dyestuff (17000 MT). Hence BCL has managed to build a strong business model and is in a position to sell or consume inhouse depending on market dynamics.


Capital expenditure to boost growth

Bodal plans to expand dyestuff capacity by ~24000 MT in next 3- 4 years to 41000 MTPA from current capacity of 17000 MTPA. First phase of 8,000 MTPA capacity is expected to be on stream by Q4FY18. Company has guided for capex of INR 1 bn distributed over next 3-4 years for dyestuff capacity expansion and expects incremental revenues of INR 4.5-5bn from it at optimum capacity utilization. To cater to additional demand of intermediates, company has acquired ~70% stake in SPS Processors (INR 40.9 mn) having capacity of 3000 MTPA for H-acid and plans to install capacity of 4200 MTPA for Vinyl Sulphone by Q2FY18.


Diversification in speciality chemicals

Company has diversified in various speciality chemicals to derisk its top line from fluctuation in dyes business. In Trion Chemicals, BCL has ~42% ownership. Trion has 12,000 MTPA capacity of TCCA (Trichloroisocyanuric acid) which is mainly used as disinfectant in swimming pools and bleaching agent in the Textiles industry. We expect ~INR 2.25 bn revenue with EBITDA margin of ~20%+ from this venture in 2-3 years. BCL also installed capacities of liquid dyestuff (10800 MTPA) and LABSA (18000 MTPA). Liquid Dyestuff is primarily used in paper industry for coloring. We expect revenue of ~INR 1 bn by FY20 with EBITDA margin of ~20% from liquid dyestuff. LABSA is widely used in detergent powder, cake and dish wash cleaners and has revenue potential of ~INR 1 bn with EBITDA margin of ~6%.


China's loss is India's gain

Chinese government is enforcing stricter environmental norms. Effluent treatment mechanism has become a pre-requisite to carry on business and to receive export incentive. This has substantially increased the manufacturing cost (Effluent treatment ~8% of revenue) for Chinese firms and eradicated their low cost advantage. Full scale environmental compliance is difficult for Chinese firms and at partial utilization, their cost advantage will be nullified. Indian manufacturers on the other hand are environmentally compliant and have scaled up their capacities for dye manufacturing. On account of uncertainty in China, we expect end user industries to shift to Indian dye manufacturers in coming years.


Outlook and Valuations

Capacity expansion in dyestuff to the tune of 24000 MT in 3-4 years will help Bodal to consolidate its position as a leader in domestic dyestuff market. Diversification in speciality chemicals through Trion, LABSA and Liquid dyestuff is expected to contribute ~19-20% in FY19 vis-à-vis current contribution of ~4%. Increasing proportion of high margin (~22%) speciality chemical business and higher internal consumption due to increase in dyestuff production will help in maintaining EBITDA margin at ~19-20%. Hence Bodal is expected to report a healthy PAT CAGR of ~17-18% between FY17-FY19E. Bodal has impressive ROE and ROCE of 36% and 40% respectively.

With ongoing capex for dyestuff, introduction of speciality chemicals portfolio and favourable macroeconomic conditions like problems in Chinese dye industry, GST are expected to provide clear earnings visibility for Bodal. We initiate coverage on stock with target price of INR 294 valuing core business at 18x of FY19E earnings.

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