IGI Logo

Focus on profitability; upping capacity upfront

Sudarshan Chemical Industries’ (SCIL) Q2FY22 EBITDA dip of 17.7% YoY was disappointing, but it has restrained selling at lower prices in Q2FY22 on rise in competitive intensity which has hurt volumes, and cyclone added to pain. It has seen improved market situation with better realisation in Q3FY22, and it is also taking price increase to offset cost pressure. We liked the company’s discipline and focus on profitable sales. Further, SCIL has delayed utility capex, instead is incurring capex to expand capacity which now enables the company to increase revenue by Rs15bn (earlier: Rs10-12bn) over FY22-25; this increases revenue growth visibility. We have conservatively cut our EPS estimates by 16% and 12% for FY22E and FY23E on cost pressure, and accordingly cut target price to Rs668 (earlier: Rs762), 26x FY23E P/E. We upgrade SCIL’s rating to BUY (from Add).

* Pigment revenue grew slower at 11.5% YoY (down 1.1% QoQ). SCIL’s revenue from the pigment segment stood at Rs4.5bn on low base, but dipped 1.1% QoQ due to 15 days’ plant shutdown on cyclone; operational issues continued postcyclone which led to 15% lower production compared to normal run-rate. These issues stand resolved which should help normalise production. The company has also refrained from selling at lower margin on increased competitive intensity; inventory is liquidated in Q3FY22 at better pricing. There has been an increase in competition by local producers in Europe to grab share from industry consolidation, logistic issues and freight cost. It is reflected in much sluggish exports revenue which grew only 4.5% YoY (down 16.4% QoQ).

* Company focused on profitability. SCIL’s gross profit margin dip 410bps QoQ to 42.3% on input cost pressure, and higher competitive intensity. It has restrained from selling at lower prices in market, which has hurt volume growth. It has also seen rise in power cost (on higher coal prices) and 3x jump in freight cost. China situation has allowed the company to sell products at better realisation in Q3FY22. It is also taking price increases to mitigate pressure. SCIL’s EBITDA declined 17.7% YoY to Rs529mn and net profit was down 25% YoY to Rs228mn.

* New product launches to support growth in H2FY22. SCIL has completed audits for its yellow pigment, and expects commercial manufacturing from Q3FY22. It is expecting pilot plant for two more HPPs in H2FY22. The company has been incurring capex to expand production of HPP which means in coming years, the proportion of HPP in overall sale will increase.

* Upfront capacity expansion. SCIL has earlier announced capacity capex of Rs6bn and Rs1.4bn towards utility with potential of Rs10-12bn revenue. It has delayed utility capex, instead expanding production capacity which will enable SCIL to earn revenue of Rs15bn with total capex of Rs7.5bn by end-FY22.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer