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Protecting margins; revenue growth tepid

Rossari Biotech’s Q1FY23 result was a mixed print with weak revenue (standalone revenue dipped 11% QoQ / up 15% YoY), while margin displayed sharp recovery (gross profit margin up 300bps QoQ). Unitop’s revenue growth was strong in Q1FY23 on seasonality (higher sales of agro-chemicals) and better availability of key raw material EO which was short for past three quarters. Company remains cautious in near term on revenue recovery considering volatility (declining) in raw material prices which has pushed customers to de-stock on anticipation of more drop in prices. It has also been agile with low inventory (in fact sold certain high cost raw material in Q1FY23) and protecting margins. It remains focused on launching new products, and synergise with acquired companies providing good support across segments. We cut our revenue estimate by 5% each for FY23/ FY24, but faster margin recovery implies EPS estimates increase by 1-8% over FY23E-FY24 and the target price to Rs920 (from Rs910) valuing the stock at P/E multiple of 30x FY24E. Maintain HOLD.

* Standalone revenue struggling; Unitop strong on seasonality. Home personal care and performance chemicals (HPPC) segment revenue grew 139% YoY to Rs3.2bn (including revenues from merged companies, Unitop and Tristar). Standalone HPPC revenue grew 10% YoY (benefited new greenfield plant commissioned in Dahej), but dipped 8.5% QoQ to Rs1.2bn. Standalone HPPC revenue was impacted from destocking by customers on falling raw material prices, and some sales forgone by the company due to excess volatility in raw material prices. Subsidiaries’ revenue grew 13.4% QoQ to Rs2bn on strong performance in Unitop on seasonality in agro chemicals. Textile chemical segment revenue grew 26% YoY (down 14.5% QoQ) to Rs0.9bn, and AHN revenue was flattish YoY (down 5% QoQ) to Rs243mn.

* Margins normalising, but more needed. Rossari’s (standalone) revenue grew 15% YoY (down 11% QoQ) which was weak on destocking. Gross profit margin up 300bps QoQ (dipped 290bps YoY) to 26.7% due to price increases, and softening raw material prices. Gross profit rose 3.4% YoY (+0.8% QoQ) to Rs623mn. EBITDA fell 11% YoY (1.5% QoQ) to Rs271mn, and EBITDA margin was 11.6%. Company remains confident of achieving 14-15% EBITDA margin again by H2FY23. Consolidated revenue and EBITDA rose 88% and 56% YoY to Rs4.3bn and Rs577mn, respectively. Unitop revenue was strong at Rs1.5bn of total Rs2bn revenue from subsidiaries.

* Other highlights. 1) Rossari’s standalone Q2FY23 performance should be similar (to Q1) as raw material volatility is making it worried of keeping inventory; 2) company remains agile and has sold certain high cost raw material even in Q1FY23 (silicone oil); 3) Unitop revenue for FY23 estimated at Rs5bn of which Rs1.5bn was achieved in Q1FY23. Better EO availability, and strong demand from exports market are helping Unitop; 4) Rossari is seeding many new products and a majority of it are coming from synergies derived from acquired companies across HPPC, textiles and AHN segments; and 5) it remains confident of achieving earlier margins of 15-17% in medium term.

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