ATUL has an established track record and strong market position in the chemical industry with diversified product portfolio. It is the global market leader in some of its high-value products and the only supplier in India. ATUL earns high margins and delivers healthy return ratios. Moreover, factors such as the growth of the textile industry in India, increasing titanium dioxide production capacity, accelerating paper production, rising plastic consumption and rapid urbanization are expected to drive the demand for its products as a whole.
Inspite of large CAPEX requirements it has been able to maintain a low debt level in its balance sheet over the last few years due to its strong cash flows. Its margins have also improved sharply owing to ease in costs, and are likely to sustain in the coming years. Wide distribution network will help the company come back on growth trajectory once the lockdown is lifted. ATUL could be one of the large beneficiaries of shift of supply chains away from China.
Valuations & Recommendation:
We expect ATUL’s revenue/EBIT/PAT to increase at a CAGR of 2.6/4.5/2.5% over FY20-22E. We expect the company’s Life science chemical business to perform better during FY21E, than its Performance & other chemical (POC) segment led by the current increased demand for pharmaceutical products, due to the ongoing COVID 19 situation, and upcoming Kharif harvesting season, aided by normal monsoon forecast. We believe the company can command higher multiple because of its diversified reach across specialty chemical category catering to wide array of industries, which will help it sail across these troubled waters. The recent rerating of all chemical companies would also help in this process. We assign a P/E multiple of 22.5x FY22E EPS for bull case fair value resulting in price of Rs.5440, and 21.5xFY22E EPS for base case fair value resulting in price of Rs.5199. We feel that investors can enter the stock at the CMP (19.1xFY22E EPS) and add on dips to Rs 4210-4250 band (17.5xFY22E EPS).
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