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Our Take:

Vishnu Chemicals Ltd (VCL) is India’s largest manufacturer of Chromium and Barium compounds. The company has a strong moat of being a low cost manufacturer and a leader in a niche industry, its products has varied applications across 20 sectors like Leather, Pharmaceuticals, Glass, Paints & Coatings, Tiles, Wood preservatives etc. Chromium is used to harden steel, to manufacture stainless steel (named as it won't rust) and to produce several alloys.

Chromium plating can be used to give a polished mirror finish to steel. Chromium plating was once widely used to give steel a polished silvery mirror coating. Chromium is used in metallurgy to impart corrosion resistance and a shiny finish; as dyes and paints, its salts colour glass an emerald green and it is used to produce synthetic rubies; as a catalyst in dyeing and in the tanning of leather; to make molds for the firing of bricks..

VCL has overall 170+ customers globally with top customer contributing ~5% of revenues and top 10 contributing ~20% of overall revenues. Its products are sold across 57 countries around the world while exports contribute ~50% of overall revenues. Over the years, the company has been constantly expanding its product portfolio from basic chromium to its derivative products and had also entered the highly synergic, Barium segment in 2015 with the acquisition of Barium carbonate facility of Solvay Barium GMBH in India.

Going forward, we are positive on the growth prospects of the company on the back of 1) Constant expansion of its product application across industries 2) Backward integration by setting up Soda Ash unit which is expected to be commissioned by Q4FY22 at a capex of Rs. 120Cr for Chromium chemicals which will be margin accretive 3) Incremental capacity expansion in Barium segment provides good visibility of future growth and 4) Post completion of investment phase in FY22, we expect VCL to generate strong cash flows which will aid in deleveraging its balance sheet and thereby improve its return ratios.

Valuation & Recommendation:

VCL had witnessed a muted earnings growth of 7.9% CAGR during FY15-21. Going forward, in our view, VCL can show acceleration in topline and bottomline. We expect, its revenue, EBITDA and PAT are likely to record a growth of 16/36% and 51% CAGR over FY21-23E along with consistent FCF generation and improvement in working capital. Segment-wise, we expect Chromium and Barium revenues to grow at CAGR 15% and 17% respectively over FY21-23E.

Higher PAT growth will be driven by strong operating performance across both Chromium and Barium segments where we expect segment-wise EBITDA margins to expand by 600/400 bps respectively over FY21-23E. At a consolidated level, we expect overall margins to expand by 430 bps to 15.9% in FY23E v/s 11.6% in FY21. Also strong cash flows on the back of better operating performance will result in lower debt, aiding lower interest cost which will further be earnings accretive.

The stock is currently trading at valuation of 10x FY23E earnings. We feel the base case fair value of the stock is Rs. 738 (11.5x FY23E) and bull case fair value is Rs. 818 (12.75x FY23E). We recommend investors to buy the stock in the band of Rs. 658-696 and further add at Rs. 593.

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