IGI Logo

Add Sudarshan Chemical Industries Ltd For Target Rs.762

Margin pressure from cost inflation

Sudarshan Chemical Industries’ (SCIL) Q1FY22 EBITDA was lower than expected at Rs620mn, down 29% QoQ / up 8% YoY, and was hit due to lockdown in India (revenues down 26% QoQ) and rise in operating costs. Gross profit margin expansion of 430bps QoQ was result of low-cost inventory, and SCIL sees nearterm margins to remain volatile due to higher raw material prices. Further, higher coal and freight costs have put margins under pressure.

Q2FY22 revenues will be adversely impacted due to Mahad plant closure for two weeks. Company sees new plant commissioning and product launches to help grow revenues from H2FY22 onward. We marginally cut our EPS estimates by ~1% each year for FY22E and FY23E, but increase the target price to Rs762 (earlier: Rs708), implying 26x FY23E P/E (earlier: 24x). Maintain ADD.

* India pigment revenues fell 26% QoQ. SCIL’s revenues from the pigment segment grew 33% YoY to Rs4.5bn on low base, but dipped 15% QoQ due to lower revenues in India market (down 26% QoQ to Rs2bn), due to lockdown. Categories worst affected in India are: plastics, coatings and inks. International revenues were steady at Rs2.5bn, up 13% YoY (down only 3.8% QoQ). Specialty pigment revenues shrunk 12% QoQ to Rs3.2bn, while non-specialty revenues fell 21% to Rs1.4bn. Q2FY22 will be impacted due to Mahad plant closure for two weeks on heavy rainfall, but H2FY22 should benefit from new product launches and commercialisation of new facilities. Company also has three new product category launches planned (pushed from Sep’21 to Q3/Q4FY22) with 10-15 products in each category. New yellow pigment continues to grow, but SCIL expects inflection point in revenues only in Q3FY23.

* Margins to remain volatile in near term. SCIL’s gross profit margin rose 430bps QoQ to 46.4% benefiting from low-cost inventories. It expects price rise in multiple intermediates, which will keep margins under pressure in the near term. Margins were also hit due to rise in fuel and freight costs. Employee costs too witnessed high inflation resulting from two increments and investment in sales personnel for the international market. Subsidiary RIECO incurred EBIT loss of Rs42mn (vs Rs34mn profit in Q4FY21) on lower revenues due to lockdown-driven difficulty in execution. Company sees RIECO margins normalising in FY22. We expect SCIL’s EBITDA margins to improve on the back of higher revenues, stabilisation of gross profit margins, and better product mix.

* Capex continues. Company is in the process of executing capex of Rs380mn, which was a spillover from FY21; this should help commercialise Rs3.07bn of investments; of which Rs1.2bn will come in Q3FY22, and remaining in Q4FY22. SCIL is also in the process of incurring capex of Rs1.35bn on infrastructure announced in FY21.

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