Atul Ltd : Performance chemicals margin squeezed, outlook good; Buy - Anand Rathi Shares and Stock Brokers
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With its product portfolio expansion, greater manufacturing efficiencies, de-bottlenecking and backward integration and its sharper focus on the retail crop protection and polymer categories, Atul’s long-term growth strategy is strong. Being in implementation phase of ~16bn-18bn capex plan, which has ~Rs20bn-25bn revenue potential at optimum utilisation, offering assurance of revenue growth. Raw material price and margin movements are key monitorables.
Mixed Q2 performance. Strong demand and better realisations in both categories helped Atul’s Q2 revenue to grow 19% y/y to Rs14.9bn. However, q/q, it was flat. Its life-science chemicals and performance & other chemicals divisions’ revenues grew 65.1% and 7% y/y respectively to Rs5.7bn and 9.9bn. High energy costs and falling realisations hurt the EBIT margin of performance and other chemicals by 805bps y/y, 496bps q/q (to 7.4%). With better price realisation in its crop protection business, Atul’s lifescience chemicals category EBIT improved 1,523bps y/y, 828bps q/q, to 24.7%, the highest. Ahead, we expect margins to improve on softer raw material prices and good volumes.
Business update. In H1 FY23, Atul developed a new process to apply vat MD dyes on cotton knit fabric. It also filed an application to impose anti-dumping duty on sulphur black originating in or exported from China to safeguard its colours business. Further, focusing on expanding retail polymers, it launched Lapox Tightseal/PTFE tape (commonly used in sealing plumbing-pipe threads) and polyurethane adhesive for footwear.
Outlook, valuation. With its greater focus on retail/brand-name products, added capacities and product launches with a widening market reach in new regions, we are positive on its long-term performance. We roll over to FY25 and maintain a Buy rating on the stock with a TP of Rs10,400 (30x FY25e EPS). Risks: Drop in spreads of major products, delay in capex/de-bottlenecking and fluctuation in prices of crude oil and its derivatives.
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