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On a strong growth path; maintain BUY

Anupam Rasayan’s (ARIL) 4QFY22 EBITDA was 12%/18% ahead of JMFe/consensus primarily on account of expansion in gross margin, which was aided by favourable inventories. The company expects inventory levels to come down significantly over the next few quarters, which should also reduce working capital debt (around INR 2.0bn). For the next leg of growth, its INR 2.5bn capex will take one year for asset creation and ramping up to peak production will take another two years. We have raised our FY23/24 EBITDA estimates by ~3%/2%, as in FY23 the company could see margin benefit from previously held inventories while in FY24 there could be some contribution from new capex. However, our FY23/24 PAT estimates have been lowered by ~4%/3% to account for higher interest expense arising from increased debt levels (due to Tanfac acquisition and upcoming capex). We maintain BUY with a revised TP of INR 1,125/share (from INR 1,170/share) as we believe its CSM business provides long-term visibility while its recent foray into fluorination using the HF route (with the acquisition of Tanfac) has further enhanced its already strong barriers (Tanfac acquisition to add strong capabilities)

* Gross margin expansion drives EBITDA beat: ARIL’s 4QFY22 gross profit was 12% above JMFe at INR 2.1bn (up 22%/43% QoQ/YoY) primarily on account of higher-thananticipated gross margin of 68% (vs. JMFe of 60% and 66% in 3QFY22) despite revenue coming in 1%/3% lower than JMFe/consensus at INR 3.2bn (up 19%/17% QoQ/YoY). As a result, EBITDA came in 12%/18% ahead of JMFe/consensus and stood at INR 973mn (up 30%/54% QoQ/YoY) more than offsetting the jump in other expenses to INR 1,046mn (vs. JMFe of INR 920mn and INR 888mn in 3QFY22). However, during the quarter, interest expense and tax rate were higher than anticipated. Hence, PAT came in, 14% below JMFe (still 1% above consensus), at INR 461mn (up 22%/108% QoQ/YoY).

* Inventory levels to go down over next few quarters: We believe that despite a challenging environment, the company’s policy of keeping higher inventory has led to a consistent improvement in gross margins over the last four quarters. Inventory days jumped to 296 days in FY22 (vs. 222 days in FY21). The management said that current inventory levels were elevated because of a fluid environment and that as supply chain disruptions stabilise and inflation in RM prices cools off, inventory days will correct significantly over the next few quarters. Moreover, the management remains hopeful of six months’ pricing contracts with all of its customers, over the next few quarters.

Fluorination piece will come in gradually- maintain BUY: On the fluorination piece, the management indicated that the validation of two new molecules will go on till Feb/March 2023 and work on four more fluorinated products for the US market is also going on. These potential molecules are likely to be high value-high margin products and will start showing up in the top-line in the medium to long term. In the near term, we build in revenue contribution from INR 2.5bn capex only in FY24, which is likely to generate ~20% RoCE. We maintain BUY with a revised TP of INR 1,125/share (based on 36x Mar’24 EPS) as we believe Anupam’s CSM business provides strong earnings growth visibility.

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