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Earnings miss; outlook encouraging for bromine demand

Archean’s 1QFY24 earnings print was weaker than expected with EBITDA/EPS miss of ~16%/17% mainly on account of subdued bromine sales. Recently, bromine prices have started firming in China. Moreover, the management has also started seeing early signs of recovery in bromine demand. Hence, in our view, 2HFY24 should be better than 1HFY24 from both bromine volume and realisation fronts. Moreover, the company’s bromine derivatives (CBR and PTA catalysts) are scheduled to be commercialised in mid-3QFY24. Taking into account 1QFY24 results, gradual bromine volume recovery, and delay in commercialisation (vs. our expectation) of flame retardants by two quarters, we cut FY24/25/26 EPS estimates by 25%/15%/13%. We continue to like the bromine derivatives story offering 29% EPS CAGR over FY23-26E. We maintain BUY with a Sep’24 TP of INR 735/share (based on 12X Sep’25E EPS).

* EBITDA miss on account of lower bromine sales; industrial salt demand outlook robust: Archean Chemicals’ consolidated 1QFY24 gross profit came in 11% below JMFe at INR 3.1bn (down 23%/21% QoQ/YoY) on account of gross margin contracting to 91.3% (vs. JMFe of 97.5% and 106.6% in 4QFY23) and lower sales of INR 3.4bn (down 10%/14% QoQ/YoY). However, other expenses was lower than expected at INR 1.6bn (vs. JMFe of INR 1.7bn). As a result, EBITDA was 16% below JMFe and stood at INR 1.3bn (down 31%/16% QoQ/YoY). Further, PAT was 17% below JMFe and stood at INR 939mn (down 31% QoQ but up 11%YoY). In 1QFY24, industrial sales realisation decreased to ~INR 1,910/MT (vs. INR 2,109/MT in 4QFY23). As a result, industrial sales revenue came in at INR 2.0bn in 1QFY24 (vs. INR 2.1bn in 4QFY23) despite an increase in sales volume. Since the majority of salt offtake is contracted, changes in spot price do not significantly affect Archean’s pricing. Growing offtake in export markets as a result of increased demand of chlorine-based products should augur well for industrial salt demand and the management maintains its quarterly volume guidance of ~1mn MT.

* Bromine offtake could improve from 2HFY24 onwards: In 1QFY24, bromine sales volume was lower sequentially and stood at 4,272MT (vs. 4,391MT in 4QFY23) with bromine realisation at INR 321/kg (vs. INR 393/kg in 4QFY23). Bromine realisation has been under pressure as a result of muted demand on account of increased destocking by global players. It was indicated that while domestic demand remains healthy, there are some green-shoots for export growth as overseas clients are looking to lock in contracted prices. The management believes that bromine prices have bottomed out, and as Chinese demand comes on stream realisation should improve. In our view, bromine volume offtake challenges could abate by 2HFY24 and the company’s bromine realisation could inch up from current USD 4/kg levels.

* Expect 29% EPS CAGR over FY23-26E; maintain BUY: On the downstream products front, PTA synthesis catalysts and CBR (clear brine fluids) are expected to be launched in mid-3QFY24 (and likely to achieve 70% utilisation in the first year of operation) while BFR (90% of which will be contracted) is expected to be commissioned only in 1QFY25 (which we had earlier expected to be commissioned along with other derivatives). Taking this into account, and gradual recovery in bromine volume, we cut our FY24/25/26 EBITDA estimates by 26%/17%/15% and EPS estimates by 25%/15%/13%. We maintain BUY with a revised Sep’24 of INR 735 (vs. Jun’24 TP of INR 810 earlier) (based on 12X Sep’25E EPS).

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