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Bromine business to face near-term challenges

Archean Chemical’s (ACI) Q4FY23 EBITDA grew 21.5% YoY to Rs1.9bn due to robust pricing in bromine and salt segments. Company is seeing pressure on bromine export volumes and realisations, which is expected to improve only in the next two quarters. Bromine realisation is likely to dip to US$4/kg from ~US$4.7 in FY23. Salt has segment positively surprised on pricing, which is expected to remain stable in FY24 though volumes are likely to witness strong growth. ACI plans to have 5mtpa salt capacity in FY25, all of which it expects to sell in same year. SOP production of 8.8kte in FY23 is likely to be billed soon and the company expects higher production in FY24. Bromine derivative production is expected to commence by end-FY24 with capex of Rs2.5bn and potential asset turnover of 3x. We have cut our EPS estimates by 29% for FY24E (on lower bromine revenues) and 8% in FY25. Our target price is reduced to Rs750 (from Rs820) with FY25E P/E multiple unchanged at 13x. Maintain BUY. Risks: Continued weakness in demand for bromine, and sharp drop in salt prices.

* Bromine volumes dip 20% YoY while prices rise 18%. In Q4FY23, ACI revenues grew 2.6% YoY to Rs3.8bn driven by industrial salt revenue growth of 10.7% YoY to Rs2.1bn, while bromine revenues dipped 5.8% to Rs1.7bn. Bromine volumes fell 20.5% YoY to 4.4kte on lower offtake from China, which was impacted by higher BFR inventory while domestic offtake has been firm. Company expects bromine export market to improve in 4- 6 months. Bromine realisation has jump to Rs392/kg (US$4.8/kg) though spot prices have dropped significantly. ACI expects blended bromine price to stabilise at US$4/kg. Industrial salt volumes were lower at 1mnte (down 14% YoY) and realisation improved to Rs2.11/kg (up 29%). ACI expects good volume growth for salt in FY24 and blended realisation to slightly dip. SOP production was at 8.8kte in FY23 and is expected to at least remain same in FY24. These volumes are likely to be sold in FY24 with realisation of US$450/te.

* EBITDA rose 21.5% YoY to Rs1.9bn. Employee costs were 2.5x YoY higher due to recognition of cost towards ESOPs and commission for promoters. The steady-state number is Rs750mn p.a. Other expenses were flattish YoY at Rs1.9bn. EBITDA rose 21.5% YoY to Rs1.9bn and EBITDA margin was at 50.8% (vs 43% in Q4FY22). ACI expects margins in the range of 40-45% going forward. EBITDA margin benefited from higher realisations in both industrial salt and bromine. Net profit rose 67.4% to Rs1.4bn on lower finance costs, which dipped 91.3% YoY on repayment of NCDs from IPO proceeds.

* Other highlights. 1) Bromine: a) Export market remains challenging for bromine due to higher BFR inventory in China; b) blended realisation for bromine is expected at US$4/kg (company is benefiting from long-term contracts in bromine); 2) Bromine derivatives: a) Jhagadia plant is expected to be commissioned by end-FY24 with capex of Rs2.5bn and asset turnover of 3x; b) assuming bromine transfer pricing, margins are expected to be at 20-25%; and 3) Salt: a) Company has secured >50% of its volumes through 2-year contracts and procures the remaining from spot market; b) salt volumes are expected to grow >10% in FY24E; 4) EBITDA margin is estimated to remain in the range of 40-45%.

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