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Bromine demand outlook buoyant; maintain BUY

Archean’s 4QFY23 EBITDA was 4% below our expectation but 1% ahead of consensus estimates. The miss was primarily on account of slightly lower improvement in bromine sales volume. However, higher industrial salt realisation surprised us positively. This was on account of contract revision (likely with its long-term partner Sojitz) with effect from Jan’23. Going forward, the management expects bromine prices to stabilise around the current price of USD 4/kg. We have a similar view given pre-Covid bromine price was ~USD 3.5-4.0/kg. On the bromine demand front, the outlook is buoyant. Besides, the company’s plan to commercialise bromine derivatives in the beginning of 2HFY24 remains on track. We continue to like the bromine derivatives story offering 36% EPS CAGR over FY23-26E (even after baking in normalised bromine prices). We maintain BUY with a Jun’24 TP of INR 810/share (based on 12X Jun’25E EPS).

Higher salt realisation a positive surprise: Archean Chemicals’ consolidated 4QFY23 gross profit came in 2% ahead of JMFe at INR 4.1bn (up 10%/13% QoQ/YoY) on account of gross margin expanding to 107% (vs. JMFe of 96% and 102% in 3QFY23), more than offsetting lower sales of INR 3.8bn (up 5%/3% QoQ/YoY). However, other expenses was higher than expected at INR 1.9bn (vs. JMFe of INR 1.7bn). As a result, EBITDA was 4% below JMFe – it was 1% ahead of consensus – and stood at INR 1.9bn (up 22%/21% QoQ/YoY). Further, PAT was 3% below JMFe (in line with consensus) and stood at INR 1.4bn (up 39%/67% QoQ/YoY). During the quarter, industrial sales realisation increased to INR 2,109/MT (vs. INR 1,858/MT in 3QFY23). As a result, industrial sales revenue came in at INR 2.1bn in 4QFY23 (vs. INR 2.0bn in 3QFY23) despite a dip in sales volume. The management indicated that it has revised the salt price upwards with effect from Jan’23. This revision is for the company’s 2-year price contract, which is almost half of the company’s volume. We believe this price revision is with Sojitz. This price revision definitely will aid the company’s topline and margins for the next 2 years. Moreover, on the salt demand front, there are no major challenges, as per the management.

Bromine prices look sustainable at USD 4/kg: During the quarter, bromine sales volume improved sequentially to 4,391MT (vs. 4,000MT in 3QFY23) while bromine realisation was flattish (compared to 3QFY23) at INR 392/kg. Going forward, firm domestic demand is likely to keep bromine demand buoyant. Hence, there is unlikely to be any volume offtake challenges, as per the management. This commentary is in line with commentary of its global peers such as Israel Chemicals, which sees robust demand for bromine in CY23. Moreover, the management believes USD 4/kg is sustainable and sees its realisation around similar levels barring any short-term spikes.

Expect 36% EPS CAGR over FY23-26E; maintain BUY: We keep our FY24E/25E EBITDA/EPS estimates largely unchanged. We expect 36% EPS CAGR over FY23-26E. Due to its strategic positioning in bromine, we believe Archean will be able to build on its bromine advantage. We maintain BUY with a revised Jun’24 target price of INR 810/share (from Mar’24 target price of INR 785/share earlier) (based on 12X Jun’25E EPS).

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