Buy Astec Lifesciences, target price Rs 2215: ICICI Direct
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Revenues upbeat; costs impacted due to deferrals…
About the stock: Incorporated in 1994, Astec Lifescience is primarily into production of active ingredients and intermediates for the agrochemicals segment.
* The company operates in the space of technical as well as bulk sales. It also has a contract manufacturing business
* Enterprise sales constitute ~80% of overall revenue while the rest comes from the CRAMS segment
Q1FY23 Results: Revenues were marginally above estimates while bottom line came in lower due to supressed margins on back of some revenue deferrals
* Reported revenue growth of 43.2% YoY to | 184.3 crore, driven by strong growth in export markets.
* Gross margins contracted by 550 bps YoY to ~33.5% while EBITDA margin were down 540 bps YoY to 13.8%
* EBITDA was up 3% YoY to | 25.4 crore.
* Adjusted PAT was down 12% YoY to | 11.4 crore due to high cost inventories and increase in fixed overheads related to herbicide plant.
What should investors do? The stock appreciated at 82% CAGR in last three years.
* Maintain BUY on the back of emerging CRAMs opportunities besides steady growth in Enterprise sales to be driven by new launches
Target Price and Valuation: We value Astec Lifesciences at 32x FY24E EPS of | 69.3 to arrive at a revised target price of | 2215/share (earlier | 2285/share).
Key triggers for future price performance:
* Better utilisation of herbicide plant to aid revenue growth for CRAMS business, which is expected to grow in high thirties over FY21-24E
* Change in the product mix towards value added products to aid gross margins and, thereby, OPM and return ratios over the coming period
* Control over working capital along with better operational performance to improve FCF generation. Prudent capital allocation towards high RoCE generating business to improve return ratios further
Alternate Stock Idea: Apart from Astec Lifesciences, in our chemical coverage we also like Neogen Chemical.
* For Neogen Chemical, future revenue growth is expected to be driven by increasing custom synthesis opportunity
* BUY with a target price of | 1870.
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