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Weak PVC price and higher energy cost weigh on earnings

Our View

CHEMPLAS’ 2QFY23 operating profit at Rs 984mn (-71.6% YoY; -49.3% QoQ), missed our & street estimates primarily on weaker than estimates PVC sales and margins. In addition higher than estimated operating costs, on account higher energy expense incrementally dented the operating margins during the quarter. Continued weakness in PVC prices and margins due to weaker Chinese demand, has resulted in 1HFY23 operating profit for Chemplast being lower by 41% YoY at Rs 2.9bn, even as sales of suspension PVC was higher by 4% YoY and that of paste PVC by about ~14% YoY, in the same period. While the PVC prices appear to have bottomed but are still sometime away from recovery. Other chemicals( Caustic, Hydrogen Peroxide etc) however had better pricing environment. The 41ktpa capacity expansion in paste PVC segment is on track, however Chemplast has decided to fast track the Phase -1 expansion in custom manufacturing block, in order to cater to upcoming attractive opportunities.

Result Highlights

* Revenue: The consolidated net-revenue stood at Rs 11.9bn (-28.6% YoY; -15.4% QoQ), impacted by weaker PVC prices during the quarter. While PVC prices seem to be bottoming out, but are still sometime away from recovery. While raw material prices also corrected, but the benefit from the same would accrue when PVC prices stabilize. The revenue for 1HFY23 at Rs 26bn stood flat YoY, even as sale volume was 10% higher YoY.

* Consolidated Ebitda & PAT: Consol. Ebitda at Rs 984mn stood lower by 71.6% YoY and 49.3% QoQ. EBITDA margin for the quarter, stood sequentially weaker at 8.2% (vs 13.8% in 4Q). QoQ weaker PVC prices, along with increase in energy and fuel costs impacted Ebitda/Ebitda margin. Reported PAT stood at Rs 385mn ( -75% YoY; -5% QoQ), despite YoY lower interest expense.

* Specialty Chemicals: The Revenue and Ebit for the segment stood at Rs 5.7bn (+6.5% YoY; -0.1% QoQ) and Rs 481mn (-35% YoY; -51% QoQ), respectively as sales volume at 20 tmt stood 3.7% lower YoY but 47% higher QoQ

* Commodities : The Revenue and Ebit for the segment stood at Rs 6.8bn (-40.1% YoY; -26.1% QoQ) and Rs (110)mn (vs Rs 395mn in 1QFY23), respectively. Sales volume at 119.6tmt stood 8.7% lower YoY but 6.4% higher QoQ.

Valuation

We maintain our BUY rating on CHEMPLAS with revised Mar’24 TP of Rs 530/sh (from Rs 630/sh), as we adjust our estimates to reflect weaker PVC price environment and roll estimates forward.

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