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Custom manufacturing springs a positive surprise

Chemplast Sanmar’s (Chemplast) weak print for Q2FY23 was anticipated in view of falling PVC prices and inventory write-downs. Company said PVC prices continue to slide in Q3FY23 too, and recovery is likely only from Q4FY23. Underlying S-PVC contribution margin was at US$180/te, which means PVC price stability should help improve EBITDA. Surprise came from the less talked-about segment of custom manufacturing wherein the management has increased its revenue growth guidance to 30% (earlier: 15%), and has secured a letter of intent to supply advance intermediate for a novel active ingredient. It expects to increase capex for custom manufacturing for both phases-1&2 (earlier capex plan: Rs3.6bn). Company has a strong product pipeline, which will help drive growth. S-PVC expansion plan seems blurred with challenges in securing a reliable supplier for VCM, and significant capacity expansion plans by peers in India. We slash our FY23E/FY24E EPS estimates by 60% and 15% on assuming lower spreads for PVC. We cut the target price to Rs615 (earlier: Rs725) valuing the stock at 18x FY24E EPS. Maintain BUY. Key risks: continued low spreads for PVC, and weaker offtake in custom manufacturing.

* Volume improves as price fall decelerate. Specialty volumes dipped 3.7% YoY (up 47.1% QoQ) to 20kte, whereas in the previous quarter it was hurt due to destocking. Volumes likely benefitted from stabilising prices. S-PVC volumes fell 16.3% YoY (up 4.6% QoQ) to 78kte on very high volumes in the base quarter, which has now normalised. Non-specialty volumes were up 10.1% YoY (9.7% QoQ) to 42kte on higher sales in caustic soda. Specialty spreads (gross profit per kg) dipped 2.8% YoY (40% QoQ) to Rs152/kg, and S-PVC spreads fell 52.5% YoY (37.6% QoQ) to Rs14/kg. PVC spreads were particularly hurt from high-cost inventory. Underlying S-PVC contribution margin was at US$180/te. Paste-PVC prices are now stabilising.

* EBITDA and net profit collapse. Revenue fell 28.6% YoY (15.4% QoQ) to Rs12bn. Gross profit dipped 30.9% YoY (18.7% QoQ) to Rs4bn. Employee and other expenses rose 28% and 25.2% YoY to Rs382mn and Rs2.8bn. Other expenses increased due to higher power cost (coal). EBITDA crashed 71.6% YoY (49.3% QoQ) to Rs1bn. Net profit declined 75% YoY to Rs385mn. Company expects Q3FY23 to be adversely impacted from falling PVC prices, but anticipates the trend to reverse thereafter.

* Improving outlook for custom manufacturing. Chemplast has raised its revenue growth guidance for the custom manufacturing business to 30% (earlier: 15%) on debottlenecking. It has secured a letter of intent from a global innovator to supply an advance intermediate for a novel active ingredient (AI). Chemplast has been working with the innovator on this product for past two years (the innovator expects strong demand for it). Chemplast is also increasing its capex for custom manufacturing and phase-1 capex has been revised to Rs3.1bn (earlier: Rs2.6bn) and phase-2 too will have higher capex than earlier guided. Almost 1/3rd capacity of the new plant will be used for the new product announced. Company has a strong product pipeline for future growth.

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