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Inventory liquidation impacts margins; demand robust  

Our View

CHEMPLAS’ 4QFY22 operating profit at Rs 3.46bn (+0.7% YoY; ‐1.8% QoQ), missed our estimates primarily on liquidation of higher priced inventory during the quarter, leading to margin compression. Extended monsoon and plant shutdown during 3Q, had led to accumulation of inventories, when incidentally prices were also at peak. Moving into 4Q, while demand recovered, realizations stood QoQ weaker. In addition, higher energy prices and logistics costs in aftermath of Russia ‐Ukraine conflict additionally impacted margins. Covid related lockdown in China, created an anomalous situation where PVC production is higher but domestic consumption is lower, leading to higher exports, thereby creating pressure on prices. Going ahead, as Chinese consumption recovers, the demand supply dynamics in PVC appears favorable to CHEMPLAS, as demand is on recovery but no there is no significant domestic capacity addition on anvil. Custom manufacturing business also experienced healthy growth, with prognosis for continued but back‐ended growth once multipurpose capacity gets commissioned by 1QFY24. Maintain BUY.  

Result Highlights

Revenue: The consolidated net‐revenue stood at Rs 18.1bn (+35% YoY; +25% QoQ), driven by strong price environment in both Paste PVC and SPVC. The FY22 revenue as result clocked in at Rs 59bn (+55% YoY)

Consolidated Ebitda & PAT: Consolidated Ebitda at Rs 3.46bn stood +0.7% YoY and  ‐1.8% QoQ, recording only a tepid growth YoY, despite strong demand traction, due to liquidation of high‐priced inventory accumulated in 3Q and also due to exceptionally strong base quarter. EBITDA margin for 4Q, stood at 19.2% (vs 24.3% in 3Q). While reported PAT stood at Rs 2.3bn (‐36.4% YoY; ‐2.2% QoQ), on adjusted basis (base quarter adjusted for Rs 1.85bn of discontinued JV)  PAT recorded a YoY growth of 29% on 62% YoY reduction in interest expense

Specialty Chemicals:  The Revenue and Ebit for the segment stood at Rs 6.5bn (+57% YoY; +25.4% QoQ) and Rs 1.7bn (+159% YoY; ‐1.7% QoQ), respectively, on backs of 43‐44% QoQ & YoY higher volume and 12% YoY but  ‐9.2% QoQ realizations

Commodities : The Revenue and Ebit for the segment stood at Rs 11.6bn (+25% YoY; +24% QoQ) and Rs 1.13bn (‐29.5% YoY;  ‐9.9% QoQ), respectively. While revenue was aided by 12% YoY & 35% QoQ growth in sales volume, the weakness in EBIT stemmed from liquidation of higher priced inventory and 8% QoQ lower realization.

Valuation

We maintain our BUY rating on CHEMPLAS with revised TP of Rs 650/sh (from Rs 700/sh). Our TP implies a target multiple of 13.2x, vs. 10.5x the stock is trading at.

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