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Result Synopsis

Sequent reported another disappointing quarter as one-off related to inventory write down, German plant closure amongst others led to large margin miss; topline struggled in face of demand issues in Turkey, Europe in formulations while API grapples with pricing pressures and forex challenges. Adjusted for one-offs, reckon margin would still be in the 6-6.5% range vs reported ~2.7% and ~7.5% in Q3, implying further worsening of underlying business.

Lack of margin recovery remains the biggest concern thus far and we have been patiently awaiting some semblance of a recovery. Management appeared quite confident in Q4 FY24 exit margin being an early double digit number with FY25 margin correspondingly in teens. Company had outlined impact of one-offs on EBIDTA which means FY23 margin would be in the 7.5% ball park on ~Rs14bn of revenues. Since the guidance is for Q4 exit rate, reckon margin recovery would be slow in nature and expect FY24/FY25 margin estimate at about 7%/11% vs 10%/13% earlier. Company has been taking steps to rationalize footprint like shutting down of German plant which would add Rs200mn annualized benefit in latter part of FY24 along-side inventory reduction; on the other hand, demand issue in Turkey and Europe continue unbated and API is still in the midst of pricing pressure. We understand taking a call is effectively betting on management’s ability to turn things around and steps outlined in Q4 call hint at a better outlook in H2 FY24. Albeit weaker end to FY23 and slow H1 FY24 would also weigh on earnings and also lead to cut in FY25 estimate by ~30% as we factor slower margin climb. Retain BUY, playing for recovery in H2 and FY25 with likely change visible from Q2 FY24. Revised TP Rs95 (earlier Rs130) based on 35x FY25 EPS

Result Highlights

Sequent reported yet another disappointing quarter with 4% YoY revenue decline vs estimated -2% YoY

Margin at 3% excluding ESOP cost came in much below expectation of 8% led by gross margin at sub 40% but which included 1.5% due to inventory reduction

Supply of product to animal health company does not look to have boosted margin

Write off to the tune of Rs616mn including in Germany Rs411mn, Turkey Rs204mn

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