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India’s leading microcrystalline cellulose manufacturer

Incorporated in 1989, Sigachi Industries Ltd. (SIL) today is one of the largest global manufacturers of microcrystalline cellulose (MCC), which is primarily used as excipients in the pharma, food, nutraceuticals, and cosmetics products. MCC is the major revenue segment (contributing around 92% of the total revenue) of the company. SIL has an exportoriented business with 75% of its business derived from exporting goods to 47 countries across Asia, Australia, Americas, Europe, and the Middle East.

Investment rationale:

• Growth in the pharma sector to support the global MCC market: MCC is a vital component, which is used in every form of oral dosage, including pellets, capsules, tablets, and sachets. Its wide applications across various oral dosage forms make MCC an economical non-active pharma ingredient for the pharma sector. Based on the end-use consumption data, the pharma sector accounts for about 40% of the total MCC market. Thus a steady growth in the pharma sector will provide direct support to the global MCC market, which is projected to cross USD 1.7bn by 2031, a growth of 5.3% CAGR over FY21-31. SIL being one of the largest global manufacturers will be the direct beneficiary from the growth in the MCC market.

• Improved adoption in food & beverages and cosmetic sector, to further push the MCC demand: MCC is a natural refined wood pulp that has properties like non-toxic, renewable, biodegradable & biocompatible. In processed food products, it is used as a substitute for unhealthy fats and is applied across various food & beverages including desserts, frozen food, dairy products, and baked goods. In personal care products, MCC is an important component and is used for a variety of purposes like abrasive absorbent, emulsion stabilizer, slip modifier; and an aqueous viscosity increasing agent mainly for bath, hair, eye & facial makeup, skincare, and shaving products. With rising importance of nutritional & healthy consumptions, food & beverage products are expected to witness a healthy growth post-pandemic. In FY22, SIL generated around 25% and 20% of the business from the food & nutraceuticals and cosmetic products, respectively. Foreseeing a robust growth potential from the food & beverages category, the company is targeting to have around 30% of the business from this category.

• Global reach, another growth factor: SIL generates around 75% of the business from overseas sales of its products. Its products are exported to customers in more than 47 countries. Through its quality products, the company has generated a long-standing market presence in the domestic as well as overseas market. Through its diversified & customized product offerings, SIL intends to further strengthen its position in the international markets. Moreover, higher global exposure resulted in higher realization for the company which has increased to Rs. 161kg as compared to Rs. 102 a few years back.

• Profitability will be lower but better than pre-pandemic period: Demand for MCC from the pharma and cosmetic sector would be secular, while improved preference from the food & beverages post-pandemic is likely to increase the top-line of SIL by 16.9% CAGR (over FY22-24E) to Rs. 341.9cr in FY24E. We believe, FY22 profitability is not sustainable thus we are expecting a contraction in the margins but would be better than the prepandemic period. EBITDA and PAT margins are anticipated to contract by 124bps and 150bps over FY22-24E to 19.9% and 14.5%. Moreover, RoE is expected at 15.3% and 15.8%, respectively, in FY23E and FY24E.

Valuations: In Nov. 2021, SIL’s stock got listed on the exchanges while trading at a peak price of around Rs. 650 per share. Since then on account of the sell-off in the global equity markets, the share price is in a downward trend. At CMP of Rs. 239.9, SIL’s share is trading at FY24E P/E multiple of 15x, which seems to be attractive considering the growth and return profiles. Thus we assign a “BUY” rating on the stock with a target price of Rs. 322.3 per share.

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