Buy Sudarshan Chemical Industries Ltd : Upcoming capex offers strong visibility ahead - ICICI Direct
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Buy Sudarshan Chemical Industries Ltd For Target Rs.795
Upcoming capex offers strong visibility ahead
About the stock: Established in 1951, Sudarshan Chemical is a leading player in the Indian colour pigment industry with ~35% market share and is also among the top four players globally.
* It has a wide portfolio of 4,000+ varieties of products of Azos, blue and green, high performance pigments (HPPs), effects, pigment preparations and inorganics
* Among end users, coatings industries contribute highest followed by plastics, inks, cosmetics and other applications.
Q1FY22 Results: The topline was almost in line with estimates but margins missed owing to higher-than-expected other cost.
* Reported revenue growth of 34.5% YoY to | 473.9 crore, led by higher growth from pigment segment (up 32.8% YoY)
* Gross margins rose 234 bps YoY to ~46.4% while EBITDA margin fell 190 bps YoY to 13.1%, due to higher other operating cost (+74% YoY)
* Adjusted EBITDA was up 28% YoY to | 63.5 crore
* PAT increased 44% YoY to | 26.2 crore owing to lower taxes (up 29.2% vs. 34.5% in Q1FY21)
What should investors do?
The stock appreciated at 30% CAGR in last three years.
* We retain BUY rating on the back of better growth outlook from speciality pigments
Target Price and Valuation: We value Sudarshan Chemical at 25x P/E FY23E EPS to arrive at a revised target price of | 795/share (earlier | 775/share).
Key triggers for future price performance:
* Upcoming capex bodes well for speciality pigments revenue growth
* Higher share of value added business portfolio to improve margins profile of the business
* Allocation of incremental FCF towards organic/inorganic growth likely to expand return ratios further
Alternate Stock Idea: Apart from Sudarshan Chemical, in our chemical coverage we also like Neogen Chemical.
* For Neogen Chemical, future revenue growth is expected to be driven by increasing custom synthesis opportunity
* BUY with a target price of | 1095
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