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Strong demand across geographies drives growth...

Sudarshan Chemical's Q3FY21 results were higher than I-direct estimates on all fronts. Revenues grew 19.6% YoY to | 506.4 crore (I-direct estimate: | 464.3 crore) led by 22.1% growth in pigment segment to | 477.1 crore amid revival in domestic demand and continuous traction in export markets. EBITDA margins improved 138 bps YoY to 15.7% (I-direct estimate: 15.7%) mainly due to lower other expenditure and partially offset by increase in raw material prices. PAT grew 38.4% YoY to | 39.2 crore (I-direct estimate: | 34.5 crore), in line with operational performance.

Favourable competitive landscape for Indian players

Indian pigment production has increased at a CAGR of ~8% in FY13-19 compared to global growth of 3-4%. This was on the back of: 1) strong demand from domestic end users, 2) global consolidation and exits of top players like BASF, Clariant to focus on different priorities besides unfavourable economies of scale and 3) diversification of end users’ preference to India from China due to supply disturbances amid recurring issues like pollution concerns, US-China trade war and now Covid. Apart from the above factors, focus on fast growing organic segment (~84% of domestic production), cheap labour, strong technical capability and chemistry knowledge are add-on advantages for the Indian players.

Prime beneficiary due to leadership, capex

Sudarshan’s estimated pigment volumes grew ~10% during same period, outpacing industry growth propelled by huge product offerings, robust cost and technical capability for consistent launches of new and customised products besides strong environmental compliance record. We believe the company is finely poised to reap the benefits of favourable macro factors and increasing domestic demand. Looking at the opportunities, Sudarshan has earmarked an aggressive capex plan of | 585 crore (| 225 crore spent in FY20) largely spend on capacity addition for growth projects (new and existing) mainly in margin accretive HPP and speciality segments. Post pandemic, we expect the company to grow at ~12% CAGR in FY21-23E amid 20-25 annual new launches, capacity addition and strong demand.

Valuation & Outlook

The company’s operations and demand from end users are reverting back to normal as the economy opens up. The company’s H2 is also likely to benefit amid some pent-up demand. Owing to strong demand, the company is trying to expedite its growth capex plans of | 585 crore (which have been bit delayed amid Covid), which gives strong visibility and management commitment towards future growth. Sudarshan’s strong track record, with favourable macro factors and strong domestic demand are key catalysts for it. Margins are also likely to improve due to backward integration and change in product mix towards margin accretive products. We maintain BUY recommendation with a target price of | 605 (24x FY23E EPS of | 25.2) vs. earlier target price of | 550.

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