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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

Q2FY22 Results: The numbers were below our estimates. Margins were impacted due to higher COGS and operational cost.

* Reported revenue growth of 16.1% YoY to | 498 crore, led by higher growth from engineering segment (up 85% YoY)

* Gross margins fell 70 bps YoY to ~42.3% while EBITDA margin contracted 500 bps YoY to 10.6%, due to higher operating cost such as employee (+29% YoY) and other (+29.8% YoY)

* EBITDA declined 21.9% YoY to | 52.9 crore

* PAT was down 24.8% YoY to | 22.8 crore owing to subdued operational performance

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 | 735/share (earlier | 825/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 margin 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 | 1515

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