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Strong volume; cost inflation drags margins…

Sudarshan's Q4FY21 results were better than our estimates on the revenue, net profit front while margins were lower mainly due to a sharp increase in intermediates price. Revenues grew 28.4% YoY to | 576.5 crore led by 32.5% growth in pigment to | 532.6 crore amid strong volume. EBITDA margins improved 315 bps YoY to 15.2% mainly due to operational leverage being partially drag by cost inflation. Subsequently, EBITDA grew 62% YoY to | 87.5 crore. PAT grew 95.6% YoY to | 53.4 crore amid a strong operational performance, lower depreciation and higher other income.

Favourable competitive landscape for Indian players

Indian pigment production has increased at ~8% CAGR 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 user’s 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 the 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 | 600 crore (| 562 crore spent; | 269 crore in CWIP) largely to be spent 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

Strong volume growth drove H2 but sharp intermediate price increases impacted margins. However, the company expects to pass on most of the raw material inflation to end users. Despite pandemic, Sudarshan has almost competed | 600 crore of capex (revenue potential of | 1000-1200 crore), which gives strong visibility and management commitment towards future growth. The company’s strong track record, with favourable macro factors and strong domestic demand are key catalysts for future course. Margins are also likely to improve due to backward integration and increase speciality contribution. We maintain BUY recommendation with a target price of | 775 (26x FY23E EPS of | 29.8, earlier target price | 605).

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