Buy Sudarshan Chemical Ltd For Target Rs.825 - ICICI Direct
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Anti-dumping on mica to aid earnings by 5-10%...
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
Anti-dumping duty on mica pigment: The Finance Ministry has imposed antidumping duty on natural mica-based pearl industrial pigments, excluding cosmeticgrade products. The duty will be ~US$2-3/kg and will be levied for five years. As per the initial document filed by the company, overall import volumes for mica pigment from key geographies is at ~2181 MT at an imported price of | 380/kg. The price undercutting is estimated to be ~20-30% as on inquiry date. Mica pigment currently contributes in low single digits to overall revenue of Sudarshan Chemical. Based on our calculation, sales volumes should be ~1300 MT against total capacity of ~3000 MT as per the pre-feasibility study report filed earlier. We expect potential earnings benefits due to price hike to be ~4-5% on FY21 PAT. We have not factored in any potential market share gains due to anti-dumping, going ahead. Any positive development can aid bottomline in high single digits on FY21 PAT
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 | 825/share (earlier | 795/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 | 1095
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