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Value extraction from inorganic growth key

Rossari Biotech’s Q1FY22 EBITDA growth of 56% YoY to Rs371mn came tad below our estimates due to raw material price volatility. Rossari remains confident of navigating through margin pressure, and reiterated EBITDA margin guidance of 16-18%. Rossari clarified it is not looking for more acquisitions and will focus on integrating the three recently acquired companies.

It remains confident of multiple synergetic benefits from the availability of products in downstream, cross-selling solutions among customers of three companies, building solutions business for Tristar and Romakk, and integrated knowledge development.

We have marginally tweaked our previous estimates. We change our valuation from DCF to PE and assign multiple of 40x FY23E merged entity EPS (pro-forma financial link), accordingly, our target price increases to Rs1,270 (from Rs1,090); we upgrade our rating to HOLD (from Reduce). Upside risk can be from material synergetic benefits from acquisitions which we have not factored in our estimates.

* HPPC / AHN remains strong, while textile chemicals impacted. Home personal care and performance chemicals (HPPC) segment continued to grow strong at 22% QoQ (58% YoY) to Rs1.3bn. Company has seen good traction in new products’ performance such as chemicals in paints, ceramics, water treatment etc. AHN has also performed well with 10.6% QoQ growth (177% YoY) to Rs241mn, while textile chemicals dipped 15% QoQ (up 331% YoY) to Rs747mn. It is a seasonally weak quarter for textiles as in Q4 sales push is high to meet targets. Rossari believes it should at least achieve revenue of Rs2.8-3bn in textiles chemicals in FY22.

* EBITDA margin saved by lower expenses; gross profit margin under pressure. Rossari’s revenue grew 5.9% QoQ / 111% YoY, and benefited from commissioning of Dahej plant and price hike on RM inflation. Gross profit margin dipped 10bps QoQ to 30.9%, while it was down 10.9pps on benefit of higher realisation on sanitizers, which was unsustainable. EBITDA grew 5.4% QoQ / 56% YoY to Rs371mn. Though gross profit margins were impacted, it managed to hold on to EBITDA margin at 16.1%, within its guidance range of 16-18%. It sees gross margin normalise as RM price stabilise, while EBITDA guidance maintained as it sees operating cost inflation with resumption in travel and other activities. Net profit grew 9.4% QoQ / 58% YoY to Rs245mn.

* Inorganic growth – to add value in medium term. Rossari has announced third investment in Romakk Chemicals, in which it plans to buy 50% stake for Rs75mn. Romakk manufactures silicone oil and upstream emulsions, which are used in personal care. Rossari’s presence in silicone was significantly skewed towards textiles thus, Romakk would enhance its portfolio. Rossari’s initial focus is on successful integration of people and culture of the three acquired companies. Over the next few quarters, it will help these companies scale-up faster and extract synergetic benefits. It sees huge scope in cross-selling and imparting solutions mind-set.

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