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Strong volume growth; spreads compress

Rossari Biotech’s Q2FY22 (standalone) EBITDA growth of 25% YoY to Rs375mn was strong considering margin pressure from sharp rise in raw material prices, and lagged impact of price hikes. Consol. EBITDA grew 46% YoY to Rs439mn on consolidation of acquisitions (Unitop, Tristar and Buzil Rossari). Standalone volume grew 25% YoY which means the company has protected EBITDA/te, but gross margin rose only 12% which implies spread compression. The company will benefit in Q3FY22 from full quarter consolidation of acquisitions; however, standalone growth may slow down considerably as Q2FY22 benefited from strong customer wins. It has sailed smartly in tough situations, but we would wait to see the full benefit of acquisitions and synergies driving faster growth in the future. We are factoring in acquisition numbers in our model which has increased our FY23E EPS by 25%. We roll over valuations to Sep’23 thus increasing our target price to Rs1,300 (from Rs1,270; maintain 40x P/E). Reiterate HOLD.

* Growth across segments on price rise, but volume growth healthy as well. Home personal care and performance chemicals (HPPC) segment continued to grow strong at 79% QoQ (169% YoY) to Rs2.4bn. Textiles chemicals and AHN have also performed well with revenue growth of 47% QoQ growth (61% YoY) to Rs1.1bn, and 61% QoQ (148% YoY) to Rs387mn, respectively. The revenue growth in HPPC was driven by strong volumes growth, price increase and one-month consolidation of Unitop and Tristar (acquisition which added 28% to growth in Q2FY22). Textiles chemicals benefited from the unlocking (recovery in demand). Volume growth at standalone level (without acquisitions) stood at healthy 25% YoY in Q2FY22.

* Spread under pressure. Rossari’s (standalone which is organic) revenue grew 66% QoQ / 95% YoY and benefited from the commissioning of Dahej plant, and price hike on RM inflation. Gross profit margin dipped 860bps QoQ to 21% due to higher input inflation. Gross profit has grown at 12% YoY (vs volume growth of 25%, which implies spread compression); company is in the process of taking tariff hike. However, at EBITDA level, we see the company maintaining EBITDA/te as EBITDA grew same as volumes at 25% to Rs375mn. Net profit grew only 12% YoY to Rs244mn and was restricted by lower other income and higher ETR. Rossari’s consolidated earnings includes one-month revenue from Unitop (Rs270mn) and Tristar (Rs100mn).

* Other highlights. 1) Higher volume growth was from new customer wins; company has guided for slower growth in H2FY22; 2) EBITDA margin in Unitop was 15.8%; and Tristar was 13%; 3) expect margins to improve in Q3FY22 led by price hike; 4) EO, a key raw material, availability by Reliance Industries has impacted performance of Unitop and Rossari; 5) it has appointed Mr. Debashish Vanikar, CEO of new business (acquisitions) and Mr. Ketan Sablok as Group CFO.

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