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After margins, revenue has headwinds now!

Rossari Biotech’s Q2FY23 result disappointed on margins despite raw material price correction, and now company is cautious on revenue growth. We are disappointed at revenue growth performance across segments of standalone business. Standalone EBITDA margin was stable despite increasing its purchases from own subsidiaries Unitop and Tristar, and fall in raw material prices. Inventory losses could have been a spoiler, but Rossari has guided for EBITDA margin of ~13.5% for FY23E, which makes us believe the underlying pressure on margins persists for various reasons. Unitop and Tristar performance has been satisfactory post the acquisition. Textiles chemicals is facing multiple headwinds which will add to woes of Rossari in near term; company stated volume growth challenges for non-toxic preservatives (produced by Tristar) in Europe and US markets. We have cut our EPS estimates by 11.6% / 5.3% for FY23E / FY24E, and target price to Rs870 (from Rs920), valuing the company at 30x FY24E EPS. Maintain HOLD. Key risk: Continued underperformance in standalone business.

* Standalone revenue dip YoY continues to disappoint; Unitop revenue dip QoQ is on seasonality. Home personal care and performance chemicals (HPPC) segment revenue grew 28.7% YoY to Rs3.0bn (including revenues from merged companies, Unitop and Tristar). Standalone HPPC revenue dipped 37.5% YoY (high base on large raw material sales), but rose 2.8% QoQ to Rs1.2bn. Adjusted for purchase goods, revenue has dipped YoY which is uncomforting. Subsidiaries’ revenue dipped 8.2% QoQ to Rs1.8bn on seasonality in agro chemicals. Textile chemical segment revenue dipped 16.2% YoY (down 2.1% QoQ) to Rs0.9bn as textile industry is facing multiple headwinds, and AHN revenue dipped 22.0% YoY (but up 24.2% QoQ) to Rs302mn.

* Margins remain steady despite falling raw material prices. Rossari’s (standalone) revenue dipped 28.9% YoY (up 3.1% QoQ). Gross profit margin up 110bps QoQ (rose 680bps YoY) to 27.8% on price increases, and softening in raw material prices. Gross profit dipped 5.7% YoY (+7.4% QoQ) to Rs669mn which indicates underlying challenges for growth. EBITDA fell 25.6% YoY (+3.0% QoQ) to Rs279mn, and EBITDA margin was 11.6% (flattish QoQ). It remains confident of achieving 14-15% EBITDA margin in long run, but revised margin expectations downwards for near term. Consolidated revenue and EBITDA rose 10.6% and 28.8% YoY to Rs4.3bn and Rs565mn, respectively. It has seen 7-8% volume growth QoQ; however, price decline in passing raw material price correction has hurt revenue growth.

* Other highlights. 1) Unitop and Tristar performance has been strong, but the company is cautious on near term revenue growth due to slowdown in Europe, and is seeing early signs of a slowdown even in US; 2) Rossari has started using more feedstock from Unitop / Tristar for standalone business, which is helping it maintain capacity utilisation; and 3) Rossari is in the process of launching many new products in water treatment, particularly, effluent from textile manufacturing, pharma coating, silicone based (import substitution) textile chemicals, silicone based agro-chemicals solutions and others.

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