Hold Sudarshan Chemical Ltd For Target Rs.385 - ICICI Direct
Weak performance; margin recovery key to watch…
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
Q2FY23 Results: Sudarshan Chemical’s numbers came in below our estimates, while EBITDA margins were marginally above our estimates.
* Reported revenue growth of 6.1% YoY to | 528.4 crore, led by higher growth from engineering (up 4.8% YoY) & pigments (up 6.2% YoY)
* Gross margins fell 360 bps YoY to ~38.7% while EBITDA margins contracted 250 bps YoY to 8.1% due to higher COGS (+12.7% YoY)
* EBITDA declined 18.9% YoY to | 42.9 crore. The decline was led by elevated level of Input costs and energy cross across multiple intermediates
* PAT was down 80% YoY to | 4.5 crore
What should investors do? The stock depreciated at 0.2% CAGR in last three years.
* Maintain HOLD as we believe margin recovery is key besides sustained revenue traction
Target Price and Valuation: We value Sudarshan Chemicals at 16x P/E FY24E EPS to arrive at a revised target price of | 385/share (earlier | 515/share).
Key triggers for future price performance:
* Upcoming capex bodes well for speciality pigments revenue growth
* Higher share of value added business portfolio expected 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 | 1680
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