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In-line results; banking on strong growth in FY22

* Atul (ATLP) reported revenue/EBITDA in line with our estimates, with further decline in the EBITDA margin to 21.9% during the quarter.

* Despite increase in contribution of high margin Performance & Other Products segment from 60% of revenues in 1QFY21 to 67% in the quarter, gross margin witnessed a compression of 5% YoY. However, better cost control arrested EBITDAM decline to meagre 2.1% YoY.

* Ongoing projects have been delayed by about six months. That said, ATLP plans to participate in growth in the Crop Protection and Pharma segments – by focusing on providing its customers with the best quality research and products as well as securing access through additional registrations.

* Furthermore, ATLP has recently formed a 100% subsidiary company (called Atul Products Ltd), which would invest INR7b over the next two years.

* ATLP has reiterated its focus (in its recently published Annual Report) on (a) enhancing people productivity and manufacturing efficiencies, (b) deploying technologies in every function, and (c) working with customers on ideas of high potential. On these factors, we build a revenue and EBITDA CAGR of ~13% over FY21–24E. Considering ATLP’s rich valuations, we maintain Neutral on the stock.

1QFY22 numbers in line with estimates

* Revenues were in line with our estimates at INR10.8b (+64% YoY; -3% QoQ).

* Life science chemicals continued to aid growth (supported by Atul Bioscience), with revenue at INR3.5b (+30% YoY; +13% QoQ). This led to an increase in the life sciences mix to 31% of revenue from 27% in the previous quarter.

* Revenue for performance and other chemicals stood at INR7.5b (+79% YoY; - 8% QoQ), weighed by the impact of the second COVID wave. As a result, the revenue mix stood at 67% (v/s 71% in the previous quarter).

* EBITDA was in-line at INR2.4b (+49% YoY; -7% QoQ), with gross margins at 52%.

* The EBIT margin has continued to normalize since the peak of 1HFY21.

* The life science chemicals EBIT margin stood at 14% (v/s 16% in 4QFY21).

* The EBIT margin for performance and other chemicals came in at 21% (v/s 22% in 4QFY21).

* Higher depreciation (+18% est) and lower other income (-21% est) led to lowerthan-estimated PAT (-10% est) at INR1.65b (+40% YoY; -7% QoQ).

Capacity additions in subsidiaries to drive major growth from FY22

* Atul Bioscience (a subsidiary) is stabilizing its operations at Ambernath Phase-I, which has a revenue potential of INR2.7b (INR1.1b investment), primarily from APIs and intermediates.

* Anaven (a JV) commenced the first phase of its monochloroacetic acid (MCA) manufacturing facility in the latter part of FY21 (with an investment of INR2b) and plans to ramp up operations in FY22. The primary objective is to have sufficient capacity to meet the entire demand of MCA in India.

* DPD has sales potential of INR500m (after an investment of INR170m towards doubling capacity). With some benefit of the investment already having accrued last year, the subsidiary would make further investments in FY22.

* Amal has shortlisted new expansion projects. Atul Rajasthan Date Palms has stabilized its operations further. Rudolf Atul Chemicals (RACL) has strengthened its marketing presence and is gaining market share gradually.

Valuation and view – maintain Neutral

* We assume EBITDAM of 24–25% (flat v/s FY21 levels) over the next three years. The company spends on debottlenecking and process efficiencies annually (as mentioned above), which presents an upside risk to our assumptions.

* We build in capex of INR11b over FY22–24E. ATLP turned net cash in FY21 and plans to fund capex via internal accruals only (FCF generation of INR14.6b over FY22–24E). Return ratios of 17–18% are likely going forward.

* Fluctuations in foreign exchange may impact sales realizations. Thus, the prices of some products may vary extensively over the short term. However, in line with the company guidance, we expect consol. revenues to reach INR54b in FY24 (clocking a CAGR of ~13% YoY). This excludes the recently announced investment of INR7b in Atul Products, which could result in an upside revision to our estimates.

* The stock is trading at 32x FY23E EPS of INR290 and 22x FY23E EV/EBITDA. Valuing ATLP at 33x Sep’23E EPS, we arrive at TP of INR10,000. Maintain Neutral.

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