Neutral Atul Ltd For Target Rs.8,991 - Motilal Oswal Financial Services
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Strong quarter led by the Life Science Chemicals segment
* ATLP reported an in line revenue, led by strong growth in the Life Science Chemicals segment, which grew 32% QoQ and 38% YoY.
* Gross margin declined to 4% YoY due to higher raw material costs, while adjusted EBITDAM came in higher than our estimate at 18.1%. The company has written off the carrying value of the assets (~INR351m) destroyed by the fire on 20th Apr’22 by including it in other expenses.
* EBIT contribution from the Life Science Chemicals segment improved to 38% in 1QFY23 from 28% in 4QFY22, while the same from the Performance and Other Chemicals segment declined to 62% in 1QFY23 from 70% in 4QFY22.
* ATLP is implementing projects at a total investment of INR17.5b in the parent company, Atul Products, Amal Specialty, and Atul Finserv. At full capacity, revenue is expected to touch INR60b.
* We build in a revenue/EBIDTA CAGR of 10%/14% over FY22-24. We value the stock at 35x FY24E EPS to arrive at our TP of INR8,991. On a one-year forward basis, ATLP trades at 34x. We maintain our Neutral rating, given its rich valuations.
Margin expands; revenue growth led by the Life Science Chemicals segment
* Revenue grew 37% YoY and 8% QoQ to INR14.8b (in line).
* Revenue from Performance Chemicals grew 40% YoY to INR10.6b.
* Revenue from Life Science Chemicals grew 38% YoY and 32% QoQ to INR4.8b.
* Gross/EBITDA margin grew 100bp/80bp QoQ to 49%/15.8%. Adjusting for the write-off of INR351m, EBITDAM stood at 18.1%.
* EBIT margin expanded in the Life Science Chemicals segment, while it remained flat in the Performance Chemicals segment.
* The margin in the Life Science Chemicals segment grew 200bp QoQ to 16%. EBIT stood at INR795m.
* The margin in the Performance Chemicals segment stood at 12% (flat QoQ) – at multi-quarter lows. EBIT stood at INR1.3b.
* EBITDA grew 14% QoQ, but fell 1% YoY to INR2.3b. Adjusted EBITDA stood at INR2.7b.
* PAT grew 20% QoQ (flat YoY) to INR1.6b (8% higher than our estimate), resulting in an EPS of INR55.2 in 1QFY23.
* Contribution from subsidiaries turned positive. PAT stood at INR49m in 1QFY23 v/s INR91m in 1QFY22 and a loss of INR120m in 4QFY22.
Maintain our Neutral rating
* ATLP has been focusing on key aspects such as: a) enhancing people productivity and manufacturing efficiencies, b) deploying technologies in every function, and c) working with customers on ideas of high potential. The management believes in prioritizing its FCF, which will enable greater innovation and guide investments in assets that pay off faster.
* We built in a capex of INR17.5b over FY23-24, as guided by the management. ATLP turned net cash in FY21, but may need to raise funds due to the huge capex that it would be undertaking in FY23. Return ratios of 13-15% are likely going forward.
* Fluctuations in foreign exchange may impact sales realizations, with prices of some products varying widely over the short-term. We value the stock at 35x FY24 EPS to arrive at our TP of INR8,991. We maintain our Neutral rating.
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