Reduce Rossari Biotech Ltd For Target Rs.1,090 - ICICI Securities
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Inorganic growth is key to watch
Rossari Biotech’s Q4FY21 EBITDA growth of 47% YoY to Rs352mn came in line with our estimates; but helped by lower other expenses, while gross profit margin was under pressure on raw material price volatility. Company remains confident of delivering strong revenue growth in FY22 on higher capacity and contribution from newer performance chemicals. RM inflation pass-through should help improve gross profit margins (guided range: 32-38%).
Rossari has ambition for inorganic growth with strict criteria of debt-free company with >20% RoCE, which may not come cheap. We are not sure on synergic benefit from the likely acquisition(s), and would evaluate them when announced. We cut our net profit estimates by 1% each for FY22E/FY23E and factor equity dilution. Our revised DCF-based target price (terminal growth rate of 6.5% {earlier 6%}) stands at Rs1,090. Downgrade to REDUCE (from Hold) on high valuation at 51x FY23E EPS.
* HPPC remains strong, textile chemicals and AHN normalise.
Home personal care and performance chemicals (HPPC) segment continued to grow strong at 42% YoY (but down 9.3% QoQ) to Rs1.1bn. HPPC’s sequential revenue decline was due to non-availability of RMs on logistics issue. Company sees HPPC revenues to continue robust growth in FY22 on new capacity addition and take-off in newer segments in performance chemicals. Textile chemicals and animal health and nutrition (AHN) bounced back with growth of 30% and 41% YoY to Rs879mn and Rs218mn respectively on low base, which was hurt from first wave of covid. Textile chemical business would be impacted from the second wave as well. Company remains confident of consuming entire expanded capacity of 2.5x in next 3-4 years.
* EBITDA margin saved by very low other expenses; gross profit margin under pressure.
Rossari’s revenues grew by a strong 37% YoY and 3.9% QoQ, and benefited from commissioning of new plant at Dahej. However, gross profit margin dipped 700bps YoY and 245bps QoQ (on raw material price volatility) to 31%, which restricted gross profit growth to just 11.4% YoY, but down 3.7% QoQ, to Rs676mn. Other expenses declined 23% YoY (down 18% QoQ) to Rs208mn helping EBITDA growth of 47% YoY to Rs352mn, and net profit growth of 49% YoY to Rs224. Consolidated numbers include full consolidation of Buzil Rossari, which became a wholly-owned subsidiary in Q3FY21 (from being JV).
* Inorganic growth – key to watch. Rossari has raised Rs3bn via QIP for inorganic growth.
The objective of acquisitions is to enter new product categories within four chemistries, access technology, have footprint in new geographies (export market) and achieve backward integration. The concern in higher benchmark valuations for chemical companies and expensive acquisitions, is that they may not be EPS / value accretive. Backward integration may not give any strategic edge and will consume considerable efforts in our view.
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