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Our Take:

Sudarshan Chemical Industries Ltd (Sudarshan) is the largest producer of pigments in India and fourth largest in the world. From being a manufacturer of pigments, agro chemicals, and master batch businesses, Sudarshan has over 70+ years evolved in to a pure pigment manufacturer.

Today, the company manufactures an extensive range of organic, inorganic and effect pigments and dispersions. The product offerings include recognised brands as Sudaperm, Sudafine, Sudafast, Sudatex, Sudacolor, Sumica, Sudadur and Sumicos. The company’s pigment business has grown by over 10% CAGR over the last 10 years. Pigment is the largest raw material for paints and coatings. It also has key applications in plastics, packaging inks and cosmetics business.

The Indian Paint Association has estimated India’s paint industry to achieve a CAGR of 12%, driven by decorative and industrial paints. During FY21, apart from the paints industry, rest had a moderate to low impact owing to use in essential goods as food packaging, medicine packaging in pharma and hygiene products. According to the company, as of FY21, the global colour pigment market is estimated at $10 bn. Of this, Sudarshan has market opportunities of $ 8.6 bn (Effect pigments $ 0.6 bn; organic pigments $ 5 bn; inorganic pigments $ 3 bn).

Sudarshan has a domestic market share of 35%+ (up from ~30% in 2011) in FY21. The China+1 policy adopted by chemical companies across the world would help raise Sudarshan’s market share further. The anti-dumping duty (ADD) on Mica based pigments could further help company increase its marketshare. The company has two manufacturing facilities - at Roha and Mahad - Dist. Raigad, Maharashtra. The installed capacity stands at 37,000 MTPA.

The Roha facility manufactures Azos, HPPs, effect pigments and dispersions, while Mahad facility manufactures blue and green pigments, HPPs, and effect pigments. Sudarshan exports to over 85+ countries, with technical teams to support applications. It has 10 sales offices, 50+ sales members and 60 channel partners. It has offices in North America, Europe, China, Mexico and Japan, with share of exports rising in the last three years from 49% to 51% in FY21.

Sudarshan embarked upon Rs 600 crore CAPEX in FY20. Of this Rs 293 crore (Rs 222 crore in FY20 and Rs 71 crore in FY21) has been put to use and Rs 269 crore is still work in progress, with Rs 38 crore yet to be invested. The management expects potential sales to reach Rs 1,000-1,200 crore, once it completes its capex and all its facilities are running at full capacities. The company has plans to expand its addressable market by launching 20-25 new products each year, with focus on specialty pigments. Sudarshan’s yellow pigment is expected to go full swing from FY23 onwards, with part of the sales likely in FY22.

Valuation & Recommendation:

Q1FY22 saw demand fluctuation on the domestic front, marred by logistics issues, container unavailability and raw material price rise. However, the company expects full year margins to turnaround and achieve a normalized margin levels by year-end. The company has an order pipeline of 10-15 products to be launched under specialty category, each under three product lines, by the end of this fiscal. It expects to see some robust product launches getting completed by Q3FY22 end as well. During Q2FY22, company’s Mahad plant was shut for two weeks due to floods and resumed operations on 08 August, 2021.

Capacity utilisation during Q1FY22 was at ~ 81%. Increased exports footprint, new additions to product lines (yellow pigment), CAPEX nearing completion, plants getting back to normalcy post second wave of Covid and lower debt levels provide a stable future outlook. Further, anti-dumping duty (ADD) on mica-based pigments (although forms a small percentage to company’s business) will be of benefit. Also, subsidiary turnaround should further increase top-line in the coming quarters. The consolidation in the pigment industry too is expected to have a positive impact on the market share of Sudarshan.

Moreover, Sudarshan’s long-term rating has been upgraded by a notch to AA- from A+ by India Ratings in April 2021 thereby raising its credit worthiness. The company has three National Accreditation Board (NABL) accredited and DSIR approved labs. Last year, it started a laboratory in Germany to be in sync with the global trends. We like the stock, on the back of healthy demand, high market share, strong CAPEX drive, newer additions of products, and China+1 policy adopted by companies worldwide.

Despite Capex spend of Rs 600 crore, it will generate FCF of Rs 645 crore over FY21-23E. We expect Sudarshan's PAT to grow at a 16.9% CAGR over FY21-23E, led by a 10.8% CAGR in revenue. We feel investors can buy the stock at CMP and add more on declines at Rs. 587 (18x FY23E EPS) for base case target of Rs 734 (22.5x FY23E EPS) and bull case target price of Rs 783 (24x FY23E EPS) over the next two quarters.

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