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Weak performance amid logistic challenges; Recovery expected in H2FY25

The company posted a revenue decline of 17.2% YoY / up 13.1% QoQ to Rs. 2,405 mn, below our expectations of Rs. 2,560 mn. The quarterly revenue decline was mainly due to logistics-related challenges. EBITDA decreased 21.7% YoY / up 4.9% QoQ to Rs. 747 mn, while EBITDA margin stood at 31.1% (down 240bps QoQ) in Q2FY25, owing to a contraction in gross margins by 1417 bps QoQ to 94.3%. The net profit stood at Rs. 157 mn (down 52.2% YoY / down 22.1% QoQ) in Q2FY25, below our expectations of Rs. 235 mn. The PAT margin was 6.5% versus 21.1% in the previous quarter. The company reported an exceptional item due to the Asna cyclone impact, resulting in a loss of Industrial salt stock of Rs. 40.18 Crs (4.72 Lakhs MT) in Gujarat during Aug 24 / Sept 24. The company has initiated the claim process with the insurance company. The performance highlights and the recent developments in the respective products are as follows. Firstly, Elemental bromine showed mixed results, with a broad recovery in demand, particularly from the domestic market, while export demand remains somewhat subdued. The industrial salt segment encountered challenges in Q2FY25 primarily due to an extended and intense monsoon season, a period typically slower for the export business. On the other hand, Archean continues to observe positive results in trials for Sulphate of Potash (SOP), which has taken proactive steps to produce a second grade of SOP, attracting promising inquiries from both global and domestic markets.

Valuation and Outlook

During the quarter, Archean experienced robust demand from the domestic market, which has shown a broad recovery, although demand from the export market remains subdued. Archean Chemical Industries is a leading manufacturer of marine specialty chemicals, including elemental bromine, A-grade industrial salt, and Sulphate of Potash derived from natural sea brine. The company is strategically positioned for expansion by leveraging synergies between its core marine specialty chemical business and its investments in high- growth sectors such as compound semiconductors and energy storage solutions. Nonetheless, the core business will continue to be the cornerstone of the company's growth strategy in the coming years. The company has successfully acquired Oren Hydrocarbon and received the NCLT order, with operations expected to commence in H2FY25. Archean is optimistic about its Bromine Derivatives project, projected to contribute significantly to the top line starting in Q4FY25. Furthermore, the company anticipates sustained strong demand in the Industrial Salt segment and a rebound in the SOP segment beginning in FY26. We forecast Revenue/EBITDA/PAT to grow at CAGRs of 14.6%/27.0%/23.5% from FY24 to FY26, driven by (1) a leading market position and ongoing expansion in bromine and industrial salt, (2) emphasis on capacity expansion and subsidiary operations, (3) consistent financial performance, and (4) diversification into bromine derivatives that have successfully undergone trials with customers. Consequently, we expect Archean Chemical to generate substantial long-term revenue and note that it is currently trading at P/E ratios of 35.6x for FY25e and 23.3x for FY26e EPS estimates. We value the company at 27x FY26e EPS, arriving at a revised target price of Rs. 776 per share, which suggests an upside of 16%.

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