Buy Archean Chemical Industries Ltd For Target Rs. 750 - ICICI Securities
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Bromine prices have dropped below 15-year low in China in Jun’23, but it has partly recovered in Aug’23. The price fall was a mix of greed, speculation and sudden drop in demand. China is undergoing destocking which may last till endCY23 as per ICL. We fundamentally like bromine producers as China is significantly dependent on imports to meet its demand, and thus, it cannot create overcapacity. Archean Chemical’s (ACI) Q1FY24 result was relatively better despite the volatility in bromine prices due to long-term contracts, and strong performance in industrial salts. We expect bromine to witness volume recovery by Q4FY24E, and prices to firm up only in FY25E. ACI is also in the process of commissioning its derivative plant which increases earnings visibility during the forecasted period.
We maintain BUY on ACI with an unchanged target price of INR 750 (13x FY25 EPS). Key risks: 1) Lower than expected bromine prices and volume recovery; and 2) delay in bromine derivative plant commissioning.
Bromine is a relatively better play
Global chemical industry has been adversely impacted in the past few months due to global end-industry destocking, lower demand from China and chemicals overcapacity in China. Amid these uncertainties, we prefer chemicals that are relatively better placed vs China overcapacity. One such commodity is bromine, where China is dependent on imports, and Chinese domestic production is significantly lower compared to its demand.
China bromine spot price was highly impacted due to a peculiar situation of ‘greed’ and speculation. The average bromine price between Jan 1, ’17 and Dec 31, 20 was USD 4.46/kg at China spot market with peak prices at USD 5.32/kg and lowest price at USD 3.59/kg. However, average bromine price jumped to USD 7.55/kg with peak prices at USD 10.87/kg and lowest price at USD 5.17/kg between Jan 1, 21 and Dec 31, 22. The price jump was due to supply-chain disruption and strong demand.
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