Buy Atul Ltd For Target Rs.8,455 by Motilal Oswal Financial Services Ltd
The Life Science segment continues its stellar performance
* Atul (ATLP) reported revenue 7% above our expectation in 3QFY25. Revenue in the Life Science Chemicals segment increased 23% YoY, while it rose 24% YoY in the Performance & Other Chemicals segment. Gross margin came in at 50.5% (+340bp YoY), while EBITDAM expanded 250bp YoY to 15.8%. EBITDA increased 48% YoY to INR2.2b, and PAT jumped 63% YoY to INR1.2b.
* The Life Science segment continued its stellar run both in terms of revenue and margin for the fourth consecutive quarter. EBIT margin for the segment improved 10.4pp YoY, while the same improved 250bp QoQ. The Performance segment continued to do well in terms of revenue, but its margin was a bit subdued in 3Q both YoY and QoQ. We remain bullish on both segments.
* The Life Science Chemicals’ contribution to EBIT increased to 55% (from 39% in 3QFY24), whereas the contribution of Performance & Other Chemicals to overall EBIT declined to 43% (from 61% in 3QFY24). Amal Ltd. (part of the Atul group) reported stellar earnings last week, and we believe that the performance of the other subsidiaries/associates will also keep on improving in the future.
* We broadly maintain our estimates for FY26/FY27 as of now, while we raise our FY25 EBITDA/PAT estimates by 5%/7%. We estimate a revenue/EBITDA/PAT CAGR of 13%/25%/32% during FY24-27. EBITDAM is estimated to improve 480bp in FY27 vs. FY24 level. We believe that ATLP is ready to make a comeback in the next 2-3 years, and 9MFY25 earnings support our view.
* Investments are set to be supported by a gradual recovery in ATLP’s subsegments and management’s efforts to expand its capacities for key products and for debottlenecking the existing ones. The stock is trading at ~31x FY26E EPS of INR210.6 and ~18x FY26E EV/EBITDA. We value the stock at 35x Dec’26E EPS to arrive at our TP of INR8,455. We reiterate our BUY rating on the stock.
EBITDA in line; margin expands YoY
* Revenue came in at INR14.2b (+25% YoY). Life Science Chemicals’ revenue was INR4.2b (+23% YoY). Performance Chemicals revenue was INR10.4b (+24% YoY).
* The gross margin was 50.5% (+340bp YoY), while the EBITDA margin was 15.8% (+250bp YoY). EBIT margin expanded for Life Science Chemicals but contracted for the Performance Chemicals on a YoY basis. Life Science Chemicals’ margin was 23% (+10.4pp YoY), while EBIT stood at INR956m. Performance Chemicals’ margin came in at 7.2% (-60bp YoY); EBIT stood at IN752m.
* EBITDA came in at INR2.2b (est. of INR2.2b, +48% YoY). Adj. EBITDA stood at INR2.4b (+58% YoY) as other expenses include INR160m incurred towards application fees, cess, premium, conversion charges, customary penal charges, non-agricultural assessment charges, differential stamp duty, etc. for converting part of the agricultural land to industrial use.
* PAT stood at INR1.8b (est. of INR1.8b, +63% YoY), resulting in EPS of INR39.7. Contribution from the subsidiaries/JVs was positive (profit at INR244m in 3QFY25, vs. PAT of INR108m in 2QFY25, and net loss of INR377m in 3QFY24).
* For 9MFY25, revenue was at INR41.3b (+18% YoY), EBITDA was at INR6.9b (+41% YoY), with PAT at INR3.7b (+39% YoY). EBITDAM for 9MFY25 stood at 16.7% (+280bp YoY).
Valuation and view
* The end-user market demand has picked up in 9MFY25, and we believe that overall demand will also accelerate going forward. The company is undertaking various projects and initiatives aimed at improving plant efficiencies, expanding its capacities for key products, debottlenecking its existing capacities, capturing a higher market share, and expanding its international presence.
* ATLP has already commissioned its liquid epoxy resins plant of 50ktpa capacity in Oct’24 (revenue potential of INR8b). Its caustic soda plant (300tpd) also faced teething issues in Dec’23, which were largely resolved in 1HFY25. Anaven (monochloroacetic acid) is also likely to ramp up its plant for optimum utilization due to better offtake in FY25.
* The stock is trading at ~31x FY26E EPS of INR210.6 and ~18x FY26E EV/EBITDA. We value the stock at 35x Dec’26E EPS to arrive at our TP of INR8,455. We reiterate our BUY rating. The upside risk could be a faster-than-expected rampup of new projects and products. Downside risks include weaker-than-expected revenue growth and margin compression amid further delays in the commissioning of new projects.
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