Buy Atul Ltd for the Target Rs.8,500 by Emkay Global Financial Services Ltd
We attended Atul’s AGM, which was addressed by Sunil Lalbhai (CMD and Promoter), along with the respective CXOs. Atul posted in-line Q1FY26 results, with revenue/EBITDA/PAT higher at 12%/5%/14% YoY. Growth is largely attributed to i) volume ramp up in the liquid epoxy resin (LER) plant, ii) positive contribution from the caustic soda plant (PBT of Rs130mn vs loss in the previous year), and iii) volume growth across other products like para-cresol and its downstream (current utilization at 70%). However, growth was partially offset by lower utilization in the 2,4 D plant owing to some teething issues, which are expected to be resolved in Q2FY26. The management expects incremental revenue of Rs15-20bn over the next 2Y and Rs25bn on full ramp-up of existing capacities (Rs20bn capex). We retain BUY with an unchanged TP of Rs8,500 (30x Jun-27E EPS).
Performance and other chemical (POC) segment saw ramp-up in benefits in Q1
The POC segment reported revenue of Rs14.8bn in Q1 (+12% YoY/+2% QoQ), with EBIT margin improvement of 30bps YoY to 9.4%, from 9.1% in Q1FY25. Q1 margin improvement was supported by a ramp-up in the LER plant and improved profitability of Atul Products (caustic soda plant). The mgmt expects Rs7.5-10bn revenue from the expanded 50ktpa LER capacity and plans to debottleneck it further with a small capex. The caustic soda plant ran at optimal utilization and turned PBT-positive at Rs130mn vs a loss of Rs140mn in Q1FY25. PBT to improve gradually over the next few quarters on better operating leverage. The mgmt plans to add hydrogen and chlorine downstream products ahead. The aromatics sub-segment had underutilized p-cresol capacities (70% utilization) due to lower demand from EU customers earlier. Atul is planning to add a couple of products under this segment in FY26. The colors sub-segment can add Rs2- 3bn of extra sales from underutilized capacities of sulphur black. Atul is entering the pigments industry to diversify beyond textile chemicals. Meanwhile, Amal delivered revenue growth of 124% YoY in Q1, repaid borrowings, and wiped-out all historical losses.
Life science chemicals (LSC) segment hurt by near-term operating challenges
The LSC segment reported revenue of Rs4.5bn in Q1 (+6% YoY/flat QoQ), with EBIT margin of 15.2% (-150bps YoY/ -650bps QoQ). The fall in margin was due to operating challenges in the 2,4-D plant under the crop protection sub-segment, coupled with lower realization in the export market (ex-US). Teething issues at the plant are expected to be resolved by end-Q2 (full ramp-up in Q3). The crop protection retail business is expected to generate revenue of Rs3-4bn in FY26. Anaven (the JV with Nouryon) became EBITDApositive in FY25, however, it reached EBITDA breakeven in Q1, owing to lower plant utilization levels. Per the mgmt, the facility can produce 35-40ktpa of MCA (currently, 10-15ktpa). Atul is working with Nouryon to increase the output as there is enough captive and domestic demand. The mgmt is actively evaluating inorganic expansion opportunities across businesses. Pharma business to see a gradual improvement QoQ.
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