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Archean Chemical Industries Ltd.

CMP: Rs. 550 Target: Rs.767 Upside: 39%

Archean Specialty Chemicals Ltd (ACIL) is a leading specialty marine chemical manufacturer in India. It caters to three major product categories such as bromine (Br), industrial salts (NaCl) and sulphate of potash (SOP). ACIL is one of the India’s largest exporters of both bromine and industrial salts (exports ~50% of Br/ 100% of NaCl production) with one of the lowest cost of production across the globe.

The demand for bromine and bromine derivatives performance products is expected to grow on account of rise in demand for flame retardants, increase in consumption of oil well chemicals and use of hydrogen bromide in flow batteries. Also, China’s bromine production is declining steadily on account of stricter environmental regulations and availability of limited land.

The growth in the industries such as food & beverage, chlor-alkali, water treatment, agriculture and de-icing to drive the demand for NaCl.

Greenfield expansion with 2 phases: Phase 1: Brominated Clear Brine Fluids (13,000 TPA) and Bromine Catalysts (PTA Synthesis – 5,000 TPA) plant (Q4FY24); Phase 2: High-end Flame Retardant (10,000 TPA) (Q1FY25).

Brownfield expansion: It has overall bromine capacity of 43K MTPA (added 28.5K /14.5K MTPA of incremental capacity in FY21/FY23, respectively. This incremental capacity will be captively used for derivatives downstream products. Also, it intends to expand the manufacturing capacities for Industrial Salt production by adding a washery of 250 tons/hour.

The production cost for Industrial salt from sea water brine is about US$12-15 per MT, while ACIL’s costs are in the range of US$5.5-6 per MT. Further its Grade 1 quality of salt is in demand by chlor-alkali producers. This has enabled it to be a competitive salt exporter to South East Asian markets and West Asia. India is among the top five cost competitive producers of bromine globally with China and Japan are expensive and the US, Israel and Jordan cheaper than India.

Valuation: During H1FY24, global headwinds in chemical industry led to downward pricing pressure on bromine. However, demand remained strong and many customers has liquidated large part of their inventory. Thus, one can expect a good quarter with demand revival in the medium-term. ACIL has delivered revenue growth of 39.5% CAGR in FY21-23 and improved EBITDA margin from 35% in FY21 to 44% in FY23. EBITDA margin guidance remained in the range of 37%-42% in the medium term. Our earnings forecast have been revised considering the expected weak performance for FY24E due to challenges faced by the overall industry. We have assigned PE valuation of 13x to FY25E EPS to arrive at a target price of Rs. 767/share with an upside of 34% over the CMP.

Elecon Engineering

CMP: Rs. 869 Target: Rs.1,050 Upside: 21%

Elecon is a manufacturer of industrial gears (~90% mix) & material handling equipment (MHE) (~10% mix). It is a play on industrial capex across various sectors, especially in cement, steel, power, sugar and other sectors.

Elecon is the leader in industrial gears with a market share of 35% in India.

Strong industrial capex is likely to drive higher utilisation in the industrial gear segment. We envisage particularly solid demand from the steel and cement sectors (around 30% of Elecon’s sales) based on announcements made by major players.

After a decade of juggling issues related to liquidity and legacy EPC projects, the MHE segment is finally turning around after the company revised its strategy. Unlike before, it no longer participates in EPC projects for MHE. All new orders are either product-based or aligned towards after-market sales.

Elecon offers strong growth visibility with improving balance sheet. We expect a CAGR of 25%/32% in revenue / profits, over FY23–25E, driven by robust demand environment. This will be accompanied by ROCE improvement from 23% in FY23 to 32% by FY25E. We assign a TP of Rs. 1050/share, valuing the company at 25x Sep 2025E EPS (in line with the avg. of midcap Cap Goods cos.).

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